Canada: Courts Struggle to Mix Bankruptcy and Environmental Law – SCC To Hear Redwater Appeal

Article by John GeorgakopoulosGiselle Davidian and Serin Remedios

Willms & Shier Environmental Lawyers LLP

The Supreme Court of Canada (SCC) granted leave to hear the appeal of Orphan Well Association v Grant Thornton Limited.1 The SCC will reconsider whether trustees and receivers in bankruptcy must remediate wells in priority to the claims of secured creditors.

In April 2017, the Alberta Court of Appeal released its decision in Redwater.2 The Court found that the Government of Alberta’s environmental orders for oil well remediation did not have priority over secured creditors in bankruptcy proceedings.

In upholding the lower court’s decision, set out in our previous update, the Court of Appeal added to the “untidy intersection” between bankruptcy proceedings and provincial environmental law. Both Courts concluded that receivers and trustees were permitted to renounce an insolvent debtor’s interest in its licensed assets while selling valuable licensed assets to maximize recovery for secured creditors.

The decision, as it stands, allows receivers and trustees in bankruptcy to disclaim unprofitable assets and not be required to fulfill certain environmental obligations associated with those disclaimed assets.

Recap

The case revolves around the assets of a junior, insolvent oil and gas producer, Redwater Energy Corporation (Redwater).

Orphan Oil Well

When Redwater’s primary secured creditor began enforcement proceedings under the Bankruptcy and Insolvency Act (BIA), Grant Thornton Limited (GTL) was appointed as receiver and trustee.3 Several of Redwater’s oil wells had costs of remediation exceeding the value of the wells. GTL took control of only 20 of 127 Redwater’s assets and disclaimed the oil wells that had onerous environmental abandonment costs.

Alberta oil and gas legislation requires licensees, including trustees, to comply with “end-of-life” rules for oil wells. Where no one is financially capable of remediating and abandoning a well, the well is designated an “orphan well” under Alberta’s Oil and Gas Conservation Act (OGCA).4/em>

The Alberta Energy Regulator (AER) ordered GTL to remediate the disclaimed oil wells before distributing funds to creditors. When GTL indicated that it did not intend to remediate the wells, AER and the Orphan Well Association (OWA) brought applications asking the court to void GTL’s disclaimer of the non-producing wells and order GTL to comply with AER’s orders. AER argued that Redwater’s insolvency and bankruptcy did not affect Redwater’s environmental obligations and that GTL was legally required to discharge those obligations before paying Redwater’s creditors.

GTL brought a cross-application challenging the constitutionality of AER’s stance on GTL’s environmental obligations and seeking approval of the sale of Redwater’s valuable wells.

At issue was whether AER’s orders were provable claims in bankruptcy and therefore subject to bankruptcy proceedings. If AER’s orders were subject to bankruptcy proceedings, other creditor’s claims would take priority. The practical outcome being that the corporation would likely have no means of satisfying its environmental obligations after settling its obligations to other creditors. The cost of remediating the orphan wells would then fall on the Government of Alberta.

As we previously reported, Alberta Court of Queen’s Bench concluded that the applicable sections of the OGCA and Pipeline Act (PA) frustrate the federal purpose of the BIA of managing the winding up of insolvent corporations and settling the priority of claims against them. Based on the doctrine of paramountcy, the OGCA and PA were inoperable to the extent that they conflicted with section 14.06 of the BIA. This section of the BIA exempts a receiver or trustee from personal liability, allowing a trustee and receiver to disclaim assets, and prescribes the priority of environmental remediation costs.

OWRA and AER appealed the decision.

Court of Appeal Decision

The Court of Appeal upheld the lower court decision. The key issue on appeal was the priority and treatment of environmental claims in bankruptcy, and whether environmental claims were provable claims under section 14.06 of the BIA.

