The reach of Redwater considered in the context of first-priority builders’ liens

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In the recent decision of the Alberta Court of Appeal in Manitok Energy Inc. (Re), 2022 ABCA 117, the court considered the reach of the Supreme Court of Canada’s decision in Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5, otherwise known as Redwater.

In Redwater, the Court considered “end-of-life” obligations for owners of oil and gas wells. Once the well has been fully exploited, the licensee operating it must seal the well in an environmentally friendly way and reclaim the surface of the land. This requirement is imposed by provincial oil and gas legislation. The Court held that a regulator can make a claim against a debtor’s estate for environmental liabilities even when the assets giving rise to liability have been disclaimed by a trustee in bankruptcy.

In Manitok, the Court considered whether such a claim from a provincial regulator ought to rank in priority to claims under the Alberta equivalent of the Builders’ Lien Act, including when the regulator’s claim is made in respect of assets that have already been sold.

The oil and gas company Manitok Energy Inc. became insolvent, and a receiver was appointed. Two builders’ liens had been filed against property of Manitok. The Alberta regulator had a claim for environmental costs associated with wells that had already been sold to a third party.

The Alberta Court of Appeal confirmed that reclamation and abandonment obligations are not “claims provable in bankruptcy”, as they are not attributable to a “creditor”. Rather, they are obligations owed to the public.  Since claims that are not “provable in bankruptcy” are not extinguished by the bankruptcy process, the abandonment and reclamation obligations remained binding on the bankrupt estate.

The Court also interpreted Redwater as standing for the proposition that a bankrupt’s assets do not fall into different “pools” for the purpose of public obligations, despite disclaiming or selling assets in the bankruptcy process. In this case, certain assets giving rise to the regulator’s claim were sold and converted to cash. The Court held these were still available to satisfy the claim, and the sale of assets does not extinguish obligations arising from those assets.

In the end, the claims relating to Manitok’s environmental obligations must first be satisfied before any claims in bankruptcy, including the builders’ liens. Notably, the Court left open the question of whether environmental obligations may be satisfied from assets unrelated to the oil and gas business.

Are you or your clients are facing claims against a bankrupt’s estate from provincial regulators?  The lawyers at Gehlen Dabbs Cash LLP are highly experienced and happy to assist. Contact us.

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