When the Polluter Doesn’t Pay: A Critical Review of Redwater and its Implications

Introduction

In the case of Redwater,[1] the majority of the Alberta Court of Appeal (“ABCA”) confirmed the power of trustees in bankruptcy to disclaim environmentally contaminated property despite outstanding provincial remediation orders. The decision, though on a firm legal foundation, is controversial as it effectively shifts the cost of environmental remediation from polluters onto third parties including taxpayers. For Alberta, a province with 155,000 oil and gas wells that are not producing but not fully remediated, the long-term impact of Redwater means that third parties (including taxpayers) may be on the hook for an $8.6 billion clean-up bill.[2]

Facts & Issues

Redwater Energy Corporation (“Redwater”) was an Albertan oil and gas well company. The Alberta Energy Regulator (“AER”) assigned a licence to each well that imposed environmental obligations on Redwater, including restrictions on how and when Redwater could abandon the wells.

In May 2015, the principal secured lender commenced enforcement proceedings against Redwater. The receiver renounced control of 107 of Redwater’s 127 wells because they were non- producing and carried net liabilities stemming from environmental obligations.[3] In October 2015, a bankruptcy order appointed the receiver as trustee in bankruptcy. The trustee proceeded to disclaim the 107 wells that it previously renounced with the understanding that by disclaiming these wells, it was also disclaiming all associated remediation obligations. The AER disagreed with the trustee’s assessment and refused to allow the trustee to transfer any of the licensed wells without satisfying the AER’s environmental orders.

At trial, the trustee argued that there was an operational conflict between section 14.06(4) of the BIA and the provincial legislation governing AER licences. The Alberta Court of Queen’s Bench agreed and held that the provincial licensing scheme frustrates the operation of the BIA. The BIA prevailed under the paramountcy doctrine, allowing the Trustee to disclaim the wells. On appeal, the ABCA addressed whether: (i) environmental claims have priority in an insolvency; and

(ii) a receiver or trustee must satisfy the contingent liability inherent in the remediation of the non- producing wells in priority to the claims of secured creditors.

Judgement

The majority, Slatter JA and Schutz JA concurring, dismissed the appeal.

Applying the three-part test from AbitibiBowater,[4] the majority held that the AER’s order for clean-up costs constituted a provable claim under section 14.06(8) of the BIA. However, the AER’s claim ranked as unsecured under the BIA’s section 136 distribution scheme. This conclusion relied on the Supreme Court of Canada’s (“SCC”) reasoning in AbitibiBowater that “[i]f Parliament had intended that the debtor always satisfy all remediation costs, it would have granted the Crown a priority with respect to the totality of the debtor’s assets.”[5]

The only instance in which the BIA provides priority to environmental claims is in section 14.06(7). However, this priority is limited to instances in which the Crown has remediated the environmental contamination. Only then can it gain security in the property or immovable asset that was remediated. In practice, this is an ineffective type of security for oil and gas wells due to the nature of these assets.[6]

The majority conducted a constitutional analysis on the interaction between the AER’s licensing scheme and the BIA. Since the AER licensing scheme imposed conditions on the abandonment and transfer of wells, the provincial legislation interfered with the trustee’s right to disclaim and dispose of assets as contemplated in the BIA. This interference frustrated the objective of federal legislation. Using the paramountcy doctrine, the BIA prevailed.

In her dissent, Martin JA stated that the paramountcy doctrine was not engaged because the AER was not seeking priority. It only sought to enforce valid provincial law by requiring that the polluter remediate its abandoned wells. Allowing insolvency practitioners to disregard valid provincial law would be an extraordinary power not conferred upon them by the BIA.

