Sequoia Resources: Environmental Obligations And The Role Of The Trustee In Bankruptcy

• Published date: 04 February 2021
• Subject Matter: Environment, Energy and Natural Resources, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Energy Law, Environmental Law
• Law Firm: Osler, Hoskin & Harcourt LLP
• Author: Ms Emily Paplawski, Randal Van De Mosselaer, Marc Wasserman and Colin Feasby

On January 25, 2021, the Alberta Court of Appeal (the ABCA) released its reasons in PricewaterhouseCoopers Inc. v Perpetual Energy Inc., 2021 ABCA 16 (Perpetual Energy). While the issue before the ABCA was of a preliminary nature ' namely whether the claims of the trustee in bankruptcy (the Trustee) should be summarily dismissed or struck as not disclosing a cause of action ' the legal principles considered by the ABCA extend far beyond the immediate parties and include broader questions around the nature and role of abandonment and reclamation obligations (AROs) after bankruptcy, the scope of a trustee in bankruptcy's duties to third parties, the duties of a director in respect of a company's environmental liabilities, and the scope of releases in favour of directors.

In particular, the ABCA considered (and in some cases, emphasized or determined) the following important issues:

• the nature of AROs, as set out by the Supreme Court of Canada in its 2019 decision in Orphan Well Association v Grant Thornton Ltd;¹
• the ability of a trustee in bankruptcy to obtain status as a "complainant" and launch an oppression action² on behalf of the estate of a bankrupt corporation;
• the scope of directors' and officers' duties in respect of environmental obligations owed by a company, including whether directors and officers owe a duty to the public to ensure that a corporation complies with its environmental obligations;
• the scope of releases in sale transactions; and
• the scope of a trustee in bankruptcy's duties.

In the result, the ABCA determined that the case management judge's criticisms of the Trustee were entirely unwarranted. According to the ABCA, the claims raised by the Trustee were complex and, in some cases, raised novel issues, which did not permit for fair disposition on a summary basis. The ABCA accordingly allowed the Trustee's appeal, set aside the award of costs made by the case management judge against the Trustee, found that the award of costs made by the case management judge against the Trustee "in its personal capacity" was "inappropriate," and dismissed the appeal of Perpetual Energy Inc. (Perpetual Energy Parent), Susan Riddell Rose (Ms. Rose) and the other respondents.

Background

Perpetual Energy involved complex claims by the Trustee of Sequoia Resources Corp., formerly known as Perpetual Energy Operating Corp. (Perpetual/Sequoia), against a former director of Sequoia and certain other companies in the Perpetual Energy Group arising from a pre-bankruptcy multi-step transaction.

Transaction

In 2016, Perpetual Energy Parent entered into a multi-step transaction (the Aggregate Transaction) whereby certain mature legacy oil and gas assets, which had significant AROs associated with them, were sold to Kailas Capital Corp. (Kailas). The Aggregate Transaction was structured such that the legacy assets could be transferred without triggering a regulatory review process from the Alberta Energy Regulator (AER).

As part of the Aggregate Transaction, Perpetual Operating Trust, the holder of the legacy assets, initially transferred the beneficial interest in the assets to its trustee, Perpetual/Sequoia, which was then a member of the Perpetual Energy Group (the Asset Transaction). Then, Perpetual Energy Parent sold all of its shares in Perpetual/Sequoia to a subsidiary of Kailas for $1.00, resulting in Kailas becoming the new parent corporation of Perpetual/Sequoia. As is common in sale transactions, Kailas and the sole director of Perpetual/Sequoia, Ms. Rose, signed a resignation and mutual release (the Release) pursuant to which Ms. Rose and Perpetual/Sequoia released each other from claims that they might otherwise be entitled to bring against the other.

Approximately 18 months after the Aggregate Transaction, Perpetual/Sequoia assigned itself into bankruptcy, and PricewaterhouseCoopers Inc. was appointed as Trustee.

Dispute

Following its appointment, the Trustee reviewed Perpetual/Sequoia's affairs and concluded that the Asset Transaction was not in the best interests of Perpetual/Sequoia. In particular, the Trustee alleged that Perpetual/Sequoia obtained only $5.67 million in value for the assets but assumed more...