Doctrine of Paramountcy – Bankruptcy – End-of-Life Obligations
In this decision, the Supreme Court of Canada (“SCC”) considered an appeal from the Alberta Court of Appeal (“ABCA”)’s decision in Orphan Well Association v Grant Thornton Limited, 2017 ABCA 124 (the “ABCA Decision”).
The ABCA Decision upheld the decision of the Alberta Court of Queen’s Bench declaring the definitions of licensee under the Pipeline Act and Oil and Gas Conservation Act (“OGCA“) to be inoperable to the extent that those definitions frustrated the purpose of the federally enacted Bankruptcy and Insolvency Act (“BIA“) under the doctrine of federal paramountcy.
Before the SCC, the AER and the Orphan Well Association (“OWA”) were the appellants. Redwater Energy Corporation (“Redwater”)’s trustee in bankruptcy, Grant Thornton Limited (“GTL”), and Redwater’s primary secured creditor, Alberta Treasury Branches (“ATB”), opposed the appeal.
In a split decision, the SCC allowed the appeal. The majority of the SCC (the “Majority”) found that the AER’s exercise of its statutory powers under the provincial legislation did not create a conflict with the BIA so as to trigger the doctrine of federal paramountcy. The Majority found the AER was not asserting any claims provable in the bankruptcy, and, therefore, did not frustrate the priority scheme in the BIA. Thus, in the Majority’s view, no conflict was caused by GTL’s status as a licensee under Alberta legislation.
The dissenting judges would have dismissed the appeal and affirmed the orders made by the Alberta Court of Queen’s Bench (“ABQB”). The dissenting justices found that there was an operational conflict. The Alberta regime’s failure to recognize the lawfulness of GTL’s disclaimers frustrated the purpose of the federally enacted BIA by interfering with the BIA’s priority scheme.
Alberta Court of Queen’s Bench Decision
GTL sought to disclaim certain of Redwater’s non-producing wells pursuant to section 14.06 of the federally enacted BIA. Section 14.06 of the BIA permits a trustee in bankruptcy to renounce unprofitable assets without the responsibility for environmental abandonment and remediation work.
The AER and the OWA jointly applied for a declaration from the Court that the Receiver’s renouncement of well assets was void and unenforceable, due to the environmental remediation work necessitated as a result of the well abandonment.
The AER and OWA sought an order compelling the GTL, the Receiver, to fulfill its obligations as a licensee under the OGCA and the Pipeline Act in relation to abandonment, reclamation, and remediation of Redwater’s licensed properties.
In the ABQB decision, Wittman C.J. found that compliance with both the provincial legislation and the federal BIA was impossible. Therefore, the Chief Justice held that the doctrine of federal paramountcy was triggered. He declared the definitions of licensee under the Pipeline Act and OGCA to be inoperable to the extent that those definitions frustrated the purpose of the BIA. It followed that the remedies sought by the AER and OWA were denied.
Alberta Court of Appeal Decision
The AER and OWA appealed, and on June 29, 2016, the ABCA granted leave to appeal.
The ABCA dismissed the appeal, based on the majority’s finding that the AER’s claim under the provincial legislation interfered with the priority of distribution in the bankrupt estate.
The ABCA found that Redwater’s obligation to remediate the wells arises directly from a cleanup order, or indirectly from a directive which imposes financial consequences on the transfer of assets. In either case, the ABCA found that the AER’s policy on transfers essentially strips away from a bankrupt estate enough value to meet the outstanding environmental obligations. The ABCA found that the AER was a creditor with a provable claim within the meaning of the BIA.
The ABCA held that the proper interpretation of the BIA does not entitle the AER to proceeds from the bankrupt Redwater’s estate in satisfaction of the environmental claims in priority to the claims of the secured creditor. The ABCA held that to the extent that the interpretation of the provincial legislation leads to a different result, the paramountcy doctrine renders the provincial legislation of no force or effect.
Redwater was the bankrupt company at the centre of this appeal. Its principal assets were 127 oil and gas assets – wells, pipelines and facilities – and their corresponding licences. A few of Redwater’s licensed wells were still producing and profitable. The majority were spent and burdened with abandonment and reclamation liabilities that exceeded their value.