Priority and Treatment of Environmental Claims in Bankruptcy

The Court found that the BIA was amended in 1997 to specifically address environmental claims. The BIA now incorporates environmental claims into the general bankruptcy process, rather than exempting them. Following the test set out in Newfoundland and Labrador v AbitibiBowater Inc., the Alberta Court of Appeal found that AER’s orders were subject to bankruptcy proceedings.5 By refusing to permit the transfer of Redwater’s valuable assets unless funds were set aside for remediation, AER reduced the environmental obligations to “sufficiently certain” monetary claims. Accordingly, AER cannot indirectly interfere with the value of assets in a bankruptcy by placing financial preconditions on the transfer of AER licences.

Constitutional Law Issue

The Court of Appeal held that there was an operational conflict between federal and provincial regimes. The Court found that the provincial regulatory scheme frustrated the purposes of the BIA, which include determining the priority of claims against insolvent corporations. The practical outcome being that GTL did not have to comply with AER’s remediation obligations prior to settling claims of secured creditors.

Nortel and Northstar

The dissenting opinion briefly considered the two leading cases in Ontario on environmental claims in bankruptcy and insolvency: Nortel Networks Corporation (Re) and Northstar Aerospace Inc. (Re).6 In Nortel, the Court found that some of the Ministry of the Environment’s (MOE, as it then was) orders had priority over creditor claims, but in Northstar, the Court found that the MOE’s orders did not have priority.

Implications

The practical implications of Redwater may be far reaching not only for the worlds of bankruptcy & insolvency and oil & gas, but also for the world of director and officer liability.

Will we see more Alberta provincial environmental orders aimed at former directors and officers? In Northstar, after the Court found the MOE’s orders did not have super priority in insolvency proceedings, the MOE issued a remediation order personally against the former directors and officers.7

We will look to the SCC to provide clarity on this important, albeit untidy, area of law.

Footnotes

1 2017 ABCA 124 [Redwater].

2 Ibid.

3 RSC 1985, c B-3 [BIA].

4 Redwater at para 21; Oil and Gas Conservation Act RSA 2000, c O-6, s 70 [OGCA].

5 2012 SCC 67.

6 Nortel Networks Corporation (Re), 2013 ONCA 599 [Nortel]; Northstar Aerospace Inc. (Re), 2013 ONCA 600 [Northstar].

7 Northstar Aerospace, Inc. (Re), 2012 ONSC 4423. Subsequently, on November 14, 2012, the MOE issued a Director’s Order against the former directors and officers personally.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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About the authors

John Georgakopoulos resolves complex environmental legal issues for clients, uniquely drawing on his technical knowledge as a former senior environmental scientist with the Ontario Ministry of the Environment and Climate Change. John is called to the bars of Ontario and Alberta.

Giselle Davidian is an associate lawyer practicing in the areas of environmental law, environmental litigation, energy and natural resource law and Aboriginal law.  Giselle draws upon her technical knowledge as a former environmental scientist at a consulting engineering firm to help clients meet their goals.  Giselle is fluent in French and Armenian and has a working knowledge of Italian.  Giselle is called to the bar of Ontario.

Serin Remedios is an associate lawyer practicing environmental litigation as well as environmental, Aboriginal, northern and energy law.  Serin’s past experience in environmental science helps her understand clients’ problems and assist them in meeting their goals.  Serin is called to the bar in Ontario.

This article was first published in the Willms & Shier Environmental Lawyers LLP website.

Innovations in Pipeline Design: Leak-proof technology

By Dema Mamon, M.Sc.Pl, BES and John Nicholson, M.Sc., P.Eng.

In Canada, getting approval to construct an oil pipeline has become increasingly difficult.  Every oil pipeline incident that involves a leak and subsequent clean-up is widely covered in the media,  providing fuel for pipeline opponents that call an end to the construction of new pipelines.

