APPLICANT

ALBERTA TREASURY BRANCHES

DOCUMENT

BENCH BRIEF IN SUPPORT OF APPLICATION OF RECEIVER TO APPROVE A SALES PROCESS AND IN RESPONSE TO APPLICATION OF THE ALBERTA ENERGY REGULATOR

ADDRESS FOR SERVICE AND CONTACT INFORMATION OF PARTY FILING THIS DOCUMENT

Gowling Lafleur Henderson LLP 1600, 421 7 Avenue SW Calgary, AB T2P 4K9 Telephone 403-298-1818/403-298-1938 Facsimile 403-695-3558/403-695-3538 File No. A152238 Attention: Jeffrey Oliver/Tom Cumming

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TABLE OF CONTENTS I.

INTRODUCTION……………………………………………………………….1

II.

FACTS……………………………………………………..………….………….4 A.

The Receivership and Bankruptcy Proceedings……...……………...……4

B.

The AER Regulation of Wells and Facilities….……...……………...……4

C.

LM Rating of Redwater, Renunciation Letter and the Abandonment Orders………………………………………….……...……………...…… 6

III.

ISSUES………………………………………………………….…..…………....7

IV.

LAW AND ARGUMENT……………………………………………....………8

V.

A.

The Receiver is permitted to renounce assets under section 14.06(4) of the BIA 8

B.

Is the Receiver permitted to refuse to take possession of the Renounced License Assets pursuant to paragraph 2 of the Receivership Order and the BIA 36

C.

The Sales Process

D.

Directive 006 constitutes an inflexible policy that improperly fetters (or pre-empts) the AER’s discretion concerning the approval of licence transfers, and should therefore not be considered on any licence transfer applications contemplated by the Sales Process 68

RELIEF REQUESTED

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42

72

I.

INTRODUCTION 1.

Redwater Energy Corp. (“Redwater”) was a publicly listed junior oil and gas producer incorporated in Alberta in 2008. Its principal secured lender, Alberta Treasury Branches (“ATB”) demanded repayment of its indebtedness and applied to the Court of Queen’s Bench of Alberta (the “Court”) for an order appointing a receiver.

2.

On May 12, 2015, the Honourable Mr. Justice C.M. Jones pronounced an order appointing Grant Thornton Limited (“Grant Thornton”) as receiver of the assets, undertakings and property of Redwater under section 243 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “BIA”) (in such capacity, the “Receiver”).

3.

On October 16, 2015, ATB filed an originating application seeking a bankruptcy order in respect of Redwater. On October 28, 2015, the Honourable Madam Justice B.E.C. Romaine made an order (the “Bankruptcy Order”) adjudging Redwater bankrupt and appointing Grant Thornton as trustee of the Estate of Redwater (in such capacity, the “Trustee”).

4.

The Receiver, the Trustee, the Alberta Energy Regulator (the “AER”) and the Orphan Well Association (the “OWA”) have filed competing applications in these proceedings. The applications illustrate that the federal insolvency regime is squarely in conflict with the provincial regime for regulating oil and gas production.

5.

Alberta’s oil and gas production industry is subject to a complex provincial regulatory system under the supervision of the regulator, the AER. Under the governing legislation, the mandate of the AER is to provide for the efficient, safe, orderly and environmentally responsible development of energy resources in Alberta. Under that legislation, the AER has broad powers to regulate the disposition and management of public lands, protect the environment, and conserve and manage water.

6.

Prior to the insolvency of a licensee of a well and associated facilities and pipelines, the AER has a legitimate interest in ensuring that the licensee has the financial capacity to pay its abandonment and reclamation liabilities. In pursuit of that interest, the AER utilizes a liability management rating system to measure and monitor, on an ongoing basis, the extent of potential licensee liabilities and the ability of the licensee to satisfy those obligations. The stated policy of this system is to ensure licensees have the means to carry out these obligations and to limit the risk of wells and associated facilities being left to the OWA to abandon, reclaim and remediate. Under the liability management rating system, the AER values licensed wells and facilities based on their monthly production and compares these values to deemed liabilities for their abandonment, reclamation and remediation at the end of their life cycle. To the extent that, on an enterprise level, a licensee’s deemed liabilities exceed its

1

deemed asset values, the AER will require the licensee to provide security for any deficiency between those values. The AER has a suite of legal powers and remedies to ensure that licensees comply with their obligations to provide security and comply with the energy resource regulatory regime. 7.

