Oil’s Well Does End Well for Alberta Environmental Regulator

In August 2017, I reported that the SCC would hear an appeal from the Court of Appeal for Alberta (Orphan Well Association v Grant Thornton Limited, 2017 ABCA 124). The case related to the jurisdiction of a regulatory body, not in terms of its governing statute, but in terms of a classical constitutional law question and division of powers. The conflict – or apparent conflict – was between a provincial regulator’s authority on environmental matters and the federal government’s jurisdiction over bankruptcy.

This case involved Redwater, a bankrupt oil and gas company that owned over one hundred oil wells, along with pipelines and other facilities. While a few of its wells were still producing, at the time of its bankruptcy the majority were spent. The cost of dismantling the wells and remediating the properties far exceeded their value. The trustee of Redwater’s estate only wanted to take possession of and sell the productive wells, with proceeds going to the creditors in priority as set out in the Bankruptcy and Insolvency Act, RSC 1985 c. B-3 (“BIA”).

To do so required permission from the Alberta Energy Regulator to transfer the licences of those wells that were still productive. The Alberta Energy Regulator refused, saying that the estate remained responsible for the end-of-life obligations for the disowned wells.

The trustee took the position that it could disclaim the unproductive assets under s. 14.06(4) of the BIA and simply walk away from the environmental remediation obligation. The trustee further took the position that even if the regulator could compel the remediation, it would have to prove its claim. Even if proven, the trustee argued that secured creditors took priority over the cost of the estate’s environmental liabilities. The trustee also argued that the provincial legislation was in conflict with the BIA, so under the doctrine of federal paramountcy, the provisions of the BIA must prevail. The regulator disagreed, arguing there was no actual conflict between the provincial and federal statutes.

The trial judge found that the trustee could simply walk away and that the abandonment costs had to be proven in bankruptcy. A divided Court of Appeal held that federal bankruptcy law took precedence over provincial jurisdiction to set environmental rules. The result was that its creditors came ahead of the company’s obligation to clean up old oil wells. It effectively meant a bankrupt company could simply walk away from its obligations for environmental remediation and make the matter someone else’s problem.

On January 31, 2019, in a 5-2 decision the SCC overturned the Court of Appeal: Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5. The majority found that there was no conflict between the provincial regulator’s statutory powers and the BIA that would trigger the doctrine of federal paramountcy. The full court did not hear the case, as Martin J. was one of the members of the panel of the Court of Appeal that issued the decision under appeal. She was the dissent in the court below. Although there were some nuanced differences in the analysis, Wagner C.J., writing for the majority, came to the same conclusions and largely agreed with the analysis of Martin J.A. (as she then was).

A key aspect of this case, which is already becoming simply known as “the orphan well case”, is that it puts more focus the first part of the three-part test regarding a regulator’s ability to impose an environmental obligation on a bankrupt set out in Newfoundland and Labrador v. AbitibiBowater Inc., [2012] 3 S.C.R. 443, 2012 SCC 67. In short, that case asks whether: (1) the regulator is a creditor; (2) the debt arose before the insolvency proceedings; and (3) it is sufficiently certain that the regulator will seek to collect from debtor.

For the most part, the courts have focused on the last part of the AbitibiBowater test. The orphan wells case may have reinvigorated the first part of the test. It did so by relying, in part, upon another case from Alberta that shared many similar facts: PanAmericana de Bienes y Servicios v. Northern Badger Oil & Gas Limited, 1991 ABCA 181.

The majority found that the trustee could not simply walk away from the disowned sites. The majority said that the BIA protected trustees from personal liability for an estate’s environmental liabilities. It did not protect the estate from those liabilities. This meant that the trustee, acting for the estate, could not simply walk away from the estate’s environmental liabilities.

The majority also found that the regulator was not asserting any claims that needed to be proved in the bankruptcy. It was not acting to recover a debt and did not stand to gain any financial benefit. Rather, the regulator was acting to enforce a duty, one that the estate owed to surrounding landowners and the public at large. While not directly cited on this point, this finding shares strong similarities to PanAmerianca at para. 33, where the Chief Justice of Alberta spoke of the obligation of the citizen not being to the peace officer or public authority that enforces the law, but rather to the public and community at large.

The conclusion of the majority meant that there was no conflict between the provincial and federal statutes and there was no need to apply the doctrine of federal paramountcy. As there was no debt to prove, it also meant that there was no disruption of the priority of creditors established by the BIA.

Côté J. reinforced her reputation as the great dissenter. Supported by Moldaver J., she would have dismissed the appeal. Côté J. concluded that there was a true inconsistency between the statutes and that the environmental obligations were provable claims. Côté J. based this, in part, upon a finding that the provincial law did not recognize the lawful and valid disclaimers invoked by the trustee under the BIA.

This case will have a significant impact on the oil patch, where there are tens of thousands of inactive oil wells. The decision gives greater life to the principle of polluter pays. As Wagner C.J. stated at para. 160, “bankruptcy is not a licence to ignore rules”.