Alberta Court Of Appeal Upholds The Redwater Decision

Orphan Well Associated v Grant Thornton Limited1

On April 24, 2017, the Alberta Court of Appeal upheld the decision in Redwater Energy Corporation (Re)2, and dismissed the appeals of the Orphan Well Association (OWA) and the Alberta Energy Regulator (AER).

The majority of the Alberta Court of Appeal held that Grant Thornton Limited (Grant Thornton), the Receiver and Trustee of Redwater Energy Corporation (Redwater), was entitled to disclaim their interest in certain uneconomic wells and pipelines of Redwater, but keep and sell the valuable wells and pipelines. The decision also confirmed that claims for abandonment and reclamation are typically subordinate to the claims of secured creditors.

Background

As a result of the recent economic downturn, Redwater, a publically traded junior oil and gas producer in Alberta, suffered financial setbacks and was unable to meet its financial obligations to Alberta Treasury Branches (ATB), its primary secured creditor (among others). ATB commenced enforcement proceedings and, on May 12, 2015, Grant Thornton was appointed as receiver over the assets, undertakings and property of Redwater. On October 28, 2015, a further Court order was issued adjudging Redwater bankrupt and appointing Grant Thornton as the trustee of Redwater's estate.

Grant Thornton, in its capacity as Receiver and Trustee of Redwater, disclaimed their interest in certain uneconomic wells and pipelines of Redwater. In reply, the AER issued orders requiring Grant Thornton to abandon and reclaim the disclaimed wells and pipelines. Upon the receipt of these orders, Grant Thornton brought an application seeking to declare certain provisions of the provincial Oil and Gas Conservation Act (OGCA) and the Pipeline Act (PA) unconstitutional by invoking the doctrine of federal paramountcy. The basis for the constitutional challenge brought by Grant Thornton was that the federal Bankruptcy and Insolvency Act (the BIA) determines the priority of claims in a bankruptcy. To the extent that the provisions of the provincial OGCA and PA disrupt the priority scheme established under the BIA, those provisions conflict with the BIA and should be rendered inoperative or inapplicable to the extent of the conflict or inconsistency.

The Chief Justice of the Alberta Court of Queen's Bench agreed with Grant Thornton, and held the claims of secured creditors have priority over the obligations to abandon and reclaim the uneconomic wells and pipelines.

The OWA and AER each appealed this decision.

Issues in Appeals

As stated in the Court of Appeal's majority decision, the issues in the appeals were the priority of environmental claims and whether a receiver or trustee in bankruptcy must satisfy the contingent liability inherent in the remediation of uneconomic wells and pipelines in priority to the claim of secured creditors. Determining these issues...