Docket 37627 Orphan Well Association, et al. v. Grant Thornton Limited, et al. (Redwater Resources contd)

Originally posted 13 January 2018

Two arms of the Crown in right of Alberta duke it out:

ATB Financial to maximize its return on its security interest in Redwater Resources

versusindex

the Alberta Energy Regulator to minimize costs of clean-up to Orphan Well Association and ultimately the Alberta Crown.

AERAt stake: creditor protection under insolvency proceedings or protection of energy/environmental regulators’ right to ensure reclamations carried out.

Sealing orders; more intervenors, and appropriateness for a judge to take part in adjudication.

 

The Supreme Court of Canada will hear arguments on 15 February 2018 regarding the majority judgement of the Alberta Court of Appeal (ACA) last May respecting the conflict between the operation of the federal Bankruptcy and Insolvency Act (BIA) and the Alberta Energy Regulator’s delegated powers to regulate the oil and gas industry. (The Supreme Court granted leave on 17 November 2017.)

The Case Summary crisply outlined the crux of the issue: whether the judicial interpretations rendered by Chief Justice Neil Wittman (Alberta Court of Queen’s Bench) and supportly by Justices Frans Slatter and  Frederica Schutz of the Alberta Court of Appeal, will prevail.  Making this case of national importance is the fundamental question:  who will pay for the massive build-up of environmental liabilities?  the provincial and/or federal treasuries; oil industry “survivors;” or creditors.

The dissenting opinion of the Honourable Madam Justice Sheilah Martin (recently elevated to the Supreme Court) holds that there is no operational conflict between the BIA and provincial legislation regulating the oil and gas industry.

289aba63cfcf51c8b1c36410efcd4d24Currently there is a sealing order with respect to certificates from the Alberta Energy Regulator, the Orphan Well Association (OWA) requesting limitation on public access to certain records filed with the court. Typically sealing orders are requested to keep secret commercial property rights or privacy rights of individuals. The Canadian Association of Petroleum Producers (CAPP) and the Canadian Association of Insolvency and Restructuring Professionals have also made submissions on the question of limitations on public access to materials.

Farmers to take fight over abandoned wells to the Supreme COurt19-1-18 EJ

A second development has been the application for intervenor status by many groups including: Ecojustice Canada Society; Greenpeace Canada; Canadian Bankers’ Association; Canadian Association of Insolvency and Restructuring Professionals;  Action Surface Rights Association;and the Canadian Association of Petroleum Producers. Go to Docket 37627

Appeal Granted -Issues of National Importance

For the Supreme Court to hear an appeal (as distinct from a reference case to the court from the federal government), the legal dispute must meet the test of “national importance.” Alberta Justice is an intervenor and argued that not only Alberta but B.C. and Saskatchewan have significant oil and gas industries, with regulatory schemes similar to Alberta’s.  (Supporting affidavits came from Alberta’s two neighbours.). Additionally,

In Alberta alone, over 300 000 oil and gas licences to operate have been issued. Included in this number are more than 167 000 operating wells, 30 000 operating facilities, and 422 000 kilometres of oil and gas pipelines. These licences include inchoate environmental liabilities estimated at over $30 billion and impact millions of acres of land.

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Secondly, the question of who pays for “end of life obligations”- the polluter (or creditor standing in the shoes of the polluter) or industry-funded OWA or Alberta taxpayers- is a critical public policy and legal issue. And thirdly, since amendments to the BIA were made 20 years ago, there has not been an interpretation of section 14.06 of the BIA relating to the ability to renounce “real property of the debtor.”   Since the debtor is normally only a license holder, and the property is generally owned by private land owners or the Crown, according to the Alberta Attorney General a “resolution of the conflicting interpretations of section 14.06 will be of assistance to regulators, insolvency practitioners, debtors, lenders and landowners.”  Is there, or is there not “real property” to renounce.

A longer submission prepared by Bennett Jones LLP, counsel for the AER argued that the lower court’s did not take into account the importance of reconciling constitutional interests and finding a balance between the rights of creditors and the energy regulator (and resources and bankruptcy heads of power). Secondly, earlier decisions misconstrued the proper application of section 14.06 of the BIA. Thirdly, the AER was not asserting a “provable claim” distinguishing Redwater from the AbitibiBowater case. And finally, the AER Counsel asserted there was no conflict between federal and provincial legislation meaning that the doctrine of paramountcy was not in play. FM010_Appellants_Orphan-Well-Association-et-al

Section 14.06 is reproduced in its entirety below.

