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Diving deep into Redwater – Supreme Court Says Trustee in Bankruptcy can’t cherry pick Environmentally Clean Assets

Written by John Stefaniuk and Scott Birse, Thompson Dorfman Sweatman LLP

The Supreme Court of Canada released its much anticipated decision in Orphan Well Association v. Grant Thornton Limited (a case more commonly known as Redwater) on January 31, 2019. You might recall our article on the Alberta Court of Appeal’s decision in the same case.

In Redwater, the courts had to decide whether bankruptcy law trumped provincial regulatory orders issued in Alberta. Redwater Energy Corporation (Redwater) was an oil and gas developer.  It held a number of development properties under the authority of the Alberta Energy Regulator (AER).  With the slump in oil prices, Alberta Treasury Branches (ATB), Redwater’s primary lender, called its loan. ATB appointed Grant Thornton Ltd. first as receiver and subsequently as trustee in bankruptcy of the estate of Redwater under the federal Bankruptcy and Insolvency Act (BIA).

In the course of examining Redwater’s realizable assets, Grant Thornton became aware of outstanding environmental reclamation obligations that were associated with some of Redwater’s non-producing properties.  Grant Thornton decided to put the valuable, producing wells and other “clean” assets up for sale, and to walk away from the remaining assets by renouncing them under the BIA. That resulted in putting the reclamation in the lap of the Orphan Well Association (OWA), an industry-funded organization set up in Alberta to administer a fund established for the purpose of reclamation of “orphan” properties.

The AER refused to allow the transfer of the productive licences. It issued abandonment orders requiring clean-up or posting of security for clean-up costs in relation to the renounced assets. The parties headed to court to see what would become of the value that could be realized for the retained assets. Both the trial court and the Alberta Court of Appeal would have allowed Grant Thornton to leave the liabilities behind.

In the majority decision written by Wagner C.J., the Court applied a three-part test found in another Supreme Court of Canada case decided in 2012, Newfoundland and Labrador v. AbitibiBowater Inc. The majority of the Court held that the reclamation claims were not  a debt, liability or claim owing to a creditor and that they were too remote to attach a monetary value. That meant that two of the three criteria in the Abitibi test were not met. The Court therefore held that the bankruptcy did not have the effect of undoing the orders and the trustee could not cherry-pick the valuable assets while renouncing the rest.

This was a bit of a surprise to many environmental law practitioners, including most of the ones I attended a conference with just a few weeks prior to the decision.

What then, is the upshot?

Ostensibly, this is good news for provincial regulators. It is more likely that their enforcement orders will be found to continue to be binding upon corporations in bankruptcy. While it does not make receivers or trustees in bankruptcy personally responsible for rehabilitation costs, it does mean that the proceeds of sale of the valuable assets may have to be put toward satisfying those orders before any of it is available to lenders and other creditors. That means less costs potentially borne by the provinces (and their taxpayers). Predictably, lenders do not seem to garner a lot of public sympathy.

On the other hand, (assuming no changes to the BIA) the decision means that lenders and other creditors will have to pay closer attention to the borrower’s unfunded clean-up and closure costs when extending and monitoring credit. If the lender no longer has the ability to deal with valuable assets and leave the “dirty” behind, it means that credit in environmentally sensitive sectors may become tighter, reporting requirements may become more onerous, and some lenders may become skittish.

The dissenting minority decision written by Côté J. said the majority decision was not based on “polluter pays”, but instead resulted in a regime of “lender pays”.  After all, it is always open to the provinces to require permittees and licensees to post better (and more) security to fund rehabilitation costs, and to carry out better monitoring and inspections to ensure that the security is really adequate to fund clean-up. On top of that, who is in a better position to monitor environmental compliance and reclamation costs, the regulator or the bank? Surely, the regulators have better expertise and, assuming proper funding from government, better resources to carry out the work. Indeed, the regulators also wield the bigger stick – fines and penalties – whereas the most that the lender can do is either refuse to lend, lend less, or call in a loan where potential trouble is spotted. By the time that issues are obvious, the lender may choose to let things ride, so long as payments are being made, rather than force a realization that could put its security at risk. It is difficult to see how that serves environmental protection.