The insolvency of a licensee fundamentally changes the legal landscape applicable to licensees. Insolvency proceedings, including court-appointed receiverships and bankruptcies, are inherently collective in nature. The AER is an important stakeholder in such an insolvency given its regulatory mandate and its power to approve, deny or impose conditions upon the transfer of licences issued by the AER. However, the AER’s rights must be balanced in insolvency proceedings against the legal rights and entitlements of all creditors to ensure that the insolvent estate is administered in a manner that is in the best interests of all creditors and stakeholders.

8.

On the facts of this case, the AER’s claims as against Redwater are financial rather than regulatory in nature. As such, they are subject to the receivership and bankruptcy, and provable as unsecured claims in Redwater’s bankruptcy in accordance with the priorities afforded to such claims under the BIA. This case considers whether the AER can exercise particular regulatory powers in support of its financial claims in a manner which prevents the Receiver from exercising some of the most fundamental powers granted to receivers in the federal insolvency system, including the power to sell assets and distribute their proceeds in a fair and equitable manner in accordance with federal insolvency legislation.

9.

Fundamentally, in the AER and OWA application, they are seeking to shift the economic burden of the abandonment, reclamation and remediation obligations of Redwater to Redwater’s creditors, without regard to the rights of and protections afforded to the Receiver and Trustee under the BIA, and notwithstanding the priorities afforded to its claim versus the claims of other creditors under the BIA. The AER is attempting to do so in two ways.

10.

First, in the Amended Notice of Application of the AER and the OWA in the receivership, and the Notice of Application of the AER and OWA in the bankruptcy (collectively, the “AER’s Application”), the AER and OWA request that this Honourable Court order that the Receiver comply with abandonment orders issued by the AER after the Receiver had declined to take possession of various shut in properties and renounced its interest in such properties under section 14.06(4)(c) of the BIA. On November 2, 2015, he Trustee released its interest in the same properties pursuant to section 14.06(4)(a)(ii) of the BIA. Such properties have abandonment and reclamation liabilities which are almost ten times higher than their deemed asset value. The AER and OWA claim that the Receiver and Trustee are obliged to comply with these orders as they are deemed to be licensees for the purposes of the legislation governing licensees.

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11.

The AER seeks to have the abandonment work performed at the cost and expense of the estate. Such an objective directly conflicts with section 14.06(6) of the BIA, which states that such costs are not costs of administration in a receivership or bankruptcy, and conflicts with the general scheme of priorities mandated by the BIA.

12.

The AER’s argument that the Receiver is required to comply with the abandonment orders, as discussed in further detail below, raises constitutional issues in relation to the paramountcy of sections 14.06(4)(a)(i), 14.06(4)(c) 14.06(6), 14.06(7), 14.06(8), 86, 87 and 141 of the BIA over sections of provincial legislation which have the effect of requiring the Receiver and the Trustee to comply with the abandonment orders and would render the cost of compliance a cost of administration.

13.

The second method by which the AER is seeking to advance a financial claim is through the exercise of its power to approve or deny applications to transfer licences or impose conditions on such transfers.

14.

The AER states that it will not approve applications to transfer licences of Redwater unless:

15.

16.

(a)

such transfers improve, or do not result in a further deterioration of, Redwater’s LM Rating (as defined below); or

(b)

such transfers are submitted with a security deposit to the AER either for the amount of Redwater’s LMR Deficiency (as defined below), or any amount by which the LMR Deficiency deteriorates as a result of such transfers.

The evidence shows, and the Receiver will argue, that the exercise by the AER of its powers with respect to the transfer of licences in the manner described in paragraph 14 of this Brief will result in, either: (a)

the Receiver being unable to sell the licensed assets of Redwater, where the vast majority of the value of the estate resides; or

(b)

if the sale process were to proceed, the AER being paid its claims for either the LMR Deficiency or the amount by which the LMR Deficiency deteriorates, in priority to any other claim against the estate, including the claim of the Receiver for its fees and disbursements, any claims pursuant to borrowings by the Receiver under its receiver’s certificates, and any claims of secured and unsecured creditors.

