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Redwater Decision Overturned by the Supreme Court of Canada

31-Jan-19

By Nathaniel Brenneis

Today, the Supreme Court of Canada (SCC) overturned the Alberta Court of Appeal’s contentious decision to prioritize the interests of secured creditors in bankruptcy over the fulfillment of oil well abandonment and reclamation obligations.

At issue was whether the province’s rules for cleaning up oil wells frustrated the purpose of Canada’s federal bankruptcy regime. The SCC held there was no conflict. As a result, the trustees of bankrupt oil and gas companies can no longer disclaim remediation liabilities and simply walk away from uneconomic oil and gas sites. Environmental clean-up now takes priority over payments to creditors.

Background

As previously reported, this case revolved around the assets of Redwater Energy Corporation (“Redwater”), a public oil and gas company which was placed in receivership in 2015 by Alberta Treasury Branch ("ATB"). Following an application by ATB, Grant Thornton Limited (“GTL”) was appointed as the receiver and trustee. Redwater had a number of non-producing oil wells licensed by the Alberta Energy Regulator (the “Regulator”), which needed to be reclaimed. The costs of abandoning and remediating these wells, however, far outstripped their remaining economic value. As a result, GTL sought to renounce or disclaim these unattractive assets.

In response, the Regulator ordered GTL to remediate the disclaimed oil wells before distributing funds to creditors. It argued that Redwater’s bankruptcy did not affect Redwater’s environmental obligations and that GTL was legally required to discharge those obligations before paying Redwater’s creditors. GTL brought a cross-application challenging the Regulator’s position and seeking approval of its sale.

Broadly speaking, the case pitted the public’s interest in ensuring that oil and gas facilities are reclaimed against the interests of secured creditors in the federal bankruptcy regime.

Lower Court Decisions

The key issue before the courts was determining the proper priority and treatment of environmental claims under the Bankruptcy and Insolvency Act (BIA).

The lower courts determined there was operational conflict between the BIA and the province’s regulatory regime set out under the Oil and Gas Conservation Act (OGCA) and Pipeline Act (PA). Based on the doctrine of paramountcy, the OGCA and PA were thus rendered inoperable to the extent that their provisions would frustrate the BIA’s system of distribution and priorities. Further, the courts held that the Regulator’s orders were essentially unprotected monetary claims and therefore unenforceable against a trustee and receiver.

As a result, the lower courts concluded that GTL did not have to comply with the Regulator’s orders and could settle the claims of secured creditors without fulfilling any of its environmental remediation obligations.

Supreme Court Decision

In a 5-2 decision, the majority of the SCC ruled that Alberta’s environmental regulatory regime can coexist alongside the scheme of distribution set out under the BIA.

Rather than find the provincial and federal regimes to be incompatible, the SCC determined that the Regulator’s orders were based on valid provincial laws of general application – exactly the kind of valid provincial laws that underpin the BIA. The BIA is clear that the ownership of certain assets and the existence of particular liabilities depend upon provincial law. In this case, the provincial laws provide certain end-of-life obligations for Redwater’s production facilities which define how much of the bankrupt’s estate is available for distribution.

In other words, in crafting the priority scheme of the BIA, Parliament intended to permit regulators to place a first charge on real property of a bankrupt affected by an environmental condition or damage in order to fund remediation and reclamation. Thus, the BIA explicitly contemplates that environmental regulators will extract value from the bankrupt’s real property if that property is affected by an environmental condition or damage. Therefore, there is no conflict to trigger the doctrine of paramountcy in this case. The Regulator’s orders supersede the distribution.

The SCC also stated that bankruptcy is not a licence to ignore rules. Redwater has remedial obligations that are not claims provable in bankruptcy. Section 14.06(4) of the BIA is purely concerned with a trustee’s personal liability, and does not empower the trustee to walk away from the environmental liabilities of the estate it is administering. Pursuant to orders of the lower courts, GTL had already sold or renounced all of Redwater’s assets, and the sale proceeds were being held in trust. Accordingly, the SCC ordered that these funds be used to address Redwater’s end-of-life obligations and reclaim the well sites.

Take Away

In overturning the lower courts’ ruling, the SCC has helped unravel the tangled intersection between bankruptcy proceedings and provincial environmental law, but this is a lengthy decision and its ramifications will take time to fully assess and consider.

There is no question, however, that this case will have far-reaching implications across several different industries nationwide. While environmental regulators and advocates will consider this ruling a significant victory, the decision also introduces uncertainty for secured lenders in the oil and gas sector, as well as secured lenders to other industries with potential for significant environmental liability.

For further information on how this decision may impact you, please contact a member of our Restructuring & Insolvency Practice Group or our Energy, Environmental & Regulatory Practice Group.

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