The Supreme Court of Canada Rules in Orphan Well Case

January 31, 2019

Written By Kenneth T. Lenz Q.C., Brad Gilmour, Vivek T.A. Warrier and Denise D. Bright

The Supreme Court of Canada ("SCC") today released its long-awaited decision in Orphan Well Association et al v Grant Thornton Limited et al, 2019 SCC 5. The SCC allowed the appeal and held that Alberta's regulatory regime can coexist with, and operate alongside, the Bankruptcy and Insolvency Act ("BIA") without triggering the doctrine of paramountcy. In simple terms, the Alberta Energy Regulator ("AER") authoritatively has the power to impose cleanup conditions on a license holder (including a receiver or trustee) and these powers survive bankruptcy.

Procedural History

In the fall of 2015, Grant Thornton, a receiver and trustee (the "Receiver"), was appointed in respect of Redwater Energy Corporation ("Redwater") under the BIA. The Receiver "disclaimed" a significant number of Redwater's properties, namely non-producing wells, which had little or no economic value and were subject to substantial environmental liabilities, pursuant to Section 14.06 of the BIA. The Receiver purported to only take possession of certain producing wells, facilities and pipelines.

The AER and the Orphan Well Association ("OWA") sought a declaration that the BIA did not permit a Receiver to disclaim any of Redwater's assets. The AER and the OWA further sought an order requiring the Receiver to comply with remedial orders issued by the AER to fulfill the abandonment, reclamation and remediation obligations related to the Redwater assets. The Receiver sought dismissal of the application and approval by the Court of its proposed sale of the retained Redwater assets, which did not include the disclaimed assets.

In May of 2016, the Alberta Court of Queen's Bench ("ABQB") found that trustees and receivers of insolvent companies could disclaim uneconomic oil and gas assets to the AER and exclusively arrange for the selling of valuable oil and gas assets (Re Redwater Energy Corporation, 2016 ABQB 278). The AER and OWA appealed this decision to the Alberta Court of Appeal ("ABCA"). The ABCA upheld the lower court's decision and dismissed the appeal in Orphan Well Association v Grant Thornton Limited, 2017 ABCA 124.

The Decision

The critical finding of this SCC decision is that while Section 14.06 of the BIA allows a receiver/trustee to avoid personal liability for existing environmental obligations, it does not allow a receiver/trustee to disclaim or renounce uneconomic assets to the AER. The ruling affirms that a receiver, who by definition becomes a licensee under AER legislation, must use the proceeds realized from a bankrupt estate to comply with valid orders made by provincial regulators under the applicable environmental regime. The SCC opined on the importance of including trustees in the definition of "licensee" at para 105:

The inclusion of trustees in the definition of “licensee” is an important part of the Alberta regulatory regime. It confers on them the privilege of operating the licensed assets of bankrupts while also ensuring that insolvency professionals are regulated during the lengthy periods of time when they manage oil and gas assets.

The SCC emphasized the importance of interpreting the BIA and provincial regulatory obligations harmoniously; holding that when a receiver/trustee assumes control over the licensed assets of bankrupts, the regulatory obligations attached to such licenses cannot be easily disposed of.

Further, the SCC held that the AER was not asserting any claims "provable in bankruptcy" when it issues regulatory orders requiring the estate to comply with existing or future regulatory obligations so the priority scheme under the BIA is unaffected. The SCC came to this conclusion by applying the test for determining whether a regulatory obligation amounts to a provable claim in bankruptcy set out in Newfoundland and Labrador v AbitibiBowater Inc, 2012 SCC 67 [Abitibi]. The regulatory obligation must 1) be a debt, liability or obligation to a creditor, 2) the debt 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. The SCC ruled first that a regulator, exercising its power to enforce a public duty, is not a creditor. As for the third part of the test, the SCC found that the claim was too remote to attach a monetary sum to and too uncertain to be a claim in the bankruptcy process. Throughout its analysis, the SCC emphasized that the AER was relying upon its power to enforce a public duty and that this did not transform it into a creditor under the test. In effect, this means that the AER can continue to enforce its legislation within the bankruptcy process.

Implications

The Redwater decision confirmed that the performance of abandonment and reclamation obligations are inherent in the right to extract, process or transport oil and gas in Alberta. These obligations must be performed, as a general duty, in priority to the claims of secured and unsecured creditors. End of life obligations for abandonment and reclamation will be of increased importance for lenders in determining the value of their collateral.

The full impact of Redwater on the regulatory, environmental and commercial landscape in Canada will be significant and will unfold in the coming months. 

Ken Lenz, Brad Gilmour and Mike Selnes, of Bennett Jones LLP, acted for the Orphan Well Association in this case.

Thank you to Jennifer Power who assisted in the publication of this blog.

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