No trustee is bound to act
  •  (1) No trustee is bound to assume the duties of trustee in matters relating to assignments, bankruptcy orders or proposals, but having accepted an appointment in relation to those matters the trustee shall, until discharged or another trustee is appointed in the trustee’s stead, perform the duties required of a trustee under this Act.

  • Marginal note:Application

    (1.1) In subsections (1.2) to (6), a reference to a trustee means a trustee in a bankruptcy or proposal and includes

    • (a) an interim receiver;

    • (b) a receiver within the meaning of subsection 243(2); and

    • (c) any other person who has been lawfully appointed to take, or has lawfully taken, possession or control of any property of an insolvent person or a bankrupt that was acquired for, or is used in relation to, a business carried on by the insolvent person or bankrupt.

  • Marginal note:No personal liability in respect of matters before appointment

    (1.2) Despite anything in federal or provincial law, if a trustee, in that position, carries on the business of a debtor or continues the employment of a debtor’s employees, the trustee is not by reason of that fact personally liable in respect of a liability, including one as a successor employer,

    • (a) that is in respect of the employees or former employees of the debtor or a predecessor of the debtor or in respect of a pension plan for the benefit of those employees; and

    • (b) that exists before the trustee is appointed or that is calculated by reference to a period before the appointment.

  • Marginal note:Status of liability

    (1.3) A liability referred to in subsection (1.2) is not to rank as costs of administration.

  • Marginal note:Liability of other successor employers

    (1.4) Subsection (1.2) does not affect the liability of a successor employer other than the trustee.

  • Marginal note:Liability in respect of environmental matters

    (2) Notwithstanding anything in any federal or provincial law, a trustee is not personally liable in that position for any environmental condition that arose or environmental damage that occurred

    • (a) before the trustee’s appointment; or

    • (b) after the trustee’s appointment unless it is established that the condition arose or the damage occurred as a result of the trustee’s gross negligence or wilful misconduct or, in the Province of Quebec, the trustee’s gross or intentional fault.

  • Marginal note:Reports, etc., still required

    (3) Nothing in subsection (2) exempts a trustee from any duty to report or make disclosure imposed by a law referred to in that subsection.

  • Marginal note:Non-liability re certain orders

    (4) Notwithstanding anything in any federal or provincial law but subject to subsection (2), where an order is made which has the effect of requiring a trustee to remedy any environmental condition or environmental damage affecting property involved in a bankruptcy, proposal or receivership, the trustee is not personally liable for failure to comply with the order, 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,

    • (a) if, within such time as is specified in the order, within ten days after the order is made if no time is so specified, within ten days after the appointment of the trustee, if the order is in effect when the trustee is appointed, or during the period of the stay referred to in paragraph (b), the trustee

      • (i) complies with the order, or

      • (ii) on notice to the person who issued the order, abandons, disposes of or otherwise releases any interest in any real property, or any right in any immovable, affected by the condition or damage;

    • (b) during the period of a stay of the order granted, on application made within the time specified in the order referred to in paragraph (a), within ten days after the order is made or within ten days after the appointment of the trustee, if the order is in effect when the trustee is appointed, by

      • (i) the court or body having jurisdiction under the law pursuant to which the order was made to enable the trustee to contest the order, or

      • (ii) the court having jurisdiction in bankruptcy for the purposes of assessing the economic viability of complying with the order; or

    • (c) if the trustee had, before the order was made, abandoned or renounced or been divested of any interest in any real property, or any right in any immovable, affected by the condition or damage. (emphasis added)

  • Marginal note:Stay may be granted

    (5) The court may grant a stay of the order referred to in subsection (4) on such notice and for such period as the court deems necessary for the purpose of enabling the trustee to assess the economic viability of complying with the order. (emphasis added)

  • Marginal note:Costs for remedying not costs of administration

    (6) If the trustee has abandoned or renounced any interest in any real property, or any right in any immovable, affected by the environmental condition or environmental damage, claims for costs of remedying the condition or damage shall not rank as costs of administration.

  • Marginal note:Priority of claims

    (7) Any claim by Her Majesty in right of Canada or a province against the debtor in a bankruptcy, proposal or receivership for costs of remedying any environmental condition or environmental damage affecting real property or an immovable of the debtor is secured by security on the real property or immovable affected by the environmental condition or environmental damage and on any other real property or immovable of the debtor that is contiguous with that real property or immovable and that is related to the activity that caused the environmental condition or environmental damage, and the security

    • (a) is enforceable in accordance with the law of the jurisdiction in which the real property or immovable is located, in the same way as a mortgage, hypothec or other security on real property or immovables; and

    • (b) ranks above any other claim, right, charge or security against the property, despite any other provision of this Act or anything in any other federal or provincial law.

