The Court of King's Bench for Saskatchewan has rejected another attempt by a rural municipality to gain priority in an oil and gas receivership. This follows the recent Alberta Decision in Orphan Well Association v Trident Exploration Corp, 2022 ABKB 839, where the Alberta Court of King's Bench confirmed that the abandonment and reclamation obligations owed to the Orphan Well Association and the Alberta Energy Regulator rank in priority to claims of municipalities for unpaid property taxes in insolvency proceedings.

In Rural Municipality of Eye Hill v Saskatchewan (Minister of Energy and Resources), 2023 SKKB 52, the Rural Municipality of Eye Hill (the RM) challenged the proposed distribution of residual proceeds from the sale of the assets of Bow River Energy Ltd. (Bow River) to the Ministry of Energy Resources (MER) to offset Bow River's environmental obligations. In rendering its decision, the Court confirmed that Orphan Well Association v Grant Thornton Limited, 2019 SCC 5 (Redwater) applies in Saskatchewan, and that rural municipalities cannot "lie in the weeds", waiting to assert their claims.

The Bow River receivership proceedings followed failed proceedings under the Companies' Creditors Arrangement Act, RSC 1985, c C-36 (CCAA). BDO Canada Limited was appointed Receiver of Bow River's Saskatchewan and Alberta assets. The Receiver sold certain of Bow River's oil and gas assets and sought to distribute the residual proceeds to the MER to offset $20 million in unaddressed environmental obligations. The RM took the position that Redwater did not apply in Saskatchewan and the RM should, therefore, be paid in priority for municipal taxes owed by Bow River, the RM also asserted a priority over funds in the receivership estate based on an alleged lien and orders issued in the CCAA proceedings.

The Funds Must Be Used to Address Bow River's Environmental Obligations

The Court rejected the RM's argument that Redwater does not apply in Saskatchewan, finding instead that it "clearly applied to the circumstances of this receivership." Applying the three-step test for a claim provable in bankruptcy, as clarified in Redwater, the Court determined that none of the requirements were met.

Firstly, the Minister was found not to be a creditor. Secondly, Bow River's environmental obligations were found to have been incurred from the date its licences for the wells were granted not the issuance of the abandonment order. Thirdly, given the long timeline to carry out the environmental obligations, it was found that it would be difficult to predict with sufficient certainty that the work would be carried out or that the MER would seek reimbursement.

A Lien Pursuant to The Municipalities Act Does Not Alter the Preference of the MER's Claim

The RM also argued that, pursuant to The Municipalities Act, SS 2005, c M-36.1, municipal taxes on resource production equipment create a lien. The RM relied on the Alberta Court of Queen's Bench chambers decision in Manitok Energy Inc. (Re), 2022 ABCA 117 (Manitok) for that lien holders have a priority. The Court rejected this attempt by the RM to gain priority. Firstly, on appeal from Manitok, the Alberta Court of Appeal determined that even if a claimant's lien survives it is to be dealt with in accordance with Redwater principles. The fact that a lien exists and monies are held in trust does not reorder the priorities in an insolvency. Further, even if a lien does exist, the Crown takes priority over the RM, pursuant to section 320 of The Municipalities Act, which provides that the RM's claim is subject to a claim of the Crown.

The Court Rejected the RM's Claim to Monies Resulting from CCAA Orders

The RM attempted to rely upon paragraph 9(c) of the Amended and Restated CCAA Initial Order, issued in the Alberta CCAA proceedings, to support its entitlement to funds. Paragraph 9(c) stated that Bow River shall remit in accordance with legal requirements, or pay:

Any amount payable to the Crown in Right of Canada or of any Province thereof or any political subdivision thereof or any other taxation authority in respect of municipal realty, municipal business or other taxes, assessments or levies of any nature or kind which are entitled at law to be paid in priority to claims of secured creditors and that are attributable to or in respect of the carrying on of the Business by the Applicant.

It was the RM's position that this paragraph created a legal entitlement to payment of municipal taxes and that Bow River failed to comply with this provision as no taxes were paid during the CCAA proceedings. The Court found that the provision simply required that the debtor comply with existing requirements, it did not create new requirements. The Court rejected the RM's claim that the CCAA Orders created a trust, constructive or otherwise, with respect to the funds in Bow River's account. Further, The Court confirmed that "a creditor should not be permitted to lie in the weeds, waiting for the most appropriate moment to raise a claim to try to gain an advantage not available to other creditors." In this case, the RM raised this argument for the first time at the distribution application in the receivership proceedings, despite there having been two distribution applications in the CCAA proceedings.

This is the first decision in Saskatchewan to consider Redwater and follows a series of unsuccessful challenges by municipalities in Alberta of distributions in insolvencies to the Alberta Energy Regulator. These challenges follow significant increases in municipal tax arrears.

Following these unsuccessful challenges, in Alberta we have seen the government take steps to assist the municipalities through legislative intervention, the most recent of which was announced on March 21, 2023, and now requires the Alberta Energy Regulator to consider municipal tax arrears when approving license transfers or applications for new licenses. For more information on this development, see our blog, Unpaid Municipal Taxes Will Impact New AER Licences and Licence Transfers. It is uncertain as to whether Saskatchewan will adopt similar measures.

The Bow River decision is currently the subject of an appeal by the RM, so there may be further developments. If you have any questions about the decision, please contact the authors of this blog.

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