Redwater court decisions sides with lenders

Update

The Alberta Court of Appeal on 24 April upheld Justice Wittman’s judgment supporting Grant Thornton as receiver in the Redwater Resources case.

Watchdog group seeks appeal to top court over abandoned wells29-4-17 EJ

Appeal court backs decision favouring Redwater creditors26-4-17 EJ

The Redwater court decision promises to become a showdown between the capacity of lenders to realize on the security of oil wells versus the rights of the Crown, the owner of the resource and the regulator.

In a densely worded 58 page decision, Mr. Chief Justice Neil Wittman of the Alberta Court of Queen`s Bench ruled in favour of the trustee in bankruptcy of Redwater Energy Corporation, a secured creditor of Alberta Treasury Branches (ATB Financial- was owed $5.072 million). The highly anticipated decision favoured creditors`rights over environmental regulation.  According to Justice Wittman,  the judicial principal of interpreting conflicts between federal and provincial head of powers of power under the Constitution Act -the paramountcy doctrine- led him to the conclusion that the  receiver (Grant Thornton LLP) could not comply with both the provisions of provincial legislation and the federal Bankruptcy and Insolvency Act (BIA). This operational inconsistency meant that the receiver would not be able to exercise their obligations under the BIA.

The Alberta Energy Regulator (AER), under the Oil and Gas Conservation Act (OGCA) and the Pipeline Act, approves the licensing of wells and the transfer of licenses necessitated when assets are sold. In June 2015, the AER advised  Grant Thornton that it required confirmation that the Receiver had taken possession and control of all of the assets of Redwater before the AER would consider any proposal dealing with the sale of assets. The concern was that of the 84 wells that Redwater owned or had working interests in,  68 which were non-producing or non-operating.  In July,the Energy Regulator took the position that before licenses could be transferred to facilitate any sale  “these licenses pose an environmental and safety hazard. Therefore, the AER believes that the Licensed Properties should be closed and abandoned for environmental and public safety reasons.` Under the OGCA, licensees include Trustees in Bankruptcy. The AER refused to allow the Receiver to `pick and choose`which assets to manage and which assets to declaim.

A key issue in any receivership is environmental liability. Receivers do not wish to take on these duties if they are personally liable for the bankruptcy estate they are administering. This issue arose about two decades ago with the AbitibiBowater (out of Newfoundland) decision that produced changes to the BIA strictly limiting the personal liability of the receiver.

The Canadian Association of Petroleum Producers (CAPP) supported the position of the Alberta regulator. CAPP`s position is intriguing because it essentially sides with an environmental position which appears to conflict with the financial realities of an industry that consumes large amounts of both debt and equity capital to conduct its business affairs. If creditors ultimately lose at the Alberta Court of Appeal or Supreme Court level, bank financing to the oilpatch may be curtailed, further damaging an industry reeling from low oil prices.

CAPP argued that the Orphan Well Association cleans up abandoned wells that no one claims liability for.   The Association acknowledged there  “are benefits and burdens that are attached to the licence, including abandonment, remediation and reclamation.” Chief Justice Wittman noted that “CAPP adds that when funds are advanced to companies, they are lent against all of the assets including the benefits and the burdens, and which means the value in the production as well as the obligation to clean-up after production is completed.`..(and further)   “that if the Court accepts the Trustee’s argument, the whole regime around the Orphan Well fund will need to be revisited and may even collapse.”

This case pits (indirectly) two agents of the Crown in Right of Alberta: AER and ATB. ATB supported the application of the Receiver. ATB argued “that if the AER’s position is to be accepted, the distribution scheme and certainty provided to creditors under the BIA will be jeopardized. The ATB submits that the AER has nothing to gain by opposing the transfer of the retained licenses, other than as leverage to improve the priority of its claim for the posting of security.”

The judge held that the federal BIA must override provincial regulation since the Receiver could not carry out its duties under the federal statute and also comply with the requirement of the provincial regulator. Furthermore, the purpose of the BIA, that is providing a predictable process for resolving bankruptcy claims, was frustrated by the application of the provincial statute.

Two final observations might be made.  Firstly, this is really the first case where this the energy regulator has acted on behalf of the environment and thereby thwarting a creditor’s claims. This begs the question -“why had not the regulator acted in this manner before?”  One reason may be that the recent decline in oil prices have produced more bankruptcies and operators abandoning wells. Secondly, the conflict between environmental considerations and creditors’ rights reminds one of the confrontation between the provincial Social Credit government and the banks in the late 1930s.  William Aberhart’s government legislated in various creative ways to frustrate the claims of banks foreclosing on farmers and homeowners.

The AER has appealed the decision to the Alberta Court of Appeal.Stay tuned for round two!

Read as PDF – Redwater court decision sides with lenders

northern-bear-golf-course-up-for-sale28-10-16-ej

Provinces toughen deposit conditions for well clean-up

Osler LLP Analysis of Redwater

Grant Thornton LLP- Trustee in Bankruptcy- Various Links

The Entire Oilpatch is Watching this Case- Oil & Gas Investments Bulletin

Dentons LLP- Analysis of Redwater

Court rulings could have far reaching implications for abandoned wells in Alberta2-6-16 CH

RedWater Ruling Provokes Debate Over Orphan Well Costs Daily Oil Bulletin 3-6-16

Justice Wittmann’s decision in Redwater Resources

Read as PDF : 2016abqb278-Justice Wittmann’s decision in Redwater Resources

CBC.ca story on orphaned wells21-6-16

Abandoned wells could rise after Alberta ruling sides with lenders20-5-16 GM

Bondholders cry foul over Twin Butte’s planned sale8-7-16 GM

Debt in deep, Tuscany Energy joins list of failed juniors9-7-16 EJ

Tervita opts for grace period on interest16-8-16 EJ

Debt holders balking at Twin Butte deal26-8-16 GM

Indebted Tervita’s service division sold for $42.8M30-8-16 EJ

Legal notice Connacher Oil and Gas30-8-16 GM

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bankruptcies-in-u-s-energy-firms-hitting-lenders-hard14-9-16-ej

Moody’s press release energy companies

Twin Butte debt holders vote down Reignwood’s takeover bid30-8-16 GM

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