In some respects, the decision can be seen as a bit of a “Get out of Jail Free” card for the provinces and their resource and environmental regulators. No doubt that is the way that ATB felt about it.

This article has been republished with the permission of the authors. It was first published on the TDL Law website.


About the Authors

John Stefaniuk engages in a broad practice with emphasis on environmental law, real estate and development law, natural resources and energy, commercial law and municipal law matters. He has particular experience in relation to contaminated sites, mining and mine rehabilitation, wind power development, natural resource development, environmental approvals and licensing, commercial real estate, leasing, financing and development, municipal approvals, taxation and assessment and business acquisitions. He appears regularly before government licensing bodies and administrative tribunals including the Manitoba Clean Environment Commission and Municipal Board, municipal councils, provincial legislative committees and in all levels of court in Manitoba and in the Federal Court in connection with environmental, resource, regulatory municipal, and property issues.

Scott Birse has a broad practice with a particular emphasis on environmental law, municipal law, real estate and development law, regulatory compliance, commercial law and related litigation. He has particular experience assisting clients in the areas of environmental liability in real estate transactions and business acquisitions, municipal planning and approvals, contaminated sites liability, environmental assessments, commercial real estate development and civil litigation. Scott has appeared before municipal tribunals, the Manitoba Court of Queen’s Bench and the Manitoba Court of Appeal. He has also advised clients with respect to municipal and environmental matters in Saskatchewan and British Columbia.

Supreme Court of Canada denies Leave to Appeal in the latest dry cleaner Contamination Case

Written by Marc McAree, Willms & Shier Environmental Lawyers LLP

On April 11, 2019, the Supreme Court of Canada denied the dry cleaner’s application for leave to appeal from the Ontario Court of Appeal’s decision in Huang v Fraser Hillary’s Ltd. 1

Huang confirms that Ontario courts are inclined to measure and assess damages in contaminated land lawsuits based on the cost to remediate contamination and that the statutory cause of action in Ontario’s Environmental Protection Act (“EPA”), 2 s. 99(2) is alive-and-well. Huang is the latest decision in what we expect will be an increasing number of claims brought pursuant to EPA, s. 99(2).

Fraser Hillary’s Limited (“FHL”) owns a dry cleaning business in Ottawa that has operated since 1960 near two neighbouring commercial properties owned by Eddy Huang. David Hillary is the president and sole corporate director of FHL. Mr. Hillary also owns a residential property situated near the FHL property. 3

Spills of dry cleaning solvents containing tetrachloroethylene (“PCE”) and trichloroethylene (“TCE”) were known to have occurred between 1960 and 1974 at FHL’s dry cleaning business. In 1974, FHL bought new equipment and deployed new practices that the trial court and Court of Appeal held virtually eliminated any possibility of spills thereafter. 4

In 2002, Mr. Huang discovered TCE at his nearby commercial properties. He sued FHL and Mr. Hillary.5 Mr. Huang relied on five causes of action that plaintiffs typically plead in contaminated land lawsuits:

  • liability pursuant to EPA, s. 99(2)
  • nuisance
  • strict liability
  • negligence
  • trespass.

Trial Decision

At trial, the Ontario Superior Court of Justice found that

  • FHL was liable pursuant to EPA, s. 99(2) as the owner and controller of a spilled pollutant. The trial court held that EPA, s. 99(2) applies prospectively to permit compensation for spills that happened before the statutory cause of action was promulgated into law in 1985.6
  • FHL was liable in nuisance because the TCE present at Mr. Huang’s property caused an interference with Mr. Huang’s use and enjoyment of land that was both substantial and nontrivial.7
  • FHL was not liable in negligence, trespass or strict liability.
  • Mr. Hillary was not liable under any cause of action. 8

The trial court considered various clean up options in assessing and awarding damages to Mr. Huang based on the cost to remediate his commercial properties. 9

Court of Appeal Decision

FHL appealed the trial court decision to the Ontario Court of Appeal.

