28 LEXPERT MAGAZINE
|
JUNE 2017
BIG SUITS
A LOOK AT THE ALBERTA COURT OF APPEAL'S UPHOLDING OF THE DECISION IN THE REDWATER ENERGY CORP. RECEIVERSHIP
AND BANKRUPTCY PROCEEDINGS, WHICH FOUND THAT REDWATER'S RECEIVER AND TRUSTEE, GRANT THORNTON,
WAS ENTITLED TO DISCLAIM REDWATER'S NON-PRODUCING OIL WELLS AND SELL ITS PRODUCING ONES
ORPHAN WELL ASSOCIATION
V. GRANT THORNTON
DECISION DATE: APRIL 24, 2017
In a landmark appeal decision released on
April 24, 2017, the majority of the Alberta
Court of Appeal dismissed an appeal by the
Alberta Energy Regulator (AER) and Or-
phan Well Association (OWA) of the May
2016 decision of the Honourable Neil Witt-
mann, Chief Justice of the Court of Queen's
Bench of Alberta in the Redwater Energy
Corp. (Redwater) receivership and bank-
ruptcy proceedings.
In its decision, the majority of the Alberta
Court of Appeal held that Grant ornton
Ltd., the receiver and trustee in the Redwater
Energy Corp. receivership and bankruptcy
proceedings, was entitled to disclaim Redwa-
ter's non-producing oil wells and sell its pro-
ducing ones.
Redwater is a junior oil and gas producer
that went into insolvency in the spring of
2015. Some of Redwater's oil wells are valu-
able, while others might be considered "or-
phans" because the costs of environmental re-
mediation required to abandon them exceed
the value of those wells. Redwater's trustee in
bankruptcy wanted to renounce or disclaim
Redwater's interest in the orphan wells, but
keep and sell the valuable wells to maximize
the recovery of the secured creditor. e Al-
berta Energy Regulator argued that that was
not permissible, and that a sufficient portion
of the sale proceeds from the valuable wells
should be set aside to meet the expected costs
of remediating the orphan wells.
e decision of the Alberta appellate
court dismissed the appeals of the AER and
the OWA, who had argued that Chief Jus-
tice Wittmann erred in finding that Grant
ornton should not have to carry out the
abandonment, reclamation and remediation
obligations of Redwater's non-producing
wells, or perform abandonment orders as is-
sued by the AER, which included paying a
security deposit.
Specifically, the majority of the Court of
Appeal (comprising the Honourable Mr.
Justice Frans Slatter and the Honourable
Madam Justice Frederica Schutz) held that:
By attempting to extract security deposits
or the performance of abandonment obliga-
tions on a transfer of AER licenses, the AER
was in effect transferring the proprietary
value in the bankrupt estate from the under-
lying real property assets of Redwater (which
were interests in its oil and gas properties) to
the AER licences, contrary to the scheme of
distribution contemplated under the Bank-
ruptcy and Insolvency Act (BIA).
A trustee and receiver is entitled to aban-
don or renounce oil and gas assets encum-
bered with environmental obligations, the
court found.
"It is commonplace for trustees and re-
ceivers to disclaim or 'abandon' assets," Jus-
tice Slatter wrote in the majority decision.
"Whether they formally abandon the assets,
or merely leave them unrealized at the end
of the bankruptcy process makes little differ-
ence. A trustee must transfer unrealized assets
to the bankrupt at the end of the process. ... If
a trustee decides that an oil and gas well has
no net realizable value, ... the trustee can ef-
fectively ignore the asset. ...
"[T]he BIA recognizes the ability of a
trustee to abandon assets that are subject to
environmental obligations."
e AER's requirement that security be
posted for abandonment obligations, or di-
verting value from the bankrupt estate to
ensure that remediation is performed, is
sufficient to classify the claims of the AER
as financial in nature, making them a credi-
tor whose claims are subject to the priorities
prescribed by the BIA. e AER cannot in-
directly interfere with the value of assets in
a bankruptcy by placing financial precondi-
tions on the transfer of AER licences.
Based on the doctrine of federal para-
mountcy, the obligations of trustees and
receivers under both the Oil and Gas Con-
servation Act (OGCA) and the Pipeline Act
(PA) to abandon oil wells and pipelines; pay
the costs of remediation performed by other
persons; and to obey any order of the AER is
in operational conflict with section 14.06 of
the BIA. Section 14.06 of the BIA exempts
a receiver or a trustee from personal liability,
allows a trustee and receiver to disclaim assets,
and prescribes the priority of environmental
remediation costs.
e majority of the Alberta Court of Ap-
peal also held that the applicable sections
of the OGCA and PA frustrate the federal
purpose of the BIA of managing the winding
up of insolvent corporations and settling the
priority of claims against them. e majority
therefore confirmed that such obligations of
the AER are unenforceable as against the Re-
ceiver and Trustee.
Arguing the applications on behalf of
Grant ornton were Jeffrey Oliver, with
Danielle Maréchal of Cassels Brock &
Blackwell LLP and Tom Cumming of
Gowling WLG (Canada) LLP.
Bennett Jones LLP acted for Orphan
Well Association with a team that included
Kenneth Lenz, Q.C., and Michael Selnes.
Alberta Energy Regulator was represented
internally by Patricia Johnston, Q.C., and
Keely Cameron.
Blake, Cassels & Graydon LLP acted for
Alberta Treasury Branches with a team that
included Ryan Zahara and Chris Nyberg.
e Minister of Justice and Solicitor
General of Alberta was represented inter-
nally by Lillian Riczu, Lisa Semenchuk and
Vivienne Ball.
e Attorney General of Canada was rep-
resented internally by Bruce Hughson.
Lawson Lundell LLP represented the Ca-
nadian Association of Petroleum Producers
with a team that included Lewis Manning.
McMillan LLP represented the Canadian
Association of Insolvency and Restructur-
ing Professionals with a team that included
Caireen Hanert and Adam Maerov.
e Attorney General for Saskatchewan
was represented internally by R. J. Fyfe.
British Columbia (Natural Gas Develop-
ment) and the British Columbia Oil and
Gas Commission was represented inter-
nally by A. Welch.
