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CREDITORS AND CLAIMS - Claims - Priorities

Thursday, May 25, 2017 @ 8:43 AM  


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Appeals by Orphan Well Association and Alberta Energy Regulator from a decision of a chambers judge finding that the claim of Redwater Energy’s secured creditor, the Alberta Treasury Branches, had priority over the obligation to reclaim Redwater’s oil and gas wells. Redwater, an insolvent oil and gas company, owned some oil wells that were valuable, and others that could potentially be declared orphans because the costs of environmental remediation required to abandon them exceeded the value of those wells. Redwater’s trustee in bankruptcy sought to renounce Redwater’s interest in the orphan wells, but keep and sell the valuable wells to maximize the recovery of the secured creditor, the Alberta Treasury Branches. The Alberta Energy Regulator indicated that this was not permissible, and required that a sufficient portion of the sale proceeds from the valuable wells be set aside to meet the expected costs of remediating the orphan wells. The trustee disclaimed the assets it had previously renounced in its capacity as Receiver, and indicated that it did not intend to comply with the environmental remediation orders. The appellants then applied for declarations that the disclaimer by the Receiver and trustee of some of Redwater’s assets was void and sought an order compelling compliance with the abandonment and remediation orders issued by the Regulator. The application was dismissed. The appellants argued that, until the assets of the estate were exhausted, the trustee was obliged to discharge all of Redwater’s environmental obligations.

HELD: Appeals dismissed. Under the proper interpretation of the Bankruptcy and Insolvency Act, the Regulator could not insist that the trustee devote substantial parts of the bankrupt estate in satisfaction of the environmental claims in priority to the claims of the secured creditor. To the extent that the interpretation of the provincial legislation led to a different result, the paramountcy doctrine was engaged. Environmental claims did not have any higher or special priority in the bankruptcy scheme. Neither s. 14.06 of the Bankruptcy and Insolvency Act nor the reasons of the chambers judge mandated the release of liability of the estate for complying with regulatory orders, as the Orphan Well Association argued. The trustee was not personally liable for environmental obligations, but that did not mean that the bankrupt debtor’s estate was not liable. Section 14.06(4) did not limit the power of the trustee to renounce or disclaim properties to those circumstances where it might be exposed to personal liability. The environmental obligations of Redwater met the test for a provable claim under s. 14.06. The Regulator’s policy on transfers essentially stripped away from the bankrupt estate enough value to meet the outstanding environmental obligations. What the Regulator was attempting to do was attach conditions on Redwater’s Alberta Energy Regulator licences that might be transferred, which really related to the wells that had been disclaimed by the trustee and were not being transferred. The effect was to transfer economic value from the producing wells to the non-producing wells in order to enforce the environmental obligations attached to the latter. The Regulator could control the transfer of Alberta Energy Regulator licences of bankrupt companies, but not by placing financial conditions on transfer that disrupted the priorities under the bankruptcy legislation. The Alberta Energy Regulator’s licensing scheme depended on the enforcement of environmental liabilities outside the bankruptcy regime, in violation of the single proceeding model. The Regulator could not sidestep the problem by artificially distinguishing between “managing obligations” and “recovering claims.” The Regulator could not establish a parallel process to collect claims.

Grant Thornton Ltd. v. Alberta Energy Regulator [2017] A.J. No. 402, Alberta Court of Appeal, F.F. Slatter, F.L. Schutz and S.L. Martin JJ.A., April 24, 2017. Digest No. TLD-May222017006