Mr. Huang cross-appealed specific aspects of the trial court decision including that: (i) FHL was not liable in negligence, trespass, or strict liability, and (ii) Mr. Hillary was not liable as a nearby residential property owner.

Footnote

1 Huang v Fraser Hillary’s Ltd, 2018 ONCA 527, leave to appeal to SCC refused, 38282 [Huang ONCA].

2 Environmental Protection Act, RSO 1990, c E19, s 99(2) [EPA].

3 Huang v Fraser Hillary’s Ltd, 2017 ONSC 1500 at paras 1-4 [Huang ONSC]

4 Huang ONSC at para 23; Huang ONCA at para 7.

5 The claim against Mr. Hillary was in his personal capacity as the owner of a nearby residential property at 36 Cameron Avenue, not as a corporate director and officer of FHL; Huang ONSC at para 19.

6 Huang ONSC at paras 84, 97

7 Huang ONSC at para 124

8 Huang ONSC at paras 52-55, 61, 103, 147, 169.

9 Huang ONSC at paras 185-93.

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.

This article has been republished with the permission of the author. It was first published on the Willms & Shier Environmental Lawyers LLP website and can be found here.


About the Author

Marc McAree, B.A. (Hons.), LL.B., M.E.S., is a partner at Willms & Shier Environmental Lawyers LLP and certified as an Environmental Law Specialist by the Law Society of Ontario. Marc provides advice and solutions to a wide range of clients to overcome their environmental law and litigation issues.  Marc has significant environmental law expertise in contaminated land/brownfields clean ups, transactions and litigation, and environmental compliance and approvals.  Marc also helps clients reduce and manage environmental risks and liabilities. Marc is recognized for his excellence representing clients in environmental civil litigation at all levels of Ontario Courts, defence of clients against environmental regulatory prosecutions, and appearances before Ontario’s Environmental Review Tribunal and other administrative law decision-makers on appeals and other hearings.  Marc has particular experience litigating soil and groundwater contaminant impacts, nuisance and odour issues.

Supreme Court of Canada refuses leave to appeal of dry cleaner liable for $1.8 million clean-up

The Supreme Court of Canada recently dismissed a Leave to Appeal from an Ottawa dry cleaner that had been held liable for $1.8 million in clean-up costs from spills of dry cleaning chemicals that occurred approximately 45 years ago.

In most legal cases, a party who wishes to appeal the decision of a lower court must obtain permission, or leave to appeal, from the higher Court.  Generally, the losing party in a lawsuit may appeal their case to a higher court. If the higher court denies the leave to appeal, the decision of the lower court stands. If the court grants the appellant leave to appeal, the appeal process continues.

In June of 2018, the Ontario Court of Appeal released a decision dealing with the case Huang v. Fraser Hillary’s Limited. The owner of contaminated property, Mr. Huang, had sued the owner of a dry cleaner business who contaminated Mr. Huang’s property, Fraser Hillary’s Limited (FHL). Mr. Huang owns two commercial properties in Ottawa that are directly south of FHL’s property.

FHL, 1235 Bank St., Ottawa (Photo Credit: Google Maps)

From 1960 onwards, FHL operated a dry cleaning business. Mr. Hillary, the president and sole director of FHL. Spills of dry cleaning solvents containing tetrachloroethylene (PCE) and trichloroethylene (TCE) were known to have occurred between 1960 and 1974 at FHL’s dry cleaning operation. Up to the mid‑70s, the adverse effects of dry cleaning chemicals were generally unknown or not clearly understoodty. In 1974, FHL bought new equipment and used new practices that eliminated the potential for subsequent spills.

