Redwater Decision

On January 31, 2019, the Supreme Court of Canada released its decision in Orphan Well Association v. Grant Thornton Ltd., popularly known as Redwater. In a 5-2 split decision, a majority of the Supreme Court allowed the appeal and held that the Alberta Energy Regulator's (AER/Regulator) assertion of its statutory enforcement powers over an insolvent licensee's assets does not create a conflict with the federal Bankruptcy and Insolvency Act (BIA) as to trigger the constitutional doctrine of federal paramountcy.

The majority held that Section 14.06(4) of the BIA is concerned with the personal liability of trustees-in-bankruptcy (Trustee) and does not empower a Trustee to walk away from the environmental liabilities of the bankrupt estate it is administering. They found that the AER was not asserting any claims provable in the bankruptcy by its abandonment orders and that the priority scheme in the BIA is not upended. Furthermore, the AER's refusal to approve license transfers unless and until a licensee's Liability Management Rating (LMR) obligations have been satisfied does not give the AER a monetary claim provable in the bankruptcy against the licensee. The majority concluded that Alberta's oil and gas regulatory regime can coexist with and apply alongside the BIA.

This decision is significant as it has implications for the energy industry and extends across the board to other sectors. It also engages a multitude of stakeholders including businesses, directors and officers, lenders, insolvency professionals, environmental groups, land owners, governments, regulators and the public.

Read the reasons for the decision below.

BACKGROUND

Since the Alberta Court of Queen's Bench decision in Redwater Energy Corporation (Re), 2016 ABQB 278 and Court of Appeal decision in Orphan Well Association v Grant Thornton Limited, 2017 ABCA 124, we have followed this case and provided analysis in a series of publications, including Where do we go from here? Alberta Court approves renouncement of AER-licensed assets by Trustees and Receivers to avoid monetary environmental obligations , and (Red)water under the bridge? Court of Appeal upholds right of trustee to disclaim uneconomic assets in the Redwater decision. The background and scope are laid out in these previous publications.

The Supreme Court of Canada's Decision

The issue in the appeal considered whether there is a conflict between the Alberta regulatory scheme and section 14.06 of the federal BIA. Specifically, the question was the applicability to a licensee, during bankruptcy, of two powers of the Regulator pursuant to the provincial Oil and Gas Conservation Act1 (OGCA) and the Pipeline Act,2 designed to ensure that licensees satisfy their end-of-life obligations: (a) the Regulator's power to order a licensee to abandon and reclaim licensed assets and associated statutory powers to enforce such orders; and (b) the Regulator's power to impose conditions upon a licensee's transfer of its licenses.

The majority allowed the appeal and agreed with the AER and the Orphan Well Association (OWA). The minority agreed with Grant Thornton Limited (GTL) and would have dismissed the appeal.

LESSONS LEARNED:

Prioritizing the Environment

This landmark decision from the Supreme Court of Canada highlights the generational shift towards environmental protection in every sphere and at every level. The new era of heightened awareness of environmental stewardship was also noted by Martin J.A. (as she then was) in her dissenting reasons at the Alberta Court of Appeal.3 Five judges of the Supreme Court of Canada were willing to redefine "creditor" in the federal insolvency law to exclude provincial Regulators enforcing provincial environmental laws, and to clarify when environmental protection orders of regulators are "sufficiently certain" to be considered monetary claims provable in bankruptcy. The majority rejected the "intrinsically financial" standard added by the Chambers Judge. According to the majority, considering whether an environmental protection order is intrinsically financial is an erroneous interpretation of the third step of the test in Newfoundland and Labrador v. AbitibiBowater Inc.4 (Abitibi); it is too broad and would result in a provable claim being found even where the existence of a monetary claim in bankruptcy is merely speculative. The message appears clear. Environmental protection should be high in the priority of all business endeavors regardless of whether the undertaking directly or indirectly engages environmental laws. This will likely require changes in business practices, especially for industries that are indirectly engaged, such as the lending industry.

Preserving the Orphan Fund as a Reserve

The oil and gas industry had supported the Regulator and OWA, given that the OWA is funded by industry. The oil and gas industry believes that the majority decision restores the balance between environmental obligations and creditor interests to that which existed for many years before the Redwater case. The industry's position is that the OWA and the orphan fund should be a last resort and only used after all other sources of funding are exhausted, including any value in the bankrupt's estate. The result of the minority decision is that the bankrupts' liabilities disclaimed by trustees and receivers would have continued to be sent to the already overburdened orphan program, funded solely by the surviving oil and gas companies. The orphan levy increases every year as a result of the number of disclaimed liabilities sent to the OWA. Oil and gas companies unable to pay the levy face enforcement by the AER, which has the potential to put them out of business or into insolvency. This would also increase the number of liabilities sent to the OWA.

Who Wins in the Short-Term?

It appears that, in the long-term, the majority decision may achieve the environmental protection purpose and curb the influx of liabilities into OWA and to the orphan well funds. However, we also consider the effects of an immediate implementation of the decision and whether it will achieve these purposes, at least in the short term, given the current state of the market and the economy.

Caution should be exercised because, upon a closer look, the decision likely has hidden costs. There appears to be no real winners in the short-term, given the Regulator's evidence that it would be a generation or more before the OWA can address its existing inventory of orphans. Should the majority decision be implemented immediately, there may be a reverse effect with more orphans ending up at the OWA's doorstep, including valuable orphans, as opined by the minority. If not properly managed, the majority decision may be a "pyrrhic victory" for the AER and the OWA.

The dilemma was highlighted in the following statement of Côté J.:

There is much to be said in the context of this appeal about which outcome will optimally balance environmental protection and economic development. On the one hand, enforcing the AER's remediation orders would effectively wipe out the estate's remaining value and...