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The Supreme Court of Canada to Decide who pays to Clean-up Toxic Industrial Sites

The Supreme Court of Canada is hearing a controversial case this week concerning who is responsible for cleaning up toxic industrial sites when a company goes bankrupt.

At stake is potentially billions of dollars in environmental clean-up costs. And entities ranging from governments to Canada’s big banks to oil and gas companies and farmers are all looking to ensure that they don’t end up on the hook for cleaning up toxic sites – many of them in remote rural and northern areas of the country.

The case itself focuses on a small Alberta oil company, Redwater Energy, which entered creditor protection in 2015. Only a few of the company’s assets had value, so the bank wanted to sell those wells to recover some of its debt and abandon the rest of the oil and gas sites. The question became whether Redwater’s assets should help pay its debts or be used to pay for the cleanup cost of its worthless oil and gas wells?

The case will address a fundamental public policy dilemma about what happens when a resource company bites the dust. For instance, every mine in the country has environmental regulations attached to its licence about reclaiming the site when the mine closes.

But if the company goes belly up, does the bank take over those end-of-life responsibilities? If not, is the site abandoned or do taxpayers pick up the hefty tab?

The question for the Government of Alberta and area farmers that had Redwater oil and gas wells on their land became whether Redwater’s assets should help pay its debts or be used to pay for the clean-up cost of its worthless and contaminated work sites?

The Supreme Court case addresses a fundamental public policy dilemma about what happens when a resource company fails. Every mine operation in Canada has environmental regulations attached to its licence about reclaiming the site when the mine closes. But if the company goes belly up, does the bank take over those end-of-life responsibilities? If not, is the site abandoned or do taxpayers pick up the hefty tab when the provincial government pays to clean it up? And how much cost should farmers and other landowners bare for clean-up and reclamation costs?

“We need to be able to ensure the people of Alberta, collectively, are protected,” Alberta Premier Rachel Notley told reporters earlier this week.

The Alberta Energy Regulator (AER) says there are approximately 1,800 abandoned oil and gas sites in that province alone and pegs the cost to remediate them at $8.6 billion.

If the Supreme Court sides with previous court rulings, the AER will likely respond by increasing the orphan levy imposed on well licensees. However, a portion of the expense will inevitably fall to the provincial government, and thus to taxpayers. But if the Supreme Court decides to reverse the decision, it will create hesitancy among lenders. Financial institutions will likely respond by tightening their purse strings as they begin pricing the risk into new loans made out to the industry.

This case has consequences that reach far beyond one small energy company. The Redwater case could act as precedent in other provinces. If the previous rulings are upheld, it will send a clear signal to natural resource companies’ creditors that bankrolling fossil fuel infrastructure, mining projects, and pulp and paper mills without accounting for clean-up costs is not only acceptable, but encouraged in a legal climate where the public—not the polluter—pays.

“The Redwater decision impacts Alberta’s constitutional right to manage its own resources,” said AER spokeswoman Cara Tobin, adding that “By rejecting the polluter pays principle that underlies virtually all of Alberta’s oil and gas legislation, it’s shifted liability from the polluter to innocent third parties and the public.”

The provincial governments of Ontario, which currently has about 2,400 oil and natural gas producing wells, along with British Columbia and Saskatchewan have also joined the Supreme Court Case, which will be heard in Ottawa this week. The Canadian Association of Petroleum Producers is also an intervener in the legal case.

Supreme Court of Canada to hear Alberta’s “orphaned” oil wells case

By – Michael Nowina and Glenn Gibson, Baker McKenzie

On November 9, 2017, the Supreme Court of Canada granted the Alberta Energy Regulator and the Orphan Well Association’s request for leave to appeal from the decision in Grant Thornton Ltd. v. Alberta Energy Regulator, 2017 ABCA 124.  By granting leave, Canada’s highest court will weigh in on the Alberta Court of Appeal’s determination that secured creditors in a bankruptcy should be paid before environmental claims arising from abandoned oil and gas wells.

Map of all Orphan Wells in Alberta

As described in our previous blog post, on April 24, 2017, a majority of the Alberta Court of Appeal determined that certain sections of the Oil and Gas Conservation Act and Pipeline Act were inoperative to the extent that they conflicted with the Bankruptcy and Insolvency Act (BIA). Under the appellate decision, a bankruptcy trustee or receiver is not required to satisfy the environmental remediation obligations in priority to other creditors.  On the other hand, the dissenting judgment noted concerns that the effect of the majority decision would be to create an incentive for corporations to avoid the end-of-life obligations of wells by using insolvency laws and shift the environmental remediation costs onto the public and other oil and gas producers.

 Leave to the Supreme Court

Leave to the Supreme Court will only be granted where the court is of the opinion that the question raised by the case is of public importance or one that ought to be decided by the Supreme Court. In their leave application, the Orphan Well Association and the Alberta Energy Regulator identified the following issues to be clarified by the Supreme Court:

(a) Given the exclusive jurisdiction of provinces to regulate their natural resources, whether regulatory obligations created by provincial legislation conflict with or frustrate the scheme of priorities set out in the BIA?

(b) Whether select provisions of the BIA enable a receiver or trustee to pick and choose which provincial laws it will comply with?

(c) Are end-of-life obligations associated with oil and gas development also duties owed to the public?

The Minister of Justice and Solicitor General of Alberta intervened in the leave application. In supporting the leave application, the Province of Alberta’s position on leave was that the majority decision of the Court of Appeal interfered “with critical provincial regulatory functions in a manner that is inconsistent with the constitutional division of legislative powers and the balance of confederation.”