Abacus Data Inc., an Ottawa-based research firm, has been tracking public opinion on the construction of new pipeline capacity and has found some interesting trends.  Since 2014, polling has shown that the negative view of building new oil pipelines has remained steady at 21 to 22% range.  However, there was a drop in the positive attitude amongst Canadians toward building new pipelines – from 58% in 2014 to 44% in 2017.  Over that three year span, a good proportion of Canadians who once viewed building new pipeline capacity with a positive attitude have shifted to a neutral view.  The neutral view on oil pipelines have grown from 20% in 2014 to 36% in 2017.

There can be many theories to explain the three year shift in public opinion on new oil pipelines.  One plausible theory is that oil spills from pipelines typically make headline news, thus leaving an impression in the minds of Canadians the perhaps pipelines are not as safe as the industry states.  Oil leaks from pipelines damage the environment, are costly to clean-up, and fuel public opinion that pipelines are not safe.

One way to eliminate the perception that building new oil pipelines is bad for the environment and shift public opinion in favour of such projects is to build pipelines that don’t leak.  However, is it even possible to build leak-proof pipelines?

Are Double-Walled Pipelines the Answer?

One logical idea for building leak-proof pipelines is for them to be double-walled.  The outer wall would serve as protection from external damage.  The technology does exist to construct double-walled pipelines and they are used in certain circumstances such as when there is a large temperature difference between the liquid in the pipe and the surrounding environment.

Double-walled pipelines are not considered the cure-all by some in the industry.  Those resistant to the use of double-walled pipelines note that in some instances, it may be more cost effective to protect pipelines from the potential of external damage by burying them or placing slabs over them in higher risk areas.  Furthermore, it can be more difficult to monitor a double-walled pipeline and an outer pipe interferes with the maintenance of the inner pipe.

At the University of Calgary, researchers believe their two-walled pipeline design and monitoring system is the solution to preventing spills.  Although double-walled pipelines have been around since the 1980’s, Thiago Valentin de Oliveira, an electrical and computer-engineering master’s student, and Martin Mintchev, an engineering professor, say that their design is superior.

The U of Calgary researchers designed and constructed their prototype to consist of a typical steel inner layer with either a steel or plastic outer layer.  There is an air gap between inner and outer pipeline contains the oil that leaks from the inner pipeline leak.  The real innovation developed by the U of Calgary is the segmentation of the inter-pipe space and the inclusion of a linear wireless network linking the segments.  With the segmentation, a leak of oil from the inner pipe enters the air gap between the two pipes and is contained in a section of pipe.  Wireless pressure sensors between the two walled layers detect the pressure build up and send an alert to the pipeline control staff.

 

If commercially implemented, the U of Calgary system would allow pipeline operators with the means of quickly shutting down the pipeline when a leak was detected into the outer pipeline and crews could be dispatched to make repairs.  The oil that leaked from the inner pipe would be contained in the air gap between the two pipes and be confined to one section of the pipeline.

The U of Calgary researchers estimate that their design would result in an additional 25% in the capital cost of building pipelines.  They believe this cost could be reduced if the outer pipeline material was composite materials or plastic.

Is Advanced Monitoring the Solution?

Also in Alberta, a Calgary-based firm, HiFi Engineering, recently announced that it has developed an innovative pipeline leak detection system.  Dubbed High-Fidelity Dynamic Sensing (HDS™), the monitoring system can spot the exact location of a leak in a pipeline within seconds of it occurring.  The system continuously monitors temperature, sonic and ultrasonic acoustics, and vibration and strain.  Any anomaly in the measurements results in an alert being sent to the pipeline company control room.

Hifi Engineering’s High Fidelity Dynamic Sensing (HDS) technology is being called the ‘ears of pipeline monitoring.’

The system works utilizing fiber optic cables that run the length of the pipeline.  A laser beam is sent down the length of the optic cable and sends signals back that provide a multitude of information to the pipeline control room.

TransCanada Pipelines Corporation has already installed the HiFi HDS™ monitoring system in sections of the Keystone XL oil pipeline that runs from Canada to the U.S.  Also, Enbridge employs the technology in its new northern Alberta pipeline.