Redwater was first granted licences by the AER in 2009. On January 31 and August 19, 2013, ATB advanced funds to Redwater and, in return, was granted a security interest in Redwater’s present and after-acquired property. In mid-2014, Redwater began to experience financial difficulties. On May 12, 2015, GTL was appointed receiver for Redwater. At that time, Redwater owed ATB approximately $5.1 million.
Position of the AER
Upon being advised of the receivership, the AER notified GTL of its position that it was not a creditor of Redwater and that it was not asserting a “provable claim in the receivership.” Accordingly, notwithstanding the receivership, Redwater remained obligated to comply with all regulatory requirements, including abandonment obligations for all licensed assets. The AER stated that GTL was legally obligated to fulfill these obligations prior to distributing any funds or finalizing any proposal to creditors. It warned that it would not approve the transfer of any of Redwater’s licences unless it was satisfied that both the transferee and the transferor would be in a position to fulfill all regulatory obligations.
The BIA is federal legislation governing the administration of a bankrupt’s estate and the orderly and equitable distribution of property among its creditors. The BIA sets out a priority scheme for paying claims provable in bankruptcy, with secured creditors being paid first, preferred creditors second and unsecured creditors last.
Purpose of the BIA
The equitable distribution of the bankrupt’s assets is one of the purposes of the BIA. It is achieved through the collective proceeding model. Creditors of the bankrupt wishing to enforce a claim provable in bankruptcy must participate in the collective proceeding. Their claims will ultimately have the priority assigned to them by the BIA. This ensures that the bankrupt’s assets are distributed fairly. For the collective proceeding model to be viable, creditors with provable claims must not be allowed to enforce them outside the collective proceeding.
Section 14.06 of the BIA deals with various environmental matters in the bankruptcy context:
• The effect of section 14.06 of the BIA on the liability of a trustee includes that a trustee in bankruptcy is not personally liable for:
(i) pre-bankruptcy environmental “conditions” or damage (BIA, section 14.06(2)(a));
(ii) post-bankruptcy environmental “conditions” or damage, absent specified misconduct (“gross negligence or wilful misconduct”) (BIA, section 14.06(2)(b)); or
(iii) compliance with post-bankruptcy “orders”, “notwithstanding anything in any federal or provincial law”, so long as the trustee abandons or releases any interest in the “real property” that is “affected by the condition or damage” within the time specified (BIA, section 14.06(4)(a)).
• The bankrupt estate remains liable for environmental damage, including:
(i) remediation costs for abandoned property do not rank in priority as “costs of administration” (BIA, section 14.06(6)); and
(ii) claims by Canada or a province for “remedying any environmental condition or environmental damage” are a secured charge on the real property or any “contiguous” property “related to the activity” that caused the environmental damage (BIA, section 14.06(7)).
• An environmental claim is considered a deemed secured charge against the bankrupt estate, and ranks prior to any other claim or security against the property (BIA, section 14.06(7)(b)).
• Environmental claims are provable in bankruptcy under BIA, section 14.06(8), if sufficiently expressed in monetary terms.
Provable Claim and the AbitibiBowater Test
A central concept in the bankruptcy regime is “claims provable in bankruptcy” (BIA, section 121).
The SCC’s decision in Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67 (“AbitibiBowater”) set out the test to determine whether an environmental obligation is a provable claim under section 14.06 of the BIA. In AbitibiBowater, the SCC held that if the environmental obligation is framed in monetary terms, it will qualify as a provable claim. If it is not framed in monetary terms, it must be examined to see whether it will “ripen into a financial liability,” having regard to the “factual matrix and the applicable statutory framework.”
To determine whether an obligation not framed in monetary terms is a provable claim, the SCC, in AbitibiBowater, set out the following three-part test:
(a) there must be a debt, liability or obligation to a creditor;
(b) the debt, liability or obligation must be incurred at the relevant time in relation to the insolvency; and
(c) it must be possible to attach a monetary value to the debt, liability or obligation.
(the “AbitibiBowater Test”).
The Doctrine of Paramountcy
To the extent of operational conflict between the Alberta regulatory regime and the BIA, or that the Alberta regulatory regime frustrates the purpose of the BIA, the doctrine of paramountcy dictates that the BIA must prevail.
Under the doctrine of paramountcy, the burden of proof rests on the party alleging the conflict.
