Environmental claims: lenders, beware of cleanup obligations

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The Supreme Court of Canada (“SCC”) will once again weigh in on the interplay of bankruptcy and environmental protection. On Nov. 9, the Alberta Energy Regulator (“AER”) was granted leave to appeal a ruling of the Alberta Court of Appeal that allowed a bankrupt oil company, Redwater Energy Corporation, to sell off about 20 producing oil wells for the benefit of secured creditors, while disclaiming interests in about 100 abandoned wells which were subject to cleanup orders from the AER. The ruling effectively provided the assets of the company to secured creditors free of any liabilities for environmental cleanup of the abandoned wells. 

Provable claims

In making its decision, a majority of the Court of Appeal had found the AER’s cleanup orders were “provable claims” under Bankruptcy and Insolvency Act (BIA) and therefore should be characterized as unsecured debts ranking behind the claims of secured lenders.

In making this decision, the Court of Appeal followed the SCC’s most recent decision on the issue, 2011’s Newfoundland v. AbitibiBowater Inc. (“Abitibi“). In Abitibi, the Province of Newfoundland argued, much like the AER, that its cleanup orders were not monetary in nature and therefore not “provable claims”. But the Supreme Court ruled that if Abitibi did not meet environmental obligations, the province would be forced to conduct the cleanup and would become a claimant for reimbursement of costs. By this logic, the cleanup orders were deemed monetary in nature and its position was therefore that of an unsecured creditor, behind secured lenders in priority.

The granting of leave suggests that the SCC may be planning to revisit its decision in Abitibi, and this could have major impacts on bankruptcies and lending practices to borrowers who may face environmental cleanup orders.

No hearing date has been set, but the appeal is being expedited and is expected to be heard sometime in the first half of 2018.

Lenders, creditors, and receivers should to consult a lawyer where insolvency and environmental liabilities are at issue. 

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