In 2002, Mr. Huang discovered TCE at his properties after a an environmental site assessment. He subsequently sued FHL and Mr. Hillary for the cost of the environmental investigations and the clean-up of his property.

In 2017, the Ontario Superior Court of Justice awarded more than $1.8 million in damages to Mr. Haung to clean up his properties and reimburse him for the monies he paid for the environmental investigations conducted on his property. A summary of the 2017 decision can be found here.

After failing in his appeal to the Ontario Court of Appeal, Mr. Hillary applied for leave to the Supreme Court of Canada (SCC). On April 11th, the SCC announced it will not hear an appeal. The top court does not issue reasons for denying leave to appeal.

Expanding Redwater Beyond Oil And Gas: Can Other Regulators Enforce Orders In An Insolvency?

Written by Alan Harvie, Norton Rose Fulbright Canada LLP

The Supreme Court of Canada recently released its decision in Orphan Well Association v Grant Thornton Limited, (Redwater). The majority ruled that a bankrupt oil company’s estate remained liable for well closure and environmental obligations in priority to the company’s creditors, including its secured creditors.

Although Redwater dealt with the Alberta Energy Regulator’s (AER) powers to order a bankrupt oil company to close oil and gas wells, the decision can likely be used by regulators in other industries to ensure compliance with environmental and other laws.

Provable claims

The concept of a provable claim is central to Canadian insolvency law. Once insolvency proceedings start, a regulator trying to enforce a compliance order that is considered a provable claim against the insolvent company is typically stayed by the court (i.e. stopped) from enforcing it. Conversely, a non-provable claim is not stayed and can be enforced.

In Redwater, the company entered receivership proceedings and the AER ordered the company to abandon and permanently close various wells by pumping cement down the well bore, cutting and capping the top of the well and removing surface equipment so as to leave the well in a safe state in perpetuity. The receiver argued the abandonment orders were stayed and sought to sell a package of Redwater’s assets to a third party and use the proceeds to pay the secured creditor.

The matter ended up in the Supreme Court, which considered the historical test of what constituted a provable claim by a regulator in an insolvency set previously by it in Newfoundland and Labrador v AbitibiBowater Inc., namely that there must be a debt, liability or obligation to a creditor, that it be incurred before the bankruptcy and that it must be possible to attach a monetary value to the debt, liability or obligation.

The Supreme Court in Redwater noted that although a regulator can be a creditor with a provable claim, a regulator exercising an enforcement power is not always one. The court noted the AER’s abandonment orders did not require the company to pay the AER, but instead to do something, namely to permanently close the wells. It was not sufficiently certain that the AER would itself perform the well abandonments if the company failed to do so and then advance a claim for reimbursement of the costs. Indeed, the AER was not in the business of abandoning wells and had no statutory duty to do so.

The Supreme Court distinguished AbitibiBowater by noting in that case the provincial government had expropriated a number of AbitibiBowater’s properties without compensation. The company entered creditor protection and responded to the expropriation by filing a NAFTA claim for compensation. The province then issued environmental clean-up orders that the government hoped to use to set off against the NAFTA claim.

The court clearly saw the province as seeking a direct financial benefit from the clean-up orders. It pointed out the orders’ timelines were not realistic, showing the province did not intend the orders to be complied with. The company also could not access some of the properties to undertake the work due to the expropriation. The court felt the ultimate purpose of the clean-up orders was not to have the properties remediated, but to create a set-off in response to the NAFTA compensation claim. Hence, the company owed a debt to the province to which monetary value could be attached.

In Redwater, the court found the regulator was acting in a bona fide regulatory capacity and did not stand to benefit financially from the abandonment orders. Unlike in AbitibiBowater, the AER had no ulterior motives in issuing the orders. It was acting in the public interest and for the public good. It was not enforcing a debt but was instead enforcing a general law of the province.