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About the Authors

Dema is a graduate of York University’s Bachelor in Environmental Studies program (2008) and the University of Toronto’s Masters of Science in Planning Programme (2010). She is currently pursuing her Canada Green Building Council’s Leadership in Energy and Environmental Design’s Green Associate certification. Her research interests include environmental conservation, green infrastructure, and sustainability. She can be reached at dema.mamon@gmail.com.

John Nicholson is the editor of Hazmat Management Magazine.  He has over 25 years of experience in the environmental and cleantech sectors.  He is a registered professional engineer in the Province of Ontario and has a M.Sc. in environmental engineering.  His professional experience includes time at a large engineering consulting firm, a major Canadian law firm, and the Ontario Ministry of the Environment and Climate Change.

ERIS Introduces Environmental Data Package for Mexico

In an effort to further expand coverage of North America, ERIS recently announced the launch of The Mexico Package for property due diligence, including: Database Reports, Fire Insurance Maps (FIMs), Aerials and a current Topographic Map.

MEXICO DATABASE REPORT
• Offers the familiar and easy-to-use format of the Canadian version, including an Executive Summary, a Detail Report, a map of the project property and surrounding sites within the search radius (for 1 mile), an Aerial, current Topo Map, and Unplottables.
Hyperlinked Page Numbers (in the Table of Contents and Executive Summary), Map Keys and Data Sources, to quickly access detailed information and/or the Definitions section.
• Searches 11 essential data sources, including gas stations; PCBs; collection, storage, use and disposal of hazardous industrial wastes and emissions to air, water and soil.
• Future enhancements will include Historical Topographic Maps.

MEXICO FIRE INSURANCE MAPS (FIMs)
FIM images are included in The Mexico Package, and where not available, a no records found letter will be provided for your due diligence.

MEXICO AERIALS
ERIS maintains a significant collection of Aerials, from 1991 to present day, covering all of Mexico.

PRICING
The Mexico Package: $300 USD

HOW TO ORDER
Order through your Regional Account Manager.

 

Ontario MOECC Issues Draft Order to Mining Company in Northern Ontario

Ontario MOECC recently issued a draft Director’s Order to Ontario Graphite Ltd. and several Directors of the company that, if finalized, will require the company to perform remedial work related to an interceptor trench, mine tailings dam, polishing pond.

The mining operation, referred to as the Kearney Graphite Mine, is located Township of Butt in the District of Parry Sound, approximately 20 km north east of the community of Kearney.

Ontario Graphite Ltd. Kearney Mine Site (Photo Credit: Sudbury Mining Solutions Journal)

Under these sections of the Environmental Protection Act and Ontario Water Resources Act, the Director may require a person who owns, or owned, or who has or had management or control of an undertaking or property, to take immediate actions and environmental measures to protect the natural environment and to prevent or reduce the discharge of a contaminant into the natural environment from the undertaking or property, or to prevent, decrease or eliminate an adverse effect.

The overall objective of the proposed Director’s Order is to amend an existing Director’s Order issued on January 26, 2016 to have the company implement a work plan for the treatment of mine water discharges as well as submit a written report prepared by a qualified person.

On April 10, 2017, Ontario Graphite Ltd. reported that the open pit was overflowing to the environment as a result of spring melt.  Ontario Ministry of the Environment and Climate Change (MOECC) staff visited the site on April 12, 2017 and observed that the collection trench used by the company to prevent acidic water from entering Graphite Lake (i.e. the interceptor ditch) had also overflowed at some point prior to the site visit.

During the April 12, 2017 MOECC site visit, company staff reported to the ministry that additional erosion had occurred on the downstream dam that separates the tailings management area from the polishing pond. Company staff did not foresee concerns for dam stability; MOECC staff, however, recommended that the company have someone with the necessary expertise undertake evaluation of the structure.

