Appeal Denied – Paramountcy – Bankruptcy and Insolvency Act – AbitibiBowater Test – Mineral Property – Environmental Claims
In this decision, the ABCA denied the appeals of the AER and the Orphan Well Association (the “OWA”) from the Alberta Court of Queen’s Bench’s (“ABQB”) decision in Grant Thornton Ltd. v Alberta Energy Regulator, 2016 ABQB 278 (the “ABQB Decision”).
ABQB Decision
Redwater Energy Corporation’s (“Redwater”) trustee and receiver in bankruptcy, Grant Thornton Limited (the “Trustee”), sought to disclaim certain of Redwater’s non-producing wells pursuant to section 14.06 of the federally enacted Bankruptcy and Insolvency Act (the “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 OWA applied to the ABQB, seeking an order to compel the Trustee to fulfill its obligations as a licensee under the Oil and Gas Conservation Act (“OGCA”) and the Pipeline Act (“PA”) in relation to abandonment, reclamation, and remediation of Redwater’s licensed properties.
Specifically, the AER and the OWA applied for a declaration from the ABQB that the Trustee’s renouncement of well assets was void and unenforceable, due to the environmental remediation work necessitated as a result of the well abandonment.
In the ABQB Decision denying that application, the ABQB found that compliance with both the provincial legislation (i.e. the PA and the OGCA) and the federal BIA was impossible. Therefore, the ABQB held that the doctrine of federal paramountcy was triggered. The ABQB declared the definitions of licensee under the PA and OGCA to be inoperable to the extent that those definitions frustrated the purpose of the BIA. It followed that the ABQB denied the remedies sought by the AER and OWA.
The Appeal
The AER and the OWA appealed the ABQB Decision to the Alberta Court of Appeal (“ABCA”). The ABCA, in a 2-1 split decision, dismissed the appeal and upheld the ABQB Decision.
The Majority ABCA Decision
Justice Frans Slater provided the ABCA majority’s (referred to simply as the ABCA herein) reasons for dismissing the appeal. The ABCA found that the issues on appeal were the priority of environmental claims, and whether a receiver or trustee in bankruptcy must satisfy the contingent liability inherent in the remediation of the worthless wells in priority to the claims of secured creditors.
The Constitutional Context
The ABCA noted that all parties agreed that:
(a) The BIA is valid federal legislation;
(b) The OGCA and the PA are valid provincial legislation; and
(c) In case of conflict, the federal legislation prevails.
Paramountcy Doctrine
The ABCA explained that the paramountcy doctrine will be engaged if:
(a) There is an operational conflict between the federal and the provincial legislation because it is impossible to comply with both laws; or
(b) The provincial legislation fundamentally frustrates the objectives of the federal legislation.
The ABCA further explained, that under the principle of cooperative federalism, the court will first attempt to interpret and apply the federal and provincial provisions harmoniously, and only if that fails, will paramountcy be invoked.
Ownership of Mineral Property in Alberta
The ABCA noted that Redwater owned a number of profits à prendre relating to oil and gas deposits in Alberta. The ABCA found that such profits à prendre gave a proprietary right to exploit minerals in Alberta and constituted both “property” and “real property,” for the purposes of the BIA.
In contrast, the ABCA found that AER licences are permissive in nature. The ABCA explained that without an AER licence, one is not legally allowed to exploit oil and gas properties. However, unlike a profit a prendre, the ABCA found that an AER licence gave no right to exploit mineral resources unless the holder also had proprietary rights in the minerals themselves.
The ABCA concluded that a “licence” or “agreement” giving a proprietary right to exploit minerals in Alberta (e.g. a profits à prendre) is both “property” and “real property”. A permissive AER licence is neither “property” nor “real property”. The ABCA found that the economic value, at least for bankruptcy purposes, rests in the mines and minerals property itself, and not in the AER licence.
Federal Bankruptcy Regime under the BIA
The ABCA summarized the purposes of the BIA, in general terms, as follows:
(a) To provide for the orderly liquidation and winding up of the insolvent debtor, at the minimum expense (the “single proceeding” model);
(b) To distribute the realizable assets fairly among the creditors, having regard to the legal priority of various types of debts; and
(c) To provide the bankrupt with a “fresh start”, free of the burden of crushing debt.
The ABCA also noted that a central concept in the bankruptcy regime is “claims provable in bankruptcy” (BIA, s. 121).
The ABCA summarized the priority of distribution to creditors set out in s. 136 of the BIA, in descending order, as follows:
(a) Secured creditors (ss. 71, 75, 136(1));
(b) Administrative costs (s. 136(1)(b));
(c) Various “preferred creditors” listed in s. 136; and
(d) Unsecured creditors, sharing rateably if there are insufficient funds.
The ABCA explained that the notion of “fresh start” can only apply to entities that continue to exist following bankruptcy. In the case of a corporation, after a bankrupt corporation is liquidated, it is usually wound up or struck off and ceases to exist. Any regulatory or environmental obligations that were not provable in bankruptcy may exist in theory, but there may be no entity against which they could be enforced.