The court found that bankruptcy was not a license to ignore the rules, and the bankruptcy trustee was bound by and must comply with valid provincial laws. Hence, the abandonment orders were not provable claims in the bankruptcy and were not stayed. The court ordered the proceeds of sale of Redwater’s assets in the bankruptcy proceeding be used to pay for the well abandonment costs to the preference of the company’s secured and other creditors.

Other regulators are likely paying attention

Regulators in other industries trying to enforce environmental protection legislation against insolvent companies are undoubtedly paying attention and considering if they can enforce their legislation in preference to an insolvent company’s creditors. It appears many have the power to do so.

For instance, Alberta Environment and Parks (AEP) has the authority to issue environmental clean-up orders in response to a spill under Alberta’s Environmental Protection and Enhancement Act. Such orders can require the company to investigate, take any action specified, minimize and remedy the effects of a spill and restore the environment. Although AEP can in certain instances claim costs incurred in enforcing the legislation, there is no requirement for it to do so.

Similarly, in British Columbia the director under the Environmental Management Act can issue a pollution abatement order in response to a spill event to any of the person who controlled the substance that caused the spill, the person who owns or occupies the land on which the substance was located prior to the spill, or a person who caused or authorized the pollution. The director may also issue a remediation order against one or more responsible persons for a site to undertake remediation.

Likewise, under Ontario’s Environmental Protection Act a director with the Ministry of the Environment, Conservation and Parks may order a person who discharges a contaminant into the environment to repair injury or damage to land, water, property, animal life, plant life or human health. The order can include requiring the person to construct and install devices, equipment and facilities, and to develop and implement plans to remediate contamination. Although the ministry may require a polluter to pay the ministry’s costs and expenses in responding to a spill, the ministry does not have to do so.

When faced with an environmental problem caused by an insolvent company, it is reasonable to expect provincial and federal environmental regulators to try to use their enforcement powers such that they fall under Redwater rather than AbitibiBowater by crafting their enforcement orders so as not to create a provable claim.

It is also reasonable to assume regulators concerned with issues besides environmental ones in the Alberta oil and gas industry are taking a close look at Redwater. Regulators of mining, forestry, transportation, agriculture, fishing and numerous other regulated industries and activities in Canada come to mind.

Secured creditors across Canada should take note

Time will tell if Redwater will be applied more broadly than to environmental obligations of an insolvent oil company. We assume regulators will try to use Redwater when faced with an insolvent company with regulatory obligations.

Secured creditors in many other instances and industries in Canada should consider what the potential shift in traditional priorities to a bankrupt’s estate might mean to repayment of their secured loans. Borrowers should consider the implications of lenders less willing to provide financing. It is also likely that lenders will want a comprehensive understanding of a borrower’s regulatory obligations and will expand their lending due diligence to understand a borrower’s assets retirement obligation and require stricter covenants in loan agreements.

The ultimate outcome of a borrower in a regulated industry becoming insolvent will be governed by the facts of each case and the particular enforcement strategies regulators use to prevent enforcement orders being provable claims and having their orders stayed upon an insolvency. It is clear, however, that Redwater will have future implications to lenders, other creditors and borrowers in many industries.


About the Author

Alan Harvie has practised energy and environmental/regulatory law since 1989 and regularly deals with commercial, operational, environmental and regulatory issues, especially for the upstream oil and gas, energy, waste disposal and chemical industries. He is a member of our energy and environmental departments. 

Mr. Harvie also has significant legal experience acting for the oil and gas industry in commercial transactions and regulatory matters, including enforcement proceedings, common carrier and processor applications, forced poolings, downspacings and holdings, rateable take, and contested facility, well and pipeline applications. He has also dealt extensively with commercial, environmental and regulatory issues concerning thermal and renewable power plants, electrical transmission and distribution lines, tourism and recreation projects, forestry, mining, agriculture, commercial real estate, industrial facilities, sewage plants, hazardous waste landfills and treatment facilities, transportation of dangerous goods and water storage reservoirs. 

