Orphan Well Association v. Grant Thornton

In a landmark appeal decision released on April 24, 2017, the majority of the Alberta Court of Appeal dismissed an appeal by the Alberta Energy Regulator (AER) and Orphan Well Association (OWA) of the May 2016 decision of the Honourable Neil Witt-mann, Chief Justice of the Court of Queen’s Bench of Alberta in the Redwater Energy Corp. (Redwater) receivership and bankruptcy proceedings.

In its decision, the majority of the Alberta Court of Appeal held that Grant Thornton Ltd., the receiver and trustee in the Redwater Energy Corp. receivership and bankruptcy proceedings, was entitled to disclaim Redwater’s non-producing oil wells and sell its producing ones.

Redwater is a junior oil and gas producer that went into insolvency in the spring of 2015. Some of Redwater’s oil wells are valuable, while others might be considered "orphans" because the costs of environmental remediation required to abandon them exceed the value of those wells. Redwater’s trustee in bankruptcy wanted to renounce or disclaim Redwater’s interest in the orphan wells, but keep and sell the valuable wells to maximize the recovery of the secured creditor. The Alberta Energy Regulator argued that that was not permissible, and that a sufficient portion of the sale proceeds from the valuable wells should be set aside to meet the expected costs of remediating the orphan wells.

The decision of the Alberta appellate court dismissed the appeals of the AER and the OWA, who had argued that Chief Justice Wittmann erred in finding that Grant Thornton should not have to carry out the abandonment, reclamation and remediation obligations of Redwater’s non-producing wells, or perform abandonment orders as issued by the AER, which included paying a security deposit.

Specifically, the majority of the Court of Appeal (comprising the Honourable Mr. Justice Frans Slatter and the Honourable Madam Justice Frederica Schutz) held that:

By attempting to extract security deposits or the performance of abandonment obligations on a transfer of AER licenses, the AER was in effect transferring the proprietary value in the bankrupt estate from the underlying real property assets of Redwater (which were interests in its oil and gas properties) to the AER licences, contrary to the scheme of distribution contemplated under the Bankruptcy and Insolvency Act (BIA).

A trustee and receiver is entitled to abandon or renounce oil and gas assets encumbered with environmental obligations, the court found.

"It is commonplace for trustees and receivers to disclaim or ‘abandon’ assets," Justice Slatter wrote in the majority decision. "Whether they formally abandon the assets, or merely leave them unrealized at the end of the bankruptcy process makes little difference. A trustee must transfer unrealized assets to the bankrupt at the end of the process. ... If a trustee decides that an oil and gas well has no net realizable value, ... the trustee can effectively ignore the asset. ...

"[T]he BIA recognizes the ability of a trustee to abandon assets that are subject to environmental obligations."

The AER’s requirement that security be posted for abandonment obligations, or diverting value from the bankrupt estate to ensure that remediation is performed, is sufficient to classify the claims of the AER as financial in nature, making them a creditor whose claims are subject to the priorities prescribed by the BIA. The AER cannot indirectly interfere with the value of assets in a bankruptcy by placing financial preconditions on the transfer of AER licences.

Based on the doctrine of federal paramountcy, the obligations of trustees and receivers under both the Oil and Gas Conservation Act (OGCA) and the Pipeline Act (PA) to abandon oil wells and pipelines; pay the costs of remediation performed by other persons; and to obey any order of the AER is in operational conflict with section 14.06 of the BIA. Section 14.06 of the BIA exempts a receiver or a trustee from personal liability, allows a trustee and receiver to disclaim assets, and prescribes the priority of environmental remediation costs.

The majority of the Alberta Court of Appeal also held that the applicable sections of the OGCA and PA frustrate the federal purpose of the BIA of managing the winding up of insolvent corporations and settling the priority of claims against them. The majority therefore confirmed that such obligations of the AER are unenforceable as against the Receiver and Trustee.

Arguing the applications on behalf of Grant Thornton were Jeffrey Oliver, with Danielle Maréchal of Cassels Brock & Blackwell LLP and Tom Cumming of Gowling WLG (Canada) LLP.

Bennett Jones LLP acted for Orphan Well Association with a team that included Kenneth Lenz, Q.C., and Michael Selnes.

Alberta Energy Regulator was represented internally by Patricia Johnston, Q.C., and Keely Cameron.

Blake, Cassels & Graydon LLP acted for Alberta Treasury Branches with a team that included Ryan Zahara and Chris Nyberg.

The Minister of Justice and Solicitor General of Alberta was represented internally by Lillian Riczu, Lisa Semenchuk and Vivienne Ball.

The Attorney General of Canada was represented internally by Bruce Hughson.

Lawson Lundell LLP represented the Canadian Association of Petroleum Producers with a team that included Lewis Manning.

McMillan LLP represented the Canadian Association of Insolvency and Restructuring Professionals with a team that included Caireen Hanert and Adam Maerov.

The Attorney General for Saskatchewan was represented internally by R. J. Fyfe.

British Columbia (Natural Gas Development) and the British Columbia Oil and Gas Commission was represented internally by A. Welch.