The AER is in essence using its statutory control over the transfer of licences to either make impossible the carrying out of a sales process, which derails one of the most fundamental reasons for receivership, or to give it a practical, superpriority over all other creditors, which is directly contrary to the priority it has under the BIA. The Receiver will argue, inter alia, that by conditioning licence 3

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approvals on the rectification of Redwater’s LMR Deficiency, or compliance with various other obligations of Redwater to the AER, the AER is frustrating important legislative purposes underlying the BIA without serving a valid provincial regulatory purpose. 17.

In the absence of the assistance of this Honourable Court, it is highly likely that all producing and non-producing oil and gas assets of Redwater will be renounced under section 14.06(4) of the BIA; will be declared orphans; and will be abandoned by the OWA or by working interest partners, who can recover Redwater’s working interest portion of the costs of the abandonments from the OWA thereafter. This outcome is contrary to the AER’s expressed mandate, and is not in the interests of the stakeholders of Redwater. In insolvency proceedings, it is in the interest of the public and consistent with the mandate of the AER that wells and associated facilities are sold to licensees in good standing so that they do not have to be abandoned and can continue to be operated in a safe and environmentally responsible manner.

18.

The Receiver and the Trustee have therefore brought a joint application (the “Receiver’s Application”) seeking, inter alia, the approval of a sales process (the “Sales Process”) to market and sell certain of Redwater’s property and assets, requiring that the AER not consider or condition its approval on the direct or indirect payment of any financial claims of the AER, and declaring that the Receiver and Trustee are entitled to renounce licensed assets of Redwater.

II.

FACTS

A.

The Receivership and Bankruptcy Proceedings

19.

B. 20.

The facts as set out in paragraphs 9 to 37 of the Second Report of the Receiver dated October 3, 2015 (the “Second Report”) are adopted in and form part of this Brief. Capitalized terms not otherwise defined in this Brief have the meanings given to them in the Second Report of the Receiver. The AER Regulation of Wells and Facilities As indicated in the Second Report, Redwater held licences from the AER for 91 wells in Alberta, of which 19 are producing or operating and the remainder, with the exception of the Expired Lease Well, were shut in prior to the appointment of the Receiver. All of these wells, facilities and pipelines are licensed by the AER under the Oil and Gas Conservation Act (the “OGCA”) and the Pipeline Act (the “Pipeline Act”) (collectively, the “Licensed Assets”). The Licensed Assets are regulated by the AER pursuant to the OGCA and Pipeline Act and the rules and directives thereunder. Oil and Gas Conservation Act, RSO 2000, c O-6 [OCGA] [Tab 7]. Pipeline Act, RSA 2000, c P-15 [Pipeline Act] [Tab 9].

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Second Report of the Receiver, dated October 3, 2015 at paras 9 and 13 [Second Report].

21.

Oil and natural gas reserves in Alberta are developed and exploited through wells and associated facilities and pipelines regulated by the AER. The OGCA, Pipeline Act and the rules and directives thereunder include provisions intended to ensure safe and efficient practices for the suspension, abandonment and reclamation of wells, associated facilities and pipelines These set out when a licensee must suspend, abandon and reclaim such assets, and the manner and time frame within which it must do so. OGCA, Part 5 [Tab 7].

22.

Licensees under the OGCA and Pipeline Act are responsible for abandoning and reclaiming wells and associated facilities and pipelines. However, in order to limit the risk to the Alberta public from licensees which become insolvent or defunct, the Orphan Fund was created pursuant to section 70(1) of the OGCA for the purpose of paying for suspension, abandonment and related reclamation costs in respect of orphan wells and facilities and the sites on which they are located. OGCA, s 70(1) [Tab 7].

23.

The AER attempts to limit the risk of the abandonment costs of wells and associated facilities and pipelines being borne by the Orphan Fund through the Licensee Liability Rating (“LLR”) program set out in Directive 006: Licensee Liability Rating (LLR) Program and Licence Transfer Process of the