Environmental Claims under BIA Section 14.06
The ABCA summarized the effect of section 14.06 of the BIA on the liability of a trustee and the bankrupt estate, respectively, as follows:
(a) A trustee in bankruptcy is not personally liable for:
(i) Pre-bankruptcy environmental “conditions” or damage (BIA, s. 14.06(2)(a));
(ii) Post-bankruptcy environmental “conditions” or damage, absent specified misconduct (“gross negligence or wilful misconduct”) (BIA, s. 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, s. 14.06(4)(a)).
(b) 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, s. 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, s. 14.06(7)).
An environment claim is considered a deemed secured charge against the bankrupt estate, and ranks prior to any other claim or security against the property (BIA, s. 14.06(7)(b)).
The ABCA noted that environmental claims are now provable in bankruptcy under BIA, section 14.06(8), if sufficiently expressed in monetary terms.
The AbitibiBowater Test regarding a “Provable Claim”
The ABCA cited the Supreme Court of Canada’s (“SCC”) decision in AbitibiBowater Inc., Re, 2012 SCC 67 (“AbitibiBowater”), which 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 set out the following three-part test:
(a) There must be a debt, liability or obligation to a creditor. When a regulatory body exercises its enforcement powers against a debtor, it is a “creditor” in insolvency proceedings;
(b) The debt, liability or obligation must be incurred at the relevant time in relation to the insolvency. For environmental claims, this can be before or after the insolvency proceedings have begun; and
(c) It must be possible to attach a monetary value to the debt, liability or obligation. The claim may be contingent, as long as it is not too remote or speculative to be included with the other claims,
(the “AbitibiBowater Test”).
The ABCA explained that the third part of the AbitibiBowater Test depends on whether there is “sufficient certainty” that the regulatory body will ultimately perform remediation and crystallize the claim. In assessing the certainty of the claim, the court can examine the entire factual context, including whether the debtor is in control of the property, whether it has the means to comply with the order, whether there are other parties responsible for the remediation, as well as the effect that compliance with the order would have on the insolvency process.
Application of AbitibiBowater Test to Redwater Obligation
The ABCA stated that the “essential question” in this appeal was whether Redwater’s environmental obligations met the test for a provable claim under section 14.06 of the BIA, as interpreted by the SCC in AbitibiBowater. The ABCA noted that there was no dispute that the first two parts of the AbitibiBowater Test was met, namely, that an obligation existed to the AER as a creditor, and the obligation had arose prior to the conclusion of the insolvency.
The ABCA found that it was therefore only necessary to address the third branch of the test.
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. Further, the ABCA found that, if security is taken, as is the case under the AER and OWA’s scheme, the environmental obligation is reduced to monetary terms.
The ABCA found that the AER’s claim under the provincial legislation interfered with the priority of distribution in the bankrupt estate.
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.
Dissent of Sheilah Martin J.A.
Justice Martin, in a dissenting opinion, would have allowed the appeal.
In Justice Martin’s view, the ABQB’s framing of the issue was premised on the assumptions that licence obligations are debts not public duties, and that there is a conflict between the legislative schemes. Justice Martin found that such assumptions failed to consider the real issue, which Justice Martin described as follows: “Given Alberta’s exclusive jurisdiction to regulate its oil and gas resources, do the licence obligations created by provincial legislation conflict with or frustrate the scheme of priorities set out in the BIA?”
Justice Martin concluded that there was no such conflict or frustration; and that both schemes could continue to co-exist.
Co-operative Federalism
Justice Martin referenced the SCC decision in Lemare Logging (2015 SCC 53) at paras 20-21, where the SCC emphasized the principle of cooperative federalism and stated:
[21] Given the guiding principle of cooperative federalism, paramountcy must be narrowly construed. Whether under the operational conflict or the frustration of federal purpose branches of the paramountcy analysis, courts must take a ‘restrained approach’, and harmonious interpretations of federal and provincial legislation should be favoured over interpretations that result in incompatibility.
Justice Martin found that a “mere effect” on bankruptcy generally, such as an effect on the amount that is available for distribution under the bankruptcy regime, does not frustrate the purpose of the BIA, and does not render a provincial law inapplicable in bankruptcy.
Abandonment Obligations not a Monetary Claim
Justice Martin found that abandonment work obligations under a licence is not a claim by the AER.
Specifically, Justice Martin found that there was not sufficient certainty that the work would be done, either by the AER or the OWA, or that a claim for reimbursement would be made. Justice Martin concluded that there was therefore no monetary claim that could be compromised in bankruptcy proceedings. Rather, Justice Martin stated that “what we are dealing with are public duties and regulatory obligations that survive the bankruptcy.”
Justice Martin found that the cost of abandonment and reclamation for licensed wells is an ongoing regulatory obligation, well known and understood by the debtor licensee and the licensee’s lenders. The end of life obligations associated with licensed assets, being compliance costs to generally applicable laws, are factored in to the lender’s risk assessment and its decision to lend.
Justice Martin concluded that the continued application of the regulatory regime following bankruptcy does not frustrate the purpose of the BIA by determining or reordering priorities among creditors. Rather, if the result is that there is less value available for distribution to the creditors, that is part of the bankruptcy scheme and the risk that the creditor takes when lending on the basis of the debtor’s assets, with their associated obligations.