The Supreme Court granted a motion to expedite the appeal, and it will likely hear the appeal in the first half of 2018. The Supreme Court’s decision is an opportunity for the court to clarify the interaction of federal insolvency laws with the province’s jurisdiction to regulate natural resources as well as whether the public and other oil and gas producers ought to bear the burden of environmental remediation. The decision will have significant implications for the oil and gas industry, lenders, and regulators across the country. We will continue to provide updates on the status of the hearing as it becomes available.

This article was originally published on the Baker McKenzie website.

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About the Authors

Michael Nowina is a member of the Firm’s Dispute Resolution and Global Financial Restructuring & Recovery practice groups. Mr. Nowina has a diverse civil litigation practice, with a focus on fraud recovery, insurance defence and insolvency law. Mr. Nowina has appeared before all levels of courts in Ontario and regularly appears on matters on the Commercial List in Toronto.

Glenn Gibson is a member of Baker McKenzie’s Litigation & Government Enforcement Practice Group in Toronto. She joined the Firm in 2015 as a summer student and completed her articles of clerkship in 2017.  Glenn acts for various clients on contractual disputes, jurisdictional disputes, commercial class actions, matters involving fraud and commercial arbitration. She is a contributor to www.canadianfraudlaw.com, www.globalarbitrationnews.com, and the Baker McKenzie International Arbitration and Litigation Newsletter.

Canada: BC Court Of Appeal Rules That Contaminated Property Must Be Assessed Using Highest and Best Use

Article by Luke Dineley and Jacob Jerome Gehlen

Borden Ladner Gervais LLP

In a highly anticipated decision for the valuation of contaminated property in British Columbia, the BC Court of Appeal overturned a decision of the BC Supreme Court and set out how contaminated property should be assessed for tax purposes.

The case involved a Brownfield – a contaminated commercial property with potential for economic redevelopment. The property in question had been operated as a retail gas station, automobile dealership, and repair shop. The soil on the property was contaminated, and the contamination had spread to neighbouring properties. The owner of the property was in considerable financial distress. In addition to tax arrears, legal bills, and accounting bills, she was defending a claim from the owner of a neighbouring property. She therefore arranged to sell the property to this owner through a share purchase agreement for $42,363.24, which was sufficient to cover her debts. She also obtained a full indemnity from any legal liabilities she might have in the future regarding the contamination. The existing structure on the property was renovated and converted into income-producing multi-tenant commercial retail units.

Abbotsford, British Columbia

In 2013, the property was assessed for taxation purposes.

The assessor had valued the land and improvements at $975,000. The property owner, Victory Motors (Abbotsford) Ltd. (“Victory Motors”), appealed, and the Property Assessment Review Panel reduced that assessment to $500,000. Victory Motors appealed to the Property Assessment Appeal Board (“Board”), claiming the property had no value. The Board reinstated the original assessment. The owner appealed again, to the Supreme Court of British Columbia. That court found that the Board had erred in law, and remitted the matter to the Board for reconsideration. The Assessor appealed that decision.

The Court of Appeal allowed the Assessor’s appeal and restored the Board’s decision.

The issue before the Court was this: how does one properly assess the value of contaminated land for taxation purposes? The assessor determined that because renovation into a two-storey structure would require remediation, the best use of the property was as it currently stood: a one-storey commercial structure. The assessor’s estimate did not otherwise take into account the presence of contamination. Their approach is known as the “income approach,” whereby a property’s value is determined according to the subject property’s highest possible annual net income. The Board agreed with the assessor’s method and ultimate evaluation.

The Supreme Court, however, held that the Board had erred in law. The chambers judge found that the assessor had ignored the property’s brownfield status, which any potential buyer would have in mind as a risk. The chambers judge further held that the land should be valued not according to value for the present owner, but according to the market in accordance with the BCCA’s decision in Southam Inc. (Pacific Newspaper Group Inc,) v. British Columbia (Assessor of Area No 14 – Surrey/White Rock), 2004 BCCA 245 [Southam]. Because there was no evidence a competitive market for the property existed, the Board’s decision was therefore unreasonable.

However, after the BCSC decision was released, a five-judge division of the BCCA overturned Southam in Assessor of Area #01 – Capital v. Nav Canada, 2016 BCCA 71, leave to appeal refused [Nav Canada]. Nav Canada supports the Board’s income-based approach.

Applying Nav Canada, the Court of Appeal allowed the assessor’s appeal and restored the Board’s decision. The Court applied the “highest and best use” principle of assessment, and found that a multi-tenant retail building was the “best use” for the purposes of assessment. The Court held: “that property has value to its current owner can be a sufficient basis on which to determine its value.” In Nav Canada, the BCCA had held that even where there was no other potential purchaser, “one must regard the owner as one of the possible purchasers.” The Court in this case agreed, and held that “when, for whatever reason, there is no market for a property that has value to its owner, that owner can serve as a proxy for a competitive market.”

Going forward, property owners should be aware that even though there are no purchasers lining up to bid for a brownfield, that property may still be assessed at a high value for taxation purposes.

About BLG

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.

About the Authors

Luke Dineley is a partner in both our Insurance and Tort Liability Group and Environmental Law Group in Borden Ladner Gervais LLP‘s Vancouver office. Luke focuses his practice on civil litigation, with an emphasis on insurance and tort law, and environmental law.  In the area of environmental law, Luke’s experience includes representing and advising clients on a wide variety of contaminated site issues relating to both commercial and residential properties — including cost-recovery actions on behalf of plaintiffs and defendants. In addition, Luke has represented and advised major companies on environmental regulatory compliance, emergency spill responses, and environmental prosecutions. Luke is also an executive board member of the British Columbia Environmental Industry Association and frequently publishes and speaks in the area of environmental law.

 

Jacob Jerome Gehlen is an articling student at Borden Ladner Gervais LLP‘s Vancouver office. He has a Juris Doctor law degree from the University of Toronto and a Bachelor’s degree from McGill University.