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Thursday, April 27, 2017

Environmental Obligations and Bankruptcy - Alberta Court of Appeal says bankruptcy trustee can disclaim orphaned wells

The Alberta Court of Appeal has released a split decision on the following question:  can the trustee administering the estate of a bankrupt oil and gas company renounce or disclaim the company's interest in orphan oil wells (i.e. wells for which the cost of remediation required for abandonment exceeds the value of the well), but keep and sell off other valuable wells in order to maximize the recovery of secured creditors?  Justices Slatter and Schutz ruled that the trustee is permitted to disclaim the orphan assets.  Justice Martin, writing in dissent, sided with the Alberta Energy Regulator ("AER") and would have ruled that a portion of the sale proceeds from valuable wells must be set aside to meet the expected costs of remediating orphan wells.

The case involved Redwater Energy Corporation, a publicly traded oil and gas company. In 2015, Redwater's principal secured creditor, the Alberta Treasury Branches ("ATB"), commenced enforcement proceedings after Redwater couldn't meet its financial obligations.  On May 12, 2015, Grant Thornton was appointed Receiver for Redwater under the Bankruptcy and Insolvency Act ("BIA").

In July, 2015, Grant Thornton told the AER that it would be taking control of only 20 of the 127 Redwater oil and gas licences.  The AER responded by issuing orders, "for environmental and public safety reasons", requiring the abandonment and remediation of the 107 wells that the Receiver was looking to disclaim.  In October, 2015, a bankruptcy order was issued for Redwater.  In November, 2015, Grant Thornton, now trustee in bankruptcy for Redwater, disclaimed the assets it had previously renounced in its capacity as Receiver, and indicated to the AER that it did not intend to comply with the environmental remediation orders.

The AER and the Orphan Well Association ("OWA") brought court applications for declarations that the disclaimer was void.  They also sought an order compelling Grant Thornton, as trustee, to comply with the abandonment and remediation orders issued by the AER.  Grant Thornton brought a cross-application for approval of the sale of certain assets, and ruling on the constitutionality of the AER's position.

The Chambers Judge hearing the matter ruled that the claim of Redwater's secured creditor, ATB, has priority over Redwater's obligation to reclaim its wells.  The Court of Appeal heard appeals of that ruling focusing on "whether a receiver or trustee in bankruptcy must satisfy the contingent liability inherent in the remediation of the worthless wells in priority to the claims of secured creditors."  The appeal involved questions of law for which the standard of review is correctness (i.e. it's not enough for the lower court decision to have been reasonable - it has to have been correct on the law).

As noted above, the majority of the panel hearing the appeals upheld the decision of the Chambers Judge, ruling that the bankruptcy trustee is not bound to comply with the abandonment and remediation orders and does not have to divert the value from valuable assets to cover the environmental costs related to other assets.  The reasons are extensive, and include discussion of the interplay between the provincial environmental legislation (the oil and gas regime) and the federal BIA regime.  The majority concluded that, "Under the proper interpretation of the BIA, the Regulator cannot insist that the bankruptcy trustee devote substantial parts of the bankrupt estate in satisfaction of the environmental claims in priority to the claims of the secured debtor.  To the extent that the interpretation of the provincial legislation leads to a different result, the [federal] paramountcy doctrine is engaged."

The majority also pointed out that the provisions in Alberta's Oil and Gas Conservation Act and Pipeline Act that purport to make receivers and trustees personally liable for the duty to abandon oil wells and pipelines, the costs of remediation performed by other persons, and the duty to obey orders of the Regulator, are in operational conflict with the BIA.  For example, the BIA contains provisions that exempt a trustee and a receiver from personal liability and that allow them to disclaim assets.  As such, the majority concluded, the personal liability provisions in the Alberta legislation are unenforceable against BIA receivers and trustees.

In her dissenting opinion, Justice Martin disagreed with the majority that the provisions of the Alberta oil and gas legislation actually conflict with the BIA.  She found that the BIA does not permit the trustee to renounce the end of life obligations imposed by the provincial regulatory regime. Therefore, the BIA does not release the trustee from its ongoing regulatory obligations with respect to the Redwater wells.  If there is no entitlement to renounce those obligations under the BIA, then there is no conflict between the BIA and the enforcement of the regulatory obligations (to abandon and remediate wells).

Justice Martin was also of the opinion that the abandonment and remediation regime in Alberta does not frustrate the purposes of the bankruptcy legislation (which include providing for the orderly liquidation and winding up of the insolvent debtor, distributing realizable assets fairly among the creditors, having regard to the legal priority of various types of debt, and providing the bankrupt with a "fresh start"):
The cost of abandoning licensed wells and reclaiming well sites is an ongoing regulatory obligation and an inherent part of the licensed asset, well known and understood by the debtor licensee and the licensee’s lenders. The record makes clear that it was well understood by the respondent ATB, the primary lender here. The end of life obligations associated with licensed assets, being compliance costs to generally applicable laws, are factored in to the lender’s risk assessment and its decision to lend on the strength of the debtor’s collateral. 
The continued application of the regulatory regime following bankruptcy does not determine or reorder priorities among creditors, but rather values accurately the assets available for distribution. The value of the debtor’s estate must take into account the end of life obligations associated with the licences that form a part of that estate. If this means that, in the end, there is less value available for distribution to the creditors, that is part of the bankruptcy scheme and the risk that the creditor takes when lending on the basis of the debtor’s assets, with their associated obligations. [emphasis added]
We'll have to see whether this case goes to the Supreme Court for a further review.

Read the decision at: Orphan Well Association v Grant Thornton Limited.