Common Law Environmental Remediation Claims Not Entitled to Super Priority Over Secured Creditors

On April 8, 2024, the Alberta Court of Appeal released its decision in the appeal of Qualex-Landmark Towers Inc v 12-10 Capital Corp (“Qualex”)[1]. The Court of Appeal’s decision clarifies that the super priority of environmental remedial obligations recognized in Orphan Well Association v Grant Thornton Ltd[2], ("Redwater") does not apply to private litigants, alleviating significant uncertainty for secured lenders.

Overview of Redwater

Redwater involved the bankruptcy and receivership of Redwater Energy Corporation, which operated in the oil and gas industry in Alberta. Redwater held licenses for its resource extraction assets which imposed end-of-life decommissioning and restoration obligations. Redwater’s receiver, Grant Thornton Ltd. (the “Receiver”), determined that Redwater’s end-of-life environmental obligations would surpass the value of its assets in bankruptcy. In an effort to maximize recovery for Redwater’s creditors, the Receiver disclaimed certain assets to avoid their end-of-life environmental liabilities. The Alberta Energy Regulator took the position that the Receiver was obligated to discharge the environmental obligations for all of Redwater’s assets before making any distribution to its creditors. The Receiver argued that it should not be held liable under the provincial regulatory scheme as doing so would conflict with the Bankruptcy and Insolvency Act[3] (the “BIA”).

The Supreme Court found that the Receiver remained responsible for the end-of-life obligations of all of Redwater’s assets. The Court held that the doctrine of federal paramountcy need not be applied as it was possible to interpret Alberta’s regulatory scheme in a manner that did not conflict with the BIA. The Supreme Court also considered whether the Alberta Energy Regulator was asserting a claim “provable in bankruptcy” which would be covered by the BIA’s collective priority scheme.  In such instance, the provincial regulatory regime would be rendered inoperative to the extent that it conflicts with the federal BIA. Applying the provable claims test in Newfoundland and Labrador v AbitibiBowater Inc[4] (“Abitibi”), the Court found that the test was not met as the Alberta Energy Regulator was acting in the public interest and did not stand to benefit financially in the same way a creditor would benefit. As a result, the environmental claim was not provable in bankruptcy and did not conflict with the priority scheme set out in the BIA. In reaching this conclusion, the Supreme Court recognized a superiority of Redwater’s regulatory environmental remediation obligation ahead of secured creditors in insolvency proceedings.