Troubled waters: Alberta oil and gas legislation frustrates the purposes of the Bankruptcy and Insolvency Act

The Alberta Court of Queen’s Bench has released its much anticipated decision in the receivership proceedings of Redwater Energy Corporation. Chief Justice Wittmann has ruled that Alberta’s provincial oil and gas legislation frustrates the purposes of the federal Bankruptcy and Insolvency Act (BIA). Chief Justice Wittmann held that the trustee in bankruptcy could disclaim its interest in certain oil and gas licensed properties and was not bound by oil and gas well abandonment orders issued by the Alberta Energy Regulator (AER).
 


Background

Redwater held a number of oil and gas licensed properties in Alberta, which were licensed under the Oil and Gas Conservation Act (OGCA) and the Pipeline Act (PA). On May 12, 2015, Redwater’s principal secured lender successfully sought the appointment of a Receiver over all of the current and future assets, undertakings and properties of Redwater. On October 28, 2015, Redwater was assigned into bankruptcy and the Trustee was appointed.

The AER asked the Trustee to confirm it had taken possession and control of all of Redwater’s oil and gas licensed properties. In response, the Trustee advised the AER that it took possession of 20 of Redwater’s 127 AER-licensed properties. The Trustee took possession of Redwater’s producing wells and opted to disclaim its interest in the non-operational wells, as it was entitled to do under s. 14.06(4) of the BIA. The effect of such a disclaimer was that those wells would become the responsibility of the AER and ultimately the Orphan Well Association (OWA).

The AER responded by issuing abandonment orders with respect to the disclaimed licensed properties. The Trustee refused to comply with the abandonment orders and advised that it intended to establish a sale process for the 20 licensed properties which it took possession of. Due to the restriction imposed by the AER’s Licensee Liability Rating (LLR) Program, the AER took the position that it would not authorize the transfer and sale of the 20 licensed properties until the Trustee had complied with the abandonment orders. The AER’s practice is to not approve the transfer of licensed properties by an insolvent licensee in cases where the insolvent licensee’s LLR ratio is worsened, unless the licensee posts security.
 

The Application and Cross-Application


The AER and the OWA brought a joint application and asked the Alberta Court of Queen’s Bench to determine whether the Trustee could pick and choose amongst Redwater’s realizable properties and ignore the abandonment orders. The Trustee cross-applied and sought the approval of a sales process to market and sell the licensed properties it took possession of.

The AER argued that when the Trustee was appointed, it stepped into the shoes of the AER licensee and assumed the care, custody and control of all of Redwater’s licensed properties. Under the OGCA and the PA, receivers and trustees are considered licensees and, as such, they are subject to the statutory obligations of the AER. The legislation imposes liability on licensees without considering whether the assets are sold or disclaimed. The AER argued that the Trustee could not rely on section 14.06(4) of the BIA to disclaim its interest in AER-licensed properties because it is not possible to disclaim AER-licensed properties under provincial legislation. Finally, the AER submitted that if receivers and trustees were permitted to disclaim assets and avoid their regulatory obligations, that would create a situation where there is no responsible party for the purposes of the care and custody, abandonment, reclamation and remediation obligations concerning the debtor’s licensed assets.

The Trustee, on the other hand, relied on the constitutional doctrine of paramountcy to argue that there was an operational conflict between s. 14.06(4) of the BIA and the definitions of licensee under the OGCA and the PA. The doctrine of federal paramountcy provides that when otherwise validly enacted federal and provincial laws cover the same or similar subject matter, but there is an operational conflict between the two, the federal legislation prevails and the provincial law is rendered inoperative to the extent of the conflict or inconsistency with the federal law. In the present case, the Trustee argued that the provincial legislation frustrated the legislative purposes of the BIA by preventing a sale of the retained licensed property and should be inoperative to the extent of the frustration. To hold otherwise would allow the AER, a provincial regulator, to create a super-priority for abandonment and environmental liabilities, ranking before all other claims, a result which would jeopardize the current distribution scheme and the certainty provided to creditors under the BIA.

The Trustee contended it had validly disclaimed the licensed properties pursuant to s. 14.06(4) of the BIA and it could not be compelled to comply with the abandonment orders. Once the licensed properties had been disclaimed, the bankrupt estate owed no further obligations to the AER except to the extent that the AER has valid financial claims against the estate, to be dealt with in accordance with the BIA scheme of distribution. Under s. 14.06(7), the Crown is granted a super-priority over contaminated property or property contiguous to it for its costs of remedying any environmental condition affecting the property. Further, under s. 14.06(8), the Crown’s clean-up costs are a provable claim against all the assets of the bankrupt, but will rank as an unsecured claim.
 

The Alberta Court of Queen’s Bench Decision

Chief Justice Wittmann agreed with the Trustee, holding that there was an operational conflict between section 14.06(4) of the BIA and the definitions of licensee under the OGCA and the PA. Section 14.06(4) allows receivers and trustees to disclaim assets and not be found responsible for environment and remediation work.

On the other hand, the OGCA and the PA do not allow a licensee, which is defined to include receivers and trustees, to disclaim assets. Pursuant to the AER orders, the Trustee remains liable for abandonment and remediation obligations with respect to the disclaimed assets, despite the fact that it disclaimed them under s. 14.06(4) of the BIA. Therefore, compliance with both the federal insolvency regime under the BIA and the provincial regime under the OGCA and PA is not possible.

The Court concluded that requiring the Trustee to comply with the abandonment orders triggered the doctrine of federal paramountcy. The effect of the provincial legislation was to remove the benefits otherwise available to receivers and trustees in disclaiming undesired assets and thus frustrated the purposes of the federal BIA. Forcing receivers and trustees to comply with AER orders would also frustrate the legislative purpose of the BIA by requiring receivers and trustees to address the abandonment orders prior to the payment of fees and disbursements or any secured or unsecured creditors.

The Court held that the Trustee had lawfully disclaimed the 107 licensed properties. Given that the Trustee had disclaimed the affected properties in accordance with the provisions of the BIA, the AER could not impose upon the Trustee the obligation to remediate the disclaimed properties. The Court found that the abandonment orders were financial in nature, constituted “provable claims”, and their priority should be determined according to the current scheme of distribution under the BIA. Finally, the Court held that the AER could not request that the Trustee pay security deposits or comply with the abandonment orders as a pre-condition to approve the transfer of Redwater’s AER licenses.

The Court concluded by stating that under s. 14.06 of the BIA, Parliament had expressly legislated with regard to priorities and claims concerning environmental liabilities. Had it been Parliament’s intention to give AER claims a priority over the other creditors of the bankruptcy, it would have expressly said so.


Implications

In light of the Court’s decision in Redwater, a trustee in bankruptcy can disclaim AER-licensed properties and will not be bound by the abandonment orders issued by the AER relating to the disclaimed properties. Further, in the bankruptcy context, the AER will not be permitted to consider disclaimed properties in evaluating a licensee’s LLR ratio for purposes of approving and authorizing the transfer of AER-licensed properties. This decision is positive for secured lenders and ensures that their priority is maintained over the assets of the debtor, albeit subject to remediation claims as contemplated in the BIA distribution scheme.

On the other hand, it is expected that the number of disclaimed AER-licensed properties will place an even heavier burden on the AER and the OWA to abandon, reclaim, and remediate such properties. This in turn could result in the OWA requesting higher levies from oil and gas companies to fund the abandonment and remediation of orphan wells. The clarification and certainty provided by Redwater is welcome, but it may not be the final word, as the AER and OWA are expected to appeal the decision to the Court of Appeal of Alberta.

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