About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world’s preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Provincial Environmental Obligations Prevail Over Federal Bankruptcy Laws – Supreme Court of Canada

by Paul Manning, Manning Environmental Law

Recently, the Supreme Court of Canada released its decision in the case of Orphan Well Association, et al. v. Grant Thornton Limited, et al.Orphan Well Association, et al. v. Grant Thornton Limited, et al. 

The decision writes another chapter in the long running saga of whether a company’s environmental regulatory obligations survive bankruptcy and, in particular, whether the company’s trustee in bankruptcy can disclaim an asset so as to avoid environmental liability. (See our blog post The Non-Polluter Pays: Creditor Roulette and Director Liability)

The Supreme Court has now decided in Orphan Well that, after going bankrupt, an oil and gas company must  fulfill provincial environmental obligations before paying its creditors.

Background

Redwater was an Alberta oil and gas company, which owned over a hundred wells, pipelines, and facilities when it went bankrupt in 2015.

Alberta has provincial laws requiring oil and gas companies to obtain a licence to operate. As part of the licence, companies have to “abandon” wells, pipelines, and facilities when they are done. This means permanently taking these structures down. They also have to “reclaim” the land by cleaning it up. Companies cannot transfer licences without permission from the Alberta Energy Regulator (AER), which they won’t receive if they haven’t met their responsibilities.

Most of Redwater’s wells were dry when it went bankrupt. Dismantling the sites and restoring the land would have cost millions of dollars more than they were worth. To avoid paying those costs, the the trustee in Orphan Well decided to disclaim (i.e. not to take responsibility for) the redundant wells and sites under the BIA. The trustee wanted to sell the productive sites to pay Redwater’s creditors.

The AER said that this wasn’t allowed under the BIA or provincial law and ordered the trustee to dismantle the disowned sites. The trustee argued that even if the AER was correct, the provincial abandonment orders were only provable claims under the BIA. In this case, this meant the money would first go to pay Redwater’s creditors.

The Supreme  Court’s Decision

There were two main legal issues before the Supreme Court. The first was whether the BIA allowed the trustee disclaim the sites it didn’t want take responsibility for. The second was whether the provincial orders to remove structures from the land were provable claims under the BIA. If they were, that would mean the payment order set up in the BIA applied. Only money left, if any, after those payments were made, could be used to pay for taking the sites down.

The trial judge had ruled that the trustee was allowed to disclaim the disowned sites and the abandonment costs were only provable claims in the bankruptcy. The majority of judges at the Alberta Court of Appeal hearing had agreed.

The majority of judges at the Supreme Court disagreed. It ruled that the trustee could not disclaim  the disowned sites. It said the BIA was meant to protect trustees from having to pay for a bankrupt estate’s environmental claims with their own money. It did not mean Redwater’s estate could avoid its environmental obligations.

The majority also said the abandonment costs were not “provable claims”. These costs weren’t debts requiring payments; they were duties to the public and nearby landowners. This put the abandonment costs outside the BIA’s payment order scheme and as such, the majority ruled, there was no conflict between the federal and provincial laws.

(The minority of judges at the Supreme Court disagreed, arguing that there was a genuine conflict between the federal and provincial laws and the BIA being the federal law should prevail over the provincial regulations. Where a valid provincial law conflicts with a valid federal law, the federal law will normally prevail under the constitutional law “doctrine of paramountcy.”)

As the trustee had already sold or given up all of Redwater’s assets, the money from the sales was held “in trust” by the court during the lawsuit. This money must now be used to abandon and reclaim the land before anything is paid to any of Redwater’s creditors.

Click here for the full decision of the Supreme Court of Canada in Orphan Well.

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Manning Environmental Law is a Canadian law firm based in Toronto, Ontario. Our practice is focused on environmental law, energy law and aboriginal law. 

Paul Manning is a certified specialist in environmental law. He has been named as one of the World’s Leading Environmental Lawyers and one of the World’s Leading Climate Change Lawyers by Who’s Who Legal. This article is only as a general guide and is not legal advice.

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

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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.