Practicalities
The effect upon Alberta’s energy industry will be profound whichever way the Supreme Court decides. As the following exchanges illustrate, the role of the Receiver or Trustee in Bankruptcy is crucial in enabling creditors to be paid back.
Justice Côté: Mr. Lenz, you are describing to us the consequences of a judgment of our Court dismissing appeal you say. In their factums the respondents are making an argument about the practical consequences of a judgment allowing the appeal…..
Mr. Lenz: And they say if the appeal is allowed there won’t be any Trustees interested in being Trustees-Trustees-in- Bankruptcy in this industry, which we have the practical consequence of not only the producing wells, but the non-producing wells depending on the value, will all become orphans.
Madame Justice Côté I’m interested in the practical aspects.
Mr Lenz: Thank you Madam Justice Côté, I’m glad you have asked that. This case isn’t about the personal liability of the Trustee. It never was. The Trustee has never been at risk of personal liability. The AER has never in Alberta history gone after the Trustee personally beyond the value of the estate. That is not what this case is about. And I would answer the question in another way. (Emphasis added)
Justice Gascon: You say they have never done it; can they do it? Can they go after, once you issue an order like the one we’re talking about here, because that’s one of the arguments that’s being raised by the other side, is that the personal liability of the Trustee can be in play. Even though I hear you that it has never been done, it’s not the approach that the regulator takes, can it be done?
Mr. Lenz. In my submission, Mr. Justice Gascon, no. And the reason among, first of all, the fundamental principle is that the Trustee or the Receiver is liable to the value of the assets in the estate, kind of like an executor under a Will. You might need to pay the deceased’s debts, but if you run out of money you don’t keep paying. That’s 14.06 (2) and they can operate together.
14.06(2) says, with respect to environmental liabilities, that they are not going to be responsible, absent gross negligence. That’s an appropriate test. Receivers should be subject to regulation. They are moving dangerous chemicals through municipalities, if they move it through the wrong pipeline there could be a dangerous consequence. They have to be regulated, subject to, and so that if they are grossly negligent they could be responsible, but beyond that in my submission that’s not an issue in this case and it may never be an issue that comes before this Court.
Justice Côté: Mr. Lenz going back again to the practical consequences, you are talking about personal liability, what would be the interest of a secured creditor to petition in bankruptcy the debtor if that secured creditor cannot have an expectation of getting back his money? Because bankruptcy does not happen automatically in the country, …If a secured creditor has no interest of petition in bankruptcy because he is not going to recover his money, so the insolvent company won’t be able to continue the business and all the well, producing and non-producing will become orphans. Do you think that, in light of the policy considerations that you have described before, that it will be a good thing on a good consequence for the industry in Alberta? (Emphasis added)
Mr. Lenz: And if there is no realizable value in the assets of an estate and secured creditor finds that, in other words they really did a bad job of evaluating the collateral that they had for their security, in that case in the past and what I would suggest is appropriate in the future the AER will move in and it will take over all the assets of the company. And yes, if there are 10 assets that have some value it will be able to realize that value and use that to apply to the abandonment costs….
I never answered your other question, though, which was the idea that Trustees will refuse to take mandates.
Again, many of my colleagues here have acted in insolvency in Alberta for as long as me, 25 years, Trustees have been taking mandates, Receivers have been taking mandates in Alberta like everywhere else. This is, again, it’s not something that’s a real issue.
Sure, 14.06 (2) was an important provision, but the abandonment provisions, that’s where we take real issue.
Real Property and Profits a prendre
Justice Brown: Can I, speaking of 14.06, at some point will you be addressing for your colleagues be addressing what is referred to in sub (4) and sub (7) by the term real property?
