Alberta Court of Appeal Provides Clarity on Redwater and Asset Retirement Obligations

Alberta Court of Appeal Provides Clarity on Redwater and Treatment of Asset Retirement Obligations

Background

On January 25, 2021, the Alberta Court of Appeal issued its decision, PricewaterhouseCoopers Inc. v Perpetual Energy Inc., 2021 ABCA 16, on three related appeals which arose from the Trustee’s claim that a component of a multi-step transaction involving the bankrupt corporation constituted a transfer at undervalue under the Bankruptcy and Insolvency Act, as well as related claims for oppression, public policy, and breach of director’s duties.  More specifically, the Trustee appealed the case management judge’s decision to strike out or summarily dismiss the majority of its claims, the Perpetual Defendants appealed the case management judge’s refusal to strike out or summarily dismiss the Trustee’s claim regarding whether or not the transaction occurred at arm’s length, and the Trustee, in its personal capacity, appealed a costs award made by the case management judge.

The Court of Appeal also heard from the Orphan Well Association and a group of industry members – Canadian Natural  Resources Limited, Cenovus Energy Inc., and Torxen Energy Ltd. – as intervenors in the Trustee’s appeal of the case management judge’s decision.

The Court of Appeal’s findings on Redwater and Asset Retirement Obligations

The decision addressed a myriad of legal and factual issues, but of significant interest to Alberta’s oil and gas industry is the Court of Appeal’s consideration of the impact of the Orphan Well Association v. Grant Thornton Limited, 2019 SCC 5 (“Redwater”) decision on the case management judge’s reasons.  The Court of Appeal found the case management judge’s reasons reflected “…at best, a significant overreading of the effect of the Redwater decision”.

The Trustee and the intervenors raised significant concerns during the appeal proceedings about the case management judge’s characterization of asset retirement obligations (“ARO”), or assets’ end-of-life abandonment and reclamation obligations, as “neither a liability nor any amount referable to an existing obligation” and his related findings that ARO were not a liability for the purposes of the Trustee’s claims.  The Court of Appeal agreed with the case management judge that Redwater stood for the proposition that ARO could not be a claim provable in bankruptcy; however, that did not mean that ARO should be found to not exist, that they are not an obligation or liability, or that they should be valued at “nil”. In contrast, the Court of Appeal found that ARO are an obligation owed to the public and the surface landowners which are “nevertheless obligations which the trustee of a bankrupt corporation cannot ignore”, adding that “not only did Redwater confirm that [ARO] are a continuing obligation of a bankrupt corporation, that decision confirms that those obligations had to be discharged even in priority to paying secured creditors”.

The Court of Appeal further noted that when “oil and gas wells are producing, they are valuable assets”; “[h]owever, after they cease to be productive they can quickly turn into significant liabilities”. While the decision acknowledged that ARO can be “contingent”, the Court of Appeal emphasized that although ARO “may not crystallize for some time, they are inevitable; no well produces forever”.  In short, the Court of Appeal found that the case management judge erred in his finding that the Trustee’s claims “lacked merit” on the basis that Redwater “nullifies” or “extinguishes” ARO.

The Court of Appeal’s Findings on the Case Management Judge’s Decisions

In considering the merit of the Trustee’s oppression claim, the Court of Appeal found that the case management judge erred in his interpretation of Redwater by concluding that the law “nullified” the oppression claim – instead, the Court of Appeal held that ARO may be a relevant consideration in assessing an oppression claim brought by creditors. Overall, the Court of Appeal held that the Trustee’s pleadings disclosed a cause of action and in light of the available record and the complexity of the issues, it was not possible to fairly dispose of the claim on a summary basis.

Similarly, the Court of Appeal found that the Trustee’s public policy claim should not have been struck as it described and engaged an important issue in the action that required resolution through a trial.

Further, the Court of Appeal held that it was also not “appropriate to either strike out or summarily dismiss the claim alleging the breach of director’s duties”, as it was an “error of law to conclude that [the director] did not control, and was not the “directing mind” of Perpetual/Sequoia”. Lastly, the Court of Appeal indicated that “the business judgment rule provides that the courts will defer to the judgment of the directors on difficult business decisions”, but “does not support the abdication of a director’s decision making responsibility”.

In considering the Perpetual Defendants’ concurrent appeal, the Court of Appeal agreed with the case management judge that the Trustee’s Section 96 arm’s length claim could not be struck or summarily dismissed.

Finally, in considering the costs appeal, the Court of Appeal found that in light of its other conclusions that resulted in some aspects of the Trustee’s claims being referred back to the trial court and therefore left unresolved, the costs award must be set aside.  The Court of Appeal strongly criticized aspects of the case management judge’s conclusions regarding costs, finding that the judge “overstated the implications of a trustee being an officer of the court”, “there is no independent duty to investigate owed to third parties”, and “there was no litigation misconduct that would justify enhanced costs”.

Conclusion

The Court of Appeal has provided clarity in the interpretation of the seminal Redwater decision, particularly as it relates to an insolvent party’s obligations and liabilities arising from Asset Retirement Obligations.  The result of the decision was that the Trustee’s claims that were struck or summarily dismissed by the case management judge were largely restored and returned to the trial court.

In a related decision, PricewaterhouseCoopers Inc. v Perpetual Energy Inc., 2021 ABQB 2, the case management judge recently summarily dismissed the Trustee’s claims against Perpetual Energy Inc, Perpetual Operating Trust, and Perpetual Operating Corp under Section 96 of the Bankruptcy and Insolvency Act, alleging a transfer at undervalue.  The Trustee has commenced its appeal of that decision and it is expected that the Court of Appeal will again be asked to address the case management judge’s interpretation of Redwater in that decision as well.

Further updates will follow as the litigation continues – questions about the Court of Appeal’s decision can be directed to our Restructuring and Insolvency litigators.

 

Disclaimer: This article is to be used for educational and non-commercial purposes only. Parlee McLaws LLP does not intend for this article to be a source of legal advice. Please seek the advice of a lawyer before choosing to act on any of the information contained in this article.