  • Marginal note:Claim for clean-up costs

    (8) Despite subsection 121(1), a claim against a debtor in a bankruptcy or proposal for the costs of remedying any environmental condition or environmental damage affecting real property or an immovable of the debtor shall be a provable claim, whether the condition arose or the damage occurred before or after the date of the filing of the proposal or the date of the bankruptcy. (emphasis added)

Why an Appeal is Unnecessary- Jurisprudence settled

Counsel for Grant Thornton LLP, the Trustee in Bankruptcy, Alberta Treasury Branches  and the Alberta Attorney General (as Intervenor), is the Bay Street heavyweight law firm Blake, Cassels & Graydon LLP (Blakes). Blakes argues that the matter is not of national importance because the majority decision did not commit any errors in finding for the Trustee.  MM030_Respondent_Alberta-Treasury-Branches  The respondents’ Counsel also argues that the provincial government has the ability to amend the “offending features” of its regulatory regime and in fact are so doing.

See inter alia  Bulletin 2016-16 Licensee Eligibility- AER Measures to Limit Environmental Impacts pending regulatory changes to address the Redwater Decision

Protecting Albertans from delinquent oil and gas operators 6 December 2017

While Blakes’ offers some intricate legal analyses questioning Justice Martin’s dissent (“misunderstanding the facts,” errors in law, incorrect calculation of LMR ratios) , theirs chief reasoning has to do with the financial impact on creditors and the oil and gas industry. Should environmental liabilities be ranked either pari passu or ahead of debts, the economy would suffer.  Blakes asserts the OWA system is working well and the environmental liabilities of failed companies will be looked after. ( “The OWA has never failed to remediate a property in its possession and prioritizes its efforts based on a risk matrix. Those properties most at risk are abandoned first.”) Further:

There is also no basis in the evidence for the assertion that the OWA does not have
sufficient resources to address its inventory or that the public will ever have to bear any of the costs associated with the properties of the defunct licensees. The OWA receives funding from an annual levy from industry in the amount of $30 million, which has been increased as needed over the past several years. There is little to no risk of the OWA becoming insolvent or failing to address its current inventory.

Another reason for not hearing the appeal would be the negative consequences for creditors and the oil and gas industry should the majority ACA judgment be reversed. Creditors would have no incentive to appoint receivers and pay for the wind-up of a bankrupt estate if they could not disclaim orphan wells. The further consequence of this is that more, not less, wells will be left to the OWA.

Another argument for supporting the status quo is the purported power of the AER to claim the costs of abandonment as a “statutory debt owed.” This position seems especially weak because an insolvent company owes more to its secured creditor (ATB) than its assets are worth, leaving the AER with nothing to claim against, absent pursuing officers and directors. Blakes also cites 14.06 as allowing Receivers to “abandon property.”  The question is whether the precise wording of the subsection (6) “abandoned or renounced any interest in any real property, or any right in any immovable,” applies. The submission by the AER and OWA posit that it is not real property that is being abandoned but rather rights of licensees.

Blakes also takes issue with Justice Martin’s analysis of the facts in the case. They argue that section 14.06(6) creates a “Catch 22” situation for the receiver-trustee since to post security for the renounced properties to obtain AER  permission AER would not be possible since the only money available to pay the security deposit would come from a sale of working properties, and given the insolvency of the company, the creditor would receive nothing.

The stakes are high. Questions from the high justices will be closely watched by industry analysts and the legal community on the 15th of February.

Earlier Albertarecessionwatch.com posts

1 July 2017

21 May 2016

 

This entry was posted in Uncategorized on by .

About albertarecessionwatch

Former Director, Institute for Public Economics, University of Alberta and currently Fellow of the Institute. Former executive with Alberta Treasury Branches. Worked for the Alberta government for 12 years with Federal and Intergovernmental Affairs and Alberta Treasury. Areas of focus: financial institutions legislation and policy, government borrowing, and relations with credit rating agencies. Ph.D in Political Science (Uof A), Masters of Public Administration and BComm. (Carleton University). Author of Politics and Public Debt: The Dominion, the Banks and Alberta's Social Credit. Presently working on study of Alberta provincial agency board appointments.

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