Supreme Court rules bankruptcy trustees can't walk away from abandoned oil wells
Tuesday, February 05, 2019 - Filed in: Court Cases
The requirements of the Bankruptcy and Insolvency Act and the province of Alberta’s regime concerning the cost of remedying the environmental effects of abandoned oil wells can co-exist, the Supreme Court of Canada ruled today.
The 5-2 decision overturned the Alberta appellate court decision in allowing the appeal of the Orphan Well Association and the Alberta Energy Regulator against Grant Thornton Limited, the receiver and trustee in bankruptcy for a bankrupt oil and gas producer.
“The big takeaway is that it’s a win for the regulator but a loss for secured creditors,” says Jeremy Opolsky, a commercial litigator at Torys LLP in Toronto. “This decision effectively puts creditors at the back of the line; in many cases, including this one, they recover nothing at all, including their investment. The [Alberta] Court of Appeal called it replacing ‘polluter pays’ with ‘third-party pays.’”
At the heart of the case was what happens with respect to obligations under a provincial regulatory scheme — in this case, Alberta’s scheme with respect to oil and gas licensees — when bankruptcy proceedings are initiated under the federal Bankruptcy and Insolvency Act.
Redwater Energy Corporation is a bankrupt company that held licences in oil and gas properties. Those properties included “orphan wells” that are at the end of their lives and no longer producing oil. The cost of remediation for disclaimed wells can exceed their value, and the company’s receiver and subsequently its trustee in bankruptcy, Grant Thornton, sought to disclaim the bankrupt’s interest in those wells but to sell the valuable assets.
The Alberta Energy Regulator has end-of-life rules on how a spent well must be rendered environmentally safe. Disclaimed wells become the responsibility of the Regulator and the Orphan Well Association. In this case, the Regulator opposed the trustee’s disclaimer on the basis that the trustee had to comply with the end-of-life obligations prior to any distribution to the creditors. The Regulator issued abandonment and remediation orders in respect of the wells that had been disclaimed, but the trustee did not comply with the orders.
The Regulator and the Association sought compliance with the remediation orders from the Court of Queen’s Bench of Alberta. The trustee brought a cross-application for approval of the sale of some assets, and a ruling on the constitutionality of the Regulator’s position.
In today’s decision in Orphan Well Association v. Grant Thornton Ltd., the majority of the Supreme Court found that the requirements of the BIA and the Alberta regime could co-exist, and that the Regulator’s use of its statutory powers did not trigger federal paramountcy; under Canadian constitutional law, this is the rule that federal law prevails, and applies when there is a provincial law and a federal law which are each valid but inconsistent or conflicting.
Two distinct forms of conflict, or branches of the paramountcy test, have been recognized, Chief Justice Richard Wagner wrote in the decision.
“The first is operational conflict, which arises where compliance with both a valid federal law and a valid provincial law is impossible. … The second is frustration of purpose, which occurs where the operation of a valid provincial law is incompatible with a federal legislative purpose. … Under both branches of paramountcy, the burden of proof rests on the party alleging the conflict,” which in this case was the respondent.
The two key legal issues were whether the BIA allowed the trustee to walk away from sites for which it had disclaimed responsibility. The second was whether the provincial orders to remove structures from the abandoned land were provable claims under the BIA, and if they were, the payment order of creditors established in the BIA applied.
Supreme Court Justice Sheilah Martin, when she sat on the Alberta Court of Appeal, had been the dissenting voice on the Alberta Court of Appeal’s decision, and would have allowed the Regulator’s appeal. She found there was no entitlement under the BIA to renounce end-of-life obligations, and that the continued application of Alberta’s regulatory regime following bankruptcy did not determine or reorder priorities for creditors.
Grant Thornton had relied on section 14.06(4) of the BIA, which states that “the trustee is not personally liable for failure to comply with the order [to remedy any environmental condition or environmental damage affecting property involved in a bankruptcy, proposal or receivership], and is not personally liable for any costs that are or would be incurred by any person in carrying out the terms of the order.”
But the majority of the Supreme Court found that this section of the BIA was intended to protect trustees from having to pay for a bankrupt estate’s environmental claims with their own money. Trustees remain fully protected by the BIA, but can’t walk away from the liabilities of the bankrupt estate.
However, the chief justice wrote, “Given the confusion caused by attempts to interpret s. 14.06 as a coherent scheme during this litigation, Parliament may very well wish to re-examine s. 14.06 during its next review of the BIA.” No conflict existed between specific Alberta legislation and the BIA in this regard, he found.
The majority also found that the end-of-life obligations binding on GTL were not claims provable in the Redwater bankruptcy — nor would all environmental obligations enforced by a regulator be claims provable in bankruptcy. The test set out by the Court in Newfoundland and Labrador v. AbitibiBowater Inc., known as the Abitibi test, must be applied to determine whether a particular regulatory obligation amounts to a claim provable in bankruptcy, namely that (1) there must be a debt, a liability or an obligation to a creditor; (2) the debt, liability or obligation must be incurred before the debtor becomes bankrupt; and (3) it must be possible to attach a monetary value to the debt, liability or obligation.
Only the first and third parts of the test were at issue in this case, and the abandonment orders and Liability Management Rating requirements failed to satisfy the third part of the test, it found.
Further, “end-of-life obligations the Regulator seeks to enforce against Redwater are public duties. Neither the Regulator nor the Government of Alberta stands to benefit financially from the enforcement of these obligations. These public duties are owed, not to a creditor, but, rather, to fellow citizens, and are therefore outside the scope of ‘provable claims.’ ”
In dissenting reasons Justice Suzanne Côté, with Justice Michael Moldaver concurring, found that the federal and provincial legislation could not co-exist. A genuine inconsistency between federal and provincial law under both branches of the paramountcy test, namely operational conflict and frustration of purpose, meant that the appeal should be dismissed, they found.
“What the dissent raises is that if you don’t let a company like Redwater transfer profitable as well as unprofitable wells, it leaves the risk that profitable wells won’t be able to be transferred to anybody,” says Opolsky, with transferral referring to the bundle of rights being sold from the estate to a buyer. “This [case] rose out of the efforts of the receiver to transfer only the profitable wells and disclaim the unprofitable ones.”
“In the big picture, this means wells will have fewer options for financing, and financing may be more expensive,” he adds. However, “it’s important to remember that somebody has to pay for remediating these wells, and the regulator said it shouldn’t only be the public who bears this onus.”
“One of the Alberta Energy Regulator’s (AER’s) responsibilities is to protect Albertans,” the AER said in a published statement. “The AER is steadfast in our belief that the public should not be on the hook for the closure and reclamation costs of insolvent licensees.
“The AER appreciates that the courts at all levels took the time to carefully consider this important matter and in each instance issued clear, well-reasoned decisions. We are pleased that the Supreme Court recognized the potential massive impacts that this issue could have caused – not just for the energy sector – but for many industries across the country.”
Note: This a reprint of an article written by Elizabeth Raymer and appearing on the Canadian Lawyer web site.