No Operational Conflict or Frustration of Purpose
The majority of the SCC found that there was no operational conflict or frustration of purpose between sections 14.06(2) and 14.06(4) of the BIA and the Alberta regulatory scheme.
The Majority held that section 14.06(4) of the BIA does not empower a trustee to walk away from all responsibilities, obligations, and liabilities concerning “disclaimed” assets. Rather, it clarified a trustee’s protection from environmental personal liability and made it clear that a trustee’s “disclaimer” does not affect the environmental liability of the bankrupt estate. Regardless of whether GTL effectively “disclaimed” the Renounced Assets, it could not walk away from them. In light of the proper interpretation of section 14.06(4), no operational conflict was caused by the fact that, under Alberta law, GTL, as a “licensee”, remained responsible for abandoning the renounced assets using the remaining assets of the Redwater estate.
The Majority found that GTL retained both the protection afforded to it under the federal law (no personal liability) and the privilege to which it was entitled under the provincial law (ability to operate the bankrupt’s assets in a regulated industry). GTL was not being asked to forego doing anything or to voluntarily pay anything. Nor was it urged that the AER could avoid conflict by declining to apply the impugned law during bankruptcy. In the Majority’s opinion, this was a situation in which the provincial law could be – and was – applied during bankruptcy without conflict.
The AbitibiBowater Test: Is the Regulator Asserting Claims Provable in Bankruptcy?
The Majority affirmed the SCC’s statements in AbitibiBowater that not all environmental obligations enforced by a regulator will be claims provable in bankruptcy. As a matter of principle, bankruptcy does not amount to a licence to disregard rules.
In this case, there was no dispute that the second part of the AbitibiBowater Test was met.
AbitibiBowater Test: Part 1: AER Not a Creditor
The Majority found that the AER was not a creditor of the Redwater estate. The end-of-life obligations the AER sought to enforce against Redwater were public duties. Neither the Regulator nor the Government of Alberta stood to benefit financially from the enforcement of these obligations. These public duties were owed, not to a creditor, but, rather, to the public, and were therefore outside the scope of “provable claims”.
AbitibiBowater Test Part 3: Not Sufficiently Certain that the AER Would Perform the Environmental Work and Advance a Claim for Reimbursement
The Majority found that even if the AER had acted as a creditor in issuing abandonment orders, it could not be said with sufficient certainty that it would perform the abandonments and advance a claim for reimbursement.
In determining whether a non-monetary regulatory obligation of a bankrupt is too remote or too speculative to be included in the bankruptcy proceeding, the Court must apply the general rules that apply to future or contingent claims. It must be sufficiently certain that the contingency will come to pass – in other words, that the regulator will enforce the obligation by performing the environmental work and seeking reimbursement.
The Majority found that it was not established either by the chambers judge’s factual findings or by the evidence that it was sufficiently certain that the AER would perform the abandonments and advance a claim for reimbursement. The claim was too remote and speculative to be included in the bankruptcy process.
Conclusion on the AbitibiBowater Test
In the Majority’s view, the end-of-life obligations binding on GTL were not claims provable in the Redwater bankruptcy and they did not conflict with the general priority scheme in the BIA. Requiring Redwater to pay for abandonment before distributing value to creditors did not disrupt the priority scheme of the BIA. In crafting the priority scheme set out in the BIA, Parliament intended to permit regulators to place a first charge on real property of a bankrupt affected by an environmental condition or damage in order to fund remediation. Thus, in the Majority’s view, the BIA explicitly contemplated that environmental regulators will extract value from the bankrupt’s real property if that property is affected by an environmental condition or damage.
The dissenting justices found that Alberta’s regulatory scheme failed to recognize the lawfulness of GTL’s disclaimers, thereby frustrating the purpose of the BIA. The dissenting judges also found that it was sufficiently certain that the AER would complete the abandonment and reclamation work, therefore satisfying the AbitibiBowater Test. The dissenting judges would have held that the AER’s abandonment orders were provable claims, meaning the AER could not compel Redwater or GTL to fulfill the end-of-life obligations.
The appeal was allowed.
The majority of the SCC held that there was no conflict between Alberta’s regulatory regime and the BIA requiring portions of the former to be rendered inoperative in the context of bankruptcy.