Commentary

The majority’s decision aligns with recent jurisprudence. Redwater dutifully applied AbitibiBowater, the SCC’s most recent and relevant decision on this matter. AbitibiBowater established that creditors’ claims must be paid in accordance with federal insolvency legislation regardless of what provincial legislation requires. The only priority provided to environmental claims is in section 14.06(7) of the BIA. Due to the limited applicability of section 14.06(7), coupled with the nature of oil and gas wells generally, environmental claims regarding oil and gas wells are not practical candidates for section 14.06(7) priority.[7]

AbitibiBowater is only the most recent case in a decades-long evolution towards removing priority for environmental claims in Canada. In the 1991 decision PanAmericana de Bienes y Servicios SA v Northern Badger Oil & Gas Ltd,[8] a case with similar facts to Redwater, the ABCA held that receivers are responsible for discharging environmental obligations and that the costs of remediation rank ahead of secured claims. This decision has not aged well. In 1995, the SCC clarified that provinces cannot disturb the priority scheme established by federal insolvency legislation,[9] and amendments to the BIA in 1997 largely rendered Northern Badger obsolete.[10]

Harbert Distressed Investment Fund LP v General Chemical Canada Ltd[11] continued this trend. It specified that the BIA takes priority over provincial legislation and that “any provincial effort to extend further the rights to the Crown in respect of environmental contamination […are…] in conflict with the provisions of the federal statute”.[12] No priority was given to the environmental claim in this case.

English case law had a similar progression. In Re Mineral Resources Ltd,[13] the court prevented the liquidator from disclaiming a waste disposal licence and gave priority to the environmental agency’s claim: “[I]n the absence of strong factors the other way, […] the interest in the protection of the environment should prevail.”[14] This decision was later overturned in Re Celtic Extraction Ltd (In Liquidation),[15] a case with similar facts that held that environmental claims receive no priority and should be treated as unsecured claims.[16]

Considering the evolution of case law in this area and the lack of apparent serious errors in the majority’s application of AbitibiBowater, the SCC is unlikely to overturn Redwater on appeal.[17] However, Redwater is unsatisfactory as it shows that the “polluter pays” model that Canada has ostensibly adopted is in practice a “taxpayer pays” model. Bankrupt corporations pay environmental claims only after satisfying more senior claims. In the all-too-common situation where there are no funds for environmental claims, publicly funded agencies pay for remediation. This allows polluters to avoid the costs of negative externalities generated from their operations. It also gives rise to a moral hazard since Redwater and its creditors enjoy the economic benefits of Redwater’s activities but not the consequences of environmental contamination. In effect, the BIA indirectly incentivizes pollution by having taxpayers subsidize it.

While there are legitimate reasons for denying priority status to environmental claims,[18] the “taxpayer pays” model is unlikely to garner support from Canadian taxpayers. Returning to a true “polluter pays” model can be achieved in one of two ways. The obvious method is for Parliament to amend section 14.06 of the BIA so that environmental claims can more easily gain priority. This, however, has yet to happen despite Parliament having ample opportunity. Such an amendment could also impact the accessibility and affordability of credit for industries prone to causing environmental contamination. The second method of achieving a “polluter pays” model is for provinces to avoid engaging in insolvency proceedings by collecting sufficient security from corporations engaging in activities that may damage the environment prior to their commencement of these activities.

Collecting security is not a new idea. This was the strategy adopted by the European Union post-Re Mineral Resources and Celtic Extraction,[19] and to an extent Canada already has similar schemes. In Alberta, the Orphan Well Association (“OWA”) collects a levy from industry participants so that it can fulfill its mandate to remediate oil and gas wells abandoned by bankrupt corporations.[20] However, this scheme is imperfect as illustrated by OWA’s $1.6 million deficit in 2016-2017.[21] Funding gaps are filled by taxpayers; for instance, the Alberta Government loaned $235 million to the OWA in March 2017.[22] Evidently, this security collection scheme needs to be revised,[23] but if run properly it has the potential to prevent the AER from needing to be a creditor and thus circumventing the need for environmental claims to have priority.

Conclusion

As Morawetz J noted in Nortel, “insolvency statutes such as the CCAA and the BIA do not mesh very well with environmental legislation.”[24] As Redwater shows, the Crown’s environmental claims (except under s 14.06(7) of the BIA) have no priority over secured creditors and provincial legislators cannot create priority if doing so interferes with the function of the BIA. Instead of trying to be prioritized creditors, provinces post-Redwater should proactively collect sufficient security from corporations involved in environmentally degrading activities. In doing so, provinces can ensure that polluters pay for their actions in the event they become bankrupt.

 

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