Originally posted 1 November 2018
SUMMARY
- What were the justices asking?
- Stakes include who will pay for the vast environmental liabilities created by the extraction of oil and gas
- Outcome will determine the future structure of lending in the oil patch
- How is the AER’s licensee liability rating system expected to work during a downturn?
On Thursday 15 February 2018, I attended the hearing on the Redwater Resources case at the impressive Supreme Court Building along Wellington Street. I had hoped to produce a write-up on the questionning by the justices well before now… but life has its interruptions.
The Players
In the next few posts, we will examine the questionning by the seven justices which sat on the panel. There was a phalanx of lawyers presenting their arguments before the Court. The appelants, the Orphan Well Association (OWA) and the Alberta Energy Regulator (AER) were supported by deep-pocketed interests such as the Canadian Association of Petroluem Producers (CAPP), the Attorneys General (AG) of Alberta, Ontario, British Columbia, and Saskatchewan. Other supporters included Ecojustice Canada Society, Greenpeace Canada, and the Action Surface Rights Association.
On the other side respondent Grant Thornton Ltd. (receiver for Redwater Energy), was supported by lawyers from ATB Financial, the Canadian Bankers’ Association, and the Canadian Association of Insolvency and Restructuring Professionals.
To watch the exchange go to Court’s archive of hearings. Webcast
Judicial Interpretation
At times the discussion became esoteric, but boils down to a main test the Court has adopted. The test is called the AbitibiBowater test. While the distinctions drawn during the hearing between Abitibi and Redwater can be somewhat like “Angels dancing on a Pin,” the applicability, or not, of Abitibi will have a profound effect on future financing of the energy industry. The Abitibi test was about how to reconcile priorities under the Bankruptcy and Insolvency Act (BIA) with provincial responsibilities and laws to remediate contaminated industrial sites.
In reasons for judgment at the Court of Queen’s Bench Alberta, Justice Wittman described the test as follows:
“Deschamps J., writing for the majority of the Court, set out a three-part test to determine whether a regulatory obligation, in that case an environmental order, is a provable claim. The first two elements are that there must be a debt, liability or obligation to a creditor, and that it must be incurred before the debtor’s bankruptcy:… The third part of the test is that it must be possible to attach a monetary value to the debt, liability or obligation. When claims are not framed in monetary terms, courts will look at the substance in order to determine whether the third part is met: …. In insolvency proceedings, a claim may be asserted even where it is contingent on a future event. At paragraph 35, Justice Deschamps explained that the reason why a broad range of claims is included under the BIA and CCAA is that it is more equitable to permit “as many creditors as possible to participate in the process and share in the liquidation proceeds.” However, in the context of an environmental protection order,the contingent claim must be sufficiently certain that the regulator will perform the remediation provided for in the order and that it will seek reimbursement of the costs in order for a court to conclude that the order will be subjected to the insolvency process:… (emphasis added)
The majority of the Court set out a list of factors which may be considered when determining whether a claim is sufficiently certain: 1) whether the activities are ongoing; 2) whether the debtor is in control of the property; 3) whether the debtor has the means to comply with the order; and 4) the effect that requiring the debtor to comply with the order would have on the insolvency process.” (2016 ACQB 276 CANLII)
Provable Claim
But what is a provable claim asked Chief Chief Justice Richard Wagner:
Justice Richard Wagner : “How do you draw the line between a provable claim and some kind of obligation, public obligation, public was duty?”
In response, Ms. Keely Cameron, Counsel to the AER, noted that the energy regulator was not seeking to gain a benefit, rather it was acting as a “disinterested party” with no assets at risk, “trying to enforce safety obligations, which is what abandonment obligations are.. to ensure a well is properly plugged and the equipment is dismantled to ensure that no environmental conditions arise and no release occurs that could create public safety and environmental issues.”
Cameron emphsized it was uncertain whether the abandonment work would be carried out at all, and who would carry the work out. Usually the OWA carries out the work but it has been overwhelmed with abandonment work. She also observed the OWA is technically not a regulator and therefore did not fall under “the objective AbitibiBowater test.”
Counsel for the Receiver, Ms. Kelly Bourassa argued that the AER had insisted that its claim for remediation was a provable claim that must be paid first and that frustrated the orderly payment of debts under the BIA.