In response to the MOECC recommendation, the company retained a consulting firm to provide recommendations for any needed remedial work on the tailings dam. As detailed in the updated action plan submitted to the ministry on October 30, 2017, the company awaits receipt of the report detailing these recommendations and following receipt, will implement the recommendations noted.

In 2017, Ontario Graphite Limited reported several non-compliance incidents with water quality discharge limits specified in the Environmental Compliance Approval including acute toxicity, iron, total suspended solids and pH.  Although the company attributed some of the exceedances to the dewatering of the open pit, a consultant hired by the company as a result of the Director’s Order noted a number of recommendations that should be implemented to improve operation of the sewage works and to maintain compliance with the final effluent limits.

Potential $9 million incentive to Developer for Clean-up and Develop Brownfield Site in Ottawa

As reported by the CBC, Ottawa city staff are proposing to offer a developer more than $9 million in incentives to build a multi-use building with three residential towers across from the future Bayview Station light rail station, approximately 2 kilometers (one mile) west of Parliament Hill.

TIP Albert GP Inc. owns the property at 900 Albert St. at the corner of Albert and City Centre Avenue, and is proposing a building that would have 1,632 residential units as well as retail and office space.

The site, a one-time rail yard and later a storage yard and snow disposal site, is eligible for the city’s brownfields rehabilitation grant program.  Under the program, developers can apply to have municipal development charges and soil remediation costs reduced, up to about half the expected cost of the cleanup.

City staff are recommending a grant not exceeding $8,255,397 over a maximum of 10 years, according to a report tabled in advance of next week’s finance and economic development committee meeting.

The property is also along the path of city sanitary and storm sewers, and for the development to go forward, the builder will have to move that infrastructure to an adjacent city property.

While the developer would pay for that work to be done, the city would have to release their eight easements on the property.

While normally the city would get market value from a developer for giving up those easements — an estimated $920,000 — city staff are proposing waiving that policy to make the project happen.

Somerset Ward Coun. Catherine McKenney, in a comment appended to the report, wrote that while she supported the brownfield grant, she couldn’t support waiving the encroachment fee, calling it “premature.”

“As this application is still under negotiation I believe it would be more prudent to measure the total monetary value to be waived against measurable features of the proposed development in its final form as ultimately presented to committee and council,” she wrote.

McKenney said such features would include affordable housing and contributions to active transportation networks like cycling and walking paths.

The development is not the only project being considered for a grant at next week’s committee meeting.

City staff are also proposing a grant of up to $2,320,420 over a maximum of 10 years to Colonnade Development Inc. to build a hotel near the Department of National Defence headquarters.

That grant, for the property at 300 Moodie Dr., would come from the Bells Corners Community Improvement Plan, which aims to encourage development in the area.

It would provide what would amount to a 75 per cent property tax break after the property is developed. If the development doesn’t happen, no grant would be paid.

Colonnade is proposing a restaurant with a drive-thru and a six-storey, 124-room hotel. Right now, the site is home to a Salvation Army thrift store, an automotive repair garage and auto parts distributor.

The finance and economic development committee will consider both proposals.

One Proposal for Development of 900 Albert Street, Ottawa

Alberta Proposing to allow Cities to Tax Vacant Brownfields

The Alberta Government recently released proposed changes to the Alberta Municipal Act that, if enacted, would allow for municipalities to tax vacant non-residential property at a higher rate than occupied properties.  The proposal is viewed as a means to spur the development of brownfield properties.

As reported in the Calgary Sun, Edmonton city council is behind the proposal, citing concerns that empty commercial buildings bring down a neighbourhood.  Municipal councillors in Calgary are split on the proposal.

Evan Woolley, a Calgary Councillor, was quoted in the Calgary Sun saying, “I have no interest in raising a new tax on property that can’t be developed. We already know how much property is vacant downtown and raising taxes will only make things worse.”

