Environmental Obligations in Bankruptcy – Who is Responsible?

February 28, 2019

The Supreme Court of Canada (“SCC”) released its decision in Orphan Well Association v Grant Thornton Ltd., 2019 SCC 51 (“Redwater”) on January 31, 2019. The case is expected to have sweeping implications for the Oil and Gas industry in Alberta, but the implications extend beyond that industry, and beyond that province.

Background

In Redwater, the Alberta Energy Regulator (the “Regulator”) imposed costly end-of-life environmental obligations associated with unproductive oil and gas wells on Grant Thornton Limited (“GTL”) as receiver, and then as Trustee in Bankruptcy of the estate of Redwater (the “Estate”). The cost of the obligations would likely exceed the sale proceeds of the productive wells forming part of the Estate and GTL disclaimed the unproductive assets. GTL invoked s. 14.06(4)(a)(ii) of the Bankruptcy and Insolvency Act, RSC, 1985, c B-3 (“BIA”), and took the position that it was not responsible for the end-of-life obligations associated with the disclaimed assets.

GTL argued that the Regulator’s use of its statutory powers conflicted with the provisions of the BIA. Second, it argued that the Regulator was attempting to upend the priority scheme established by the BIA by having the end-of-life obligations satisfied ahead of Redwater’s secured creditors.

The SCC Decision

Chief Justice Wagner, writing for a 5-2 majority, found that s. 14.06(4) of the BIA is concerned only with the personal liability of the Trustee, and does not allow GTL to walk away from environmental obligations. Chief Justice Wagner stated:

Where a trustee has “disclaimed” real property, it is not personally liable under an environmental order applicable to that property, but the bankrupt estate itself remains liable. Of course, the fact that the bankrupt estate remains liable even where a trustee invokes s. 14.06(4) does not necessarily mean that the trustee must comply with environmental obligations in priority to all other claims. The priority of an environmental claim depends on the proper application of the Abitibi test, as I will discuss below.2

The SCC found that the priority issue turned on whether the end-of-life obligations amounted to a claim provable in bankruptcy, properly determined by applying the test from Newfoundland and Labrador v AbitibiBowater, 2012 SCC 673  (“Abitibi”). It found that the first step of the Abitibi test had become “practically meaningless”4 by assuming that a regulator is always a creditor when it exercises its enforcement powers against a debtor. The SCC clarified that whether a regulator is found to be a creditor will turn on whether it stands to benefit financially from the environmental obligations that it is imposing, or the obligations are for the benefit of the public. Applying this conclusion to Redwater, the SCC found that the Regulator was not a creditor, as the end-of-life obligations were for the benefit of the public.

The SCC concluded its reasons with the below statement:

Bankruptcy is not a license to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy. They must, for example, comply with non-monetary obligations that are binding on the bankrupt estate, that cannot be reduced to provable claims, and the effects of which do not conflict with the BIA, notwithstanding the consequences this may have for the bankrupt’s secured creditors. The Abandonment Orders and the LMR requirements are based on valid provincial laws of general application – exactly the kind of valid provincial laws upon which the BIA is built. As noted in Moloney, the BIA is clear that “the ownership of certain assets and the existence of particular liabilities depend upon provincial law” (para. 40). End-of-life obligations are imposed by valid provincial laws which define the contours of the bankrupt estate available for distribution.5

What Does the Decision Mean?

The SCC’s interpretation of s. 14.06(4) of the BIA draws a bright line in terms of the limited effect of disclaiming assets of the estate of a bankrupt. While the section protects the trustee from personal liability, it does not absolve the estate from environmental obligations. The SCC clarified Abitibi test opens the door for more obligations imposed by regulators to be afforded a super-priority position ahead of secured and unsecured creditors inside the BIA’s priority scheme.

The implications of this decision should not be underestimated. In light of the SCC’s interpretation of s. 14.06(4) and the clarified Abitibi test, anyone lending into or advising a person or company operating in a provincially regulated industry in Atlantic Canada should undertake a review of all applicable environmental legislation to identify areas in which the costs associated therewith could rank ahead of secured creditors.6

_________________

1 On November 9, 2017, leave to appeal was granted from a decision of the Alberta Court of Appeal (Orphan Well Association v Grant Thornton Ltd., 2017 ABCA 124), dismissing an appeal by the Alberta Energy Regulator and Orphan Well Association of the May 2016 decision (Grant Thornton Ltd. v Alberta Energy Regulator, 2016 ABQB 278) of the Honourable Neil Wittmann, Chief Justice of the Court of Queen’s Bench of Alberta.

2 Redwater, at para 99.

3 (1) There must be a debt, a liability or an obligation to a creditor; (2) The debt, liability, or obligation must be incurred before the debtor becomes bankrupt; and (3) It must be possible to attach a monetary value to the debt, liability or obligation.

4 Redwater, at para 121.

5 Redwater, at para 160.

6 For example, under section 4 of the Clean Water Act, SNB 1989, c C-6.1 the Minister may issue an order “if a contamination has been released into or upon water, to carry out clean-up, site rehabilitation, restoration of land, premises or personal property or other remedial action.” Under the SCC’s iteration of the Abitibi test, the order would likely be found to be for the benefit of the public and not the Minister, and thus, not a provable claim under the BIA, potentially granting it priority status ahead of secured and unsecured creditors.

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