Justice Rosalie Silberman Abella questioned counsel on the nature of the AER’s monetary claim in an effort to determine if there exists an operational conflict. Counsel for the respondents, Mr. Cumming, replied that “operational conflict rarely engages priorities.” Rather the monetary claim brought to the fore the matter of a “frustration of purpose…
There you have to get to provable claim….but in terms of the third test you really have to go back to what Chief Justice Wittman’s decision at paragraph 170 where he talks about the various factors, all of the factors that were cited by Justice Deschamps, and how they were satisfied on the record: no possession, no funding to do the abandonment, the wells were not sellable…
And he (Wittman) talks about the economic effect on the insolvency, …And Justice Deschamps said you are entitled to consider the financial effect on the insolvency as an additional fact factor.”(Emphasis added)
Justice Abella: Do you agree with the quote from Nortel that Justice Martin said out at paragraph 183 which says the position:
“…is clear: ongoing environmental remediation obligations may be reduced to monetary claims… Only where the work has been done and advances a claim for reimbursement, or where the obligation may be considered a contingent or future claim because it is ‘sufficiently certain.’” (Emphasis added)
Is there anything in Chief Justice Wittman’s reasons that take away from what Justice Deschamps said about the third step, or Justice Morawitz in Nortel?
In responding, Cumming noted that Chief Justice Wittman and Justice Deschamps had set out an “objective test.” Initially the AER had written a letter to the Receiver that “they (AER) were not going to advance the claim, that is a litigation position, it requires delving into their subjective intent.” In other words, the AER was fudging its position to bolster its chances of successfully recouping more value from the bankrupt company’s estate.
Justice Abella challenged the view that AER’s affidavit said– “that they are not in the business of ….performing abandonment work, the evidence was that it rarely if ever conducts abandonment work and where it does so it virtually never asserts a claim for reimbursement. That it seems to me could be an answer to the fact that there is no certainty. Doesn’t that go to the heart of what the third step is?” (Emphasis added)
Cumming responding referred to section 30 of the Alberta law says that if abandonment cost aren’t paid, it becomes a debt to the AER. ” Further discussion ensued around the question about the contingency of the claim and its subjective nature. More debate on the relative reliance on the relative weigh to be given to contradictory letters versus affadavits might play some role in the final decision.
Sufficient certainty
Sufficient certainty is another critical piece in the Abitibi test.
Justice Abella: “I guess I’m stuck on Justice Deschamps’ test, sufficient certainty. Can you give us any guidance on what you think sufficient certainty means?
Mr. Cumming: Well, did Justice Deschamps not say that one of the very factors is if they, if they basically sit on a claim, and just flagging to the..
Justice Abella: I’m looking at paragraph 36 of her Reasons. You may have a better–
Mr. Cumming: well, paragraph 37 near the bottom talks about the activities being on-going, the regulatory body having no realistic alternative but simply delays to improve its position. Go over to the next page. If the property, whether or not the property is under the control and it has been disclaimed, and whether the debtor does not have the means to carry out the work. And there’s no funding for this work. There is no means. All these factors were thoroughly reviewed and she says in 38 it is a relevant consideration what the effect on the insolvency proceeding is.
Justice Abella: Would you accept Chief Justice Wittman’s concession that the fact that there is a letter
[“The AER takes the position that Grant Thornton is legally and statutorily obligated to fulfill these obligations and must do so prior to distributing any funds or finalizing any proposal to creditors, secured or otherwise.” (As read)]
and an affidavit that say two different things means there really is uncertainty?
Mr. Cumming: I would not take that that conclusion because I’m looking at that test more from an objective point of view that, and from the point of view of they had ability to create this debt. The OWA, they can claim on behalf of for the debt at any time under Section 72 and section 30. If you don’t put a claim in, surely that can’t control whether there is a provable claim.
Justice Gascon: You say sufficiently certain, that is the test that Abitibi has provided. The trial judge asked himself the precise question at paragraph 173 and he said it is unclear.
Mr. Zahara: He said in an narrow–
Justice Gascon: in a technical and narrow sense whether there is sufficient certainty and he went beyond that. Isn’t that what we have to look at? Leaving aside the letter, the affidavit. This is a finding…. This is what we look at. And his finding is in a narrow and technical sense it is unclear, but :
“The situation does meet, in my opinion, what was intended by the majority of the Court in AbitibiBowater.”
So we have to ask ourselves, what did they intend? And in order to know what they intend should we not look at the very peculiar facts of Abitibi? And the more we do are we not further away from the situation that we are seeing here?”
Ryan Zahara counsel for the Receiver returned to the position that the effect of the Regulator’s decision to delay becoming a claimant was ultimately strategic in nature. Delay in declaring a well orphan is tantamount to acting as creditors with a provable claim while demanding a security deposit or work to be done, before the Receiver can transfer licenses to a prospective buyer.
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