Mr. Lenz: So what happened here is that a statute or a provision designed to manage the personal liability of Trustees, which is something we take no issue with, has been used now to enhance the value of the estate and that has a lot of bad social consequences. You know, it encourages lenders at the end of, or companies at the end of, if they are in financial trouble to not clean up the environment. It encourages companies in and one of the down cycles, you know, my friends are going to refer you to a case, the Sydco case, it just happened, where what happens is, in a down cycle the directors and officers can simply buy the debt, credit bid out the assets and liabilities on to the public. That’s the kind of maneuver this decision encourages and kind of procedure that’s going to happen in the downturns.
But coming back to your point, Justice Brown, first of all I would say that the statute should be confined to personal liability, but with respect to real property and abandonment obligations in 14.06, one of the areas where Justice Slatter at the Court of Appeal was incorrect, and maybe you could say he’s correct if you construed his words really narrowly, he was incorrect in saying renouncement or abandonment is commonplace. That’s not the case. There is no evidence of that- none of my friends who practice and insolvency represented that.
Before Redwater nobody wrote a letter to the AER saying we renounce these 20 or these hundred or these thousand wells. It worked under the old system.
And this comes back to something you said. This system has worked. The system that we had before people were allowed to renounce assets worked. Trustees took appointments, secured creditors got parts of their money back, the public was protected by monetizing some of those assets and using the money to pay for abandonment liabilities.
Justice Brown: property involved in a bankruptcy.
Mr. Lenz: So we submit that 14.06 (4) doesn’t apply to a the renouncement of assets to the extent that the Courts below have said it does.
There are a number of points to this and alternative arguments, but the first one would be it specifically refers to personal liability of the Trustee and, like the rest of the section, should be so construed.
Second, and I think this is one of the points raised by Justice Martin in her dissent, when you look at the section it really says okay if there’s a regulatory order that the Trustees can’t comply with for one reason or another, maybe they don’t have the technical capability, maybe it’s going to take too long, maybe they don’t have enough assets in the estate, it basically is a notification mechanism to tell, in this case the Alberta Energy Regulator, “I can’t comply with that, I’m not going to comply with that.” It puts them on notice so they have to do something.
But what it doesn’t say anywhere in that section is that regulatory obligations are going to be renounced, are capable of being renounced or abandoned, and in fact the land title, or the Bankruptcy Act specifically preserves regulatory obligations, as it should.
It doesn’t say in that section that, it does say any real property, I will say that, but what it doesn’t do is define this term of “abandon,” “transfer,” and so on
There are a number of ways that could be modified. The only really empowerment section for abandonment in the Bankruptcy and Insolvency Act is section 20, which only pertains to real property in the sense that we all think of it, not the profits a prendre that are mines and minerals.
But the point I think is that the bargain, the super priority bargain that’s contained in the legislation 14.06 (7) and (8) doesn’t make any sense in the oil and gas context. Subsection (7) and (8) provide that the Crown can take over contaminated property and if it does clean it up it gets a super priority charge in advance of everyone else.
Justice Brown: I’m sorry to interrupt you, but maybe I need to be more precise. The majority below identify the profit a prendre interest under the Mines and Minerals Act as the real property of the debtor. Under Section 14.06 (4). Is that right or wrong and why?
Mr. Lenz: So a profit a prendre is a real property interest, I concede the point. Is it the type of real property interest that was intended to apply to, I am less, much less certain. And I don’t know whether it has to be a bright line, it’s real property and therefore it fits or it’s not.
Because of the unique nature, as you know, Justice Brown, of profit a prendre, it’s a different kind of property the section would work better if it was confined to surface rights, and I think it would it should be so confined, but there are a number of ways to manage that.
First of all, okay if you are renouncing the personal liability as opposed to the state liability.
Second, if, as is argued by the AG of Alberta, what we are really talking about is renouncing the rights to the minerals. Well, that’s not even where the damage occurs. The abandonment is separate and apart from the minerals, it’s part of the surface. I know it goes down maybe a kilometer or two, but it’s still not part of the minerals.
So there’s a sense in which what’s being renounced here, what’s being abandoned are obligations to clean up other people’s property that is the surface rights owners. And again, to read the section as stretching to get that and stretching to get this is where we say the Courts below went wrong.