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.

Court grants injunction to Enbridge over interference with maintenance digs

Back in March, 2017, Enbridge Pipelines Inc. ("Enbridge") was in court seeking injunctions against two individuals to prohibit them from interfering with maintenance work being conducted on Lines 10 and 11, two adjacent oil pipelines near Hamilton, Ontario.  Enbridge asserted that the individuals had been regularly interfering with its work crews since January, 2017, including the tearing down of snow fences and gates and verbally demanding that work be shut down.  Enbridge also alleged that, after two weeks of obstruction, the individuals placed rabbit traps to obstruct access to the dig sites and then asserted treaty hunting rights.

In their defence, the individuals involved in the case alleged that they are Haudenosaunee citizens with the ability to exercise rights upon Haudenosaunee traditional treaty territory.  They served Notices of Constitutional Question stating their intention to question the constitutional validity of the following: 1) the Trespass to Property Act as it may apply to a Haudenosaunee person undertaking harvesting activity pursuant to treaty rights; 2) any interim or interlocutory injunction which would directly or indirectly impair, infringe and/or interfere with the exercise of treaty rights where the Crown has not discharged its obligations to uphold the Honour of the Crown (duty to consult and accommodate); and, 3) the granting of any easement (i.e. Enbridge's pipeline easements) where treaty rights would be impaired, infringed and/or interfered with where the Crown has not discharged its obligation to uphold the Honour of the Crown (duty to consult and accommodate).

Justice Broad of the Ontario Superior Court of Justice reviewed the constitutional arguments and concluded that, "the question of whether the Crown has made efforts to comply with its duty to consult and accommodate is not relevant to the exercise of the court's decision to deny an injunction sought by a private party such as Enbridge with an interest in land on discretionary grounds."  Also, Justice Broad noted, "The defendants have been unable to point to any cases where a precondition involving the exhaustion of efforts to consult and find negotiated or legislated resolutions has been recognized or applied where an injunction is sought at the instance of a private property owner where aboriginal treaty rights are claimed or exercised."

Having disposed of the constitutional issues, Justice Broad reviewed Enbridge's request for injunctive relief on the basis of the standard three-part test for injunctions:

1)      the plaintiff must establish a serious question to be tried;

2)      the plaintiff must show that it will suffer irreparable harm if the injunction is not granted; and

3)      the balance of convenience favours the granting of an injunction. This involves a consideration of which party will suffer greater harm if the injunction is granted or refused.

Justice Broad ruled in favour of Enbridge on all three parts of the test.  With respect to the defendants' treaty right claims, he concluded: "The defendants' claim to relevant interests or rights may be advanced by appropriate parties or groups having the requisite standing through lawful avenues.  The defendants' resort to unlawful self-help should not, however, be countenanced ...".

Read the decision at: Enbridge Pipelines Inc. v. Williams et al.

Bachelor farmer dies in accident in 2009 - Court tasked with interpreting holographic will from 1992

Farmer P was 60 years old when he died in an accident on his Saskatchewan farm in March, 2009.  He had no spouse and no children, and was survived by his 95-year old mother, a brother and sister-in-law, and a sister.  After P's death, his family discovered that he had made a holographic will in 1992 that provided as follows:

Last Will and Testament of [P]

I leave all my farming assets to [my brother and sister-in-law].

I leave 50% of my personal assets to [my brother and sister-in-law].

I leave 50% of my personal assets to my sister [K].

All household personal assets (those that Mom can use) I leave to [my mother].

A holographic will is one that is made entirely by the testator's own handwriting, without formality, and without the presence, attestation or signature of a witness (e.g. the mythic will written on a napkin).

For almost 8 years after P's death, his siblings were engaged in acrimonious disputes about the administration of P's estate and their entitlement to his assets.  The assets included farmland, farm equipment, grain and inputs inventories, etc.  The debts owing by P's estate included substantial income tax owing, a tractor loan, a mortgage, etc.  The questions left by the holographic will included which assets were farm assets and which assets were personal assets, and which debts were to be paid by the Estate and which debts were to be paid by individual beneficiaries.  In January, 2017, Justice Ball of the Court of Queen's Bench in Saskatchewan issued a decision in which he wrote: "Hopefully, this decision will do something to bring an end to the litigation."

Justice Ball noted that, "The court's only objective in interpreting a will is to ascertain and give effect to the intention of the testator, as expressed by the language of the will, at the time the will was executed."  After reviewing the law applicable to the interpretation of wills, Justice Ball then reviewed the evidence about the information known by P at the time he made his will in 1992 that provides the context for the will.  Having reviewed the context, Justice Ball concluded, among other things, that "farming assets" included all farmland, farm implements and inventory, and unsold grain on hand; "Personal assets" included all household effects in P's home, personal motor vehicles, and personal bank account balances.

At the end of the decision, there were still some assets that could not be assigned to a specific category based on the evidence before the Court.  These assets included surface lease annual payments and farm subsidies or other government payments.  Further evidence would need to be filed with the Court before any decision could be made on those assets.

As with most estate law cases involving farms, the lesson to be drawn from this case is that it pays to have a clear and fully-documented succession plan in place as soon as possible.  Farmer P did have a will at the time of his fatal accident, but that will was not sufficiently instructive to his family to avoid nearly a decade of litigation.

Read the decision at: Ellingson v Ellingson Estate.

Court of Appeal confirms inconsistent use requirement for adverse possession in Ontario

In a recent post, I wrote about a B.C. adverse possession case that made it all the way to the Supreme Court of Canada - Nelson v. Mowatt.  The Ontario Court of Appeal has now released a decision in which it comments on the Mowatt decision and the question of whether an Ontario adverse possession claimant must satisfy the "inconsistent use requirement" (by demonstrating that his or her use of disputed lands was inconsistent with the intended use of the "true owner").  Here is what the Court says:

A note on Mowatt

[29]      After this appeal was heard, the Supreme Court released Mowatt, a decision concerning the law of adverse possession in British Columbia. We refer to Mowatt in para. 20, above. In Mowatt, the Supreme Court also noted, citing Masidon and other cases, that the inconsistent use requirement appears in the jurisprudence of Ontario.  It held that the law of British Columbia governing adverse possession does not require a claimant to demonstrate that his or her use of disputed lands was inconsistent with the intended use of the “true owner”. At para. 27, Brown J., for the court, wrote: “Whether the requirement is properly applicable in other provinces remains an open question subject to examination of their respective legislative histories, the wording of their particular limitation statutes, and the treatment of these matters by the courts of those provinces.”  

[30]      In supplemental submissions following the release of Mowatt, the appellants effectively urge this panel to overrule Masidon and eliminate the inconsistent use requirement in Ontario, without regard to whether there is mutual or unilateral mistake.  However, this panel is not in a position to overrule Masidon.

So, it seems that the question left open by the Supreme Court has (relatively) quickly been answered by the Ontario Court of Appeal: inconsistent use remains a requirement of the law of adverse possession in Ontario (see Masidon Investments Ltd. v. Ham).

Read the Ontario Court of Appeal's decision at: Sipsas v. 1299781 Ontario Inc.