Calgary Ward 7 councillor Druh Farrell disagrees with her colleague, arguing that raising taxes on business owners who are bringing down the property values for the rest of the community can be an effective way to encourage them to either use the land, or sell it to someone who will.  “We see contaminated sites in high profiles areas, particularly with old gas stations. There’s no incentive to develop it and if it was taxed on highest and best use that would encourage the owner to actually make the most out of it instead of keeping it there as an eyesore,” said Farrell in the Calgary Sun.

Farrell emphasizes that even if the province gives the city power, they won’t necessarily use it, but it’ll be another tool the city can access if they want.

The province hopes to have the amendments come into force prior to October’s municipal election.

The abandoned Eamon’s Camp land in Calgary, Alberta on January 12, 2012. (Photo Credit: Leah Hennel, Calgary Herald)

Canadian TSB rules on Train Derailment in Northern Ontario

The Transportation Safety Board of Canada recently issued a report on its findings related to the 2015 derailment of a train in 2015.  In its report, it ruled that a missed defect in an improperly repaired rail led to a 2015 freight train derailment in northern Ontario that caused numerous cars carrying crude oil to catch fire and crash into a local river system, the Transportation Safety Board of Canada said Thursday.

As a result of its investigation into the incident, the board recommended Transport Canada consistently collect data on general rail surface conditions — and not just previously recorded defects — to better focus its track inspections and help predict future rail failures.

“Track defect information is required to be reported to Transport Canada, while rail surface condition information is not consistently provided and rarely requested by the regulator,” said TSB chair Kathy Fox.

Gogama train derailment

“By integrating rail surface condition data, the planning process may more clearly identify areas of potential track deterioration and the targeted track inspections can be better focused to reduce risk in the rail transportation system.”

Thirty-nine CN Rail cars went off the tracks near Gogama, Ont., in March 2015, while the train was travelling east at 69 kilometres an hour, less than the speed limit. As a result, 2.6 million litres of oil were released, igniting an explosion that destroyed a steel rail bridge, the TSB said.

“This was the third significant derailment involving a CN freight train in a three-week span in early 2015 … in northern Ontario,” Fox said, noting that Transport Canada had not inspected that area of track since 2012.

There were no injuries reported, but residents of the nearby Mattagami First Nation were advised to stay indoors during the cleanup due to possible smoke inhalation and told not to consume water from the community source.

The TSB said the derailment occurred after a recently repaired rail within a joint broke under the train.

Rob Johnston, manager of the TSB’s central region rail operations, said a track maintenance employee repaired the broken rail three days before the derailment.

But during the repair, he missed an internal defect called a vertical split head, which was present, but not visible to the naked eye, Johnston said.

The crack could have been detected with what’s known as a dye penetrant test, Johnston said, but that was not performed even though it was required by CN standards.

“While aware of the test, the employee had never performed one or seen one before,” he said. “CN’s training did not highlight the importance of the test and did not provide opportunities for practical, hands-on training.”

Given the botched rail repair, the TSB’s report notes that a “slow order” should have been applied to reduce the speed of the train on that section of the track, but none was issued.

Going forward, the TSB called on Transport Canada to gather data from railways on rail conditions — such as localized surface collapse — that can help identify areas of potential track deterioration.

Fox said Transport Canada considers various factors to identify areas of concern, most of which are events that have already occurred — such as the number of accidents, broken rails or track defects that required repair under track safety rules.

CN said it has taken action to increase safety measures following the 2015 derailments, from improving training for all track workers to implementing stronger engineering standards for its rail repairs and inspections.

“We have expanded our use of technology to analyse, monitor and inspect track across the CN network. We continue to invest to maintain, improve and protect our infrastructure,” CN spokesman Patrick Waldron said Thursday.

“This was a very unfortunate incident, the result of a broken rail, and we apologize to the residents of Gogama and the Mattagami First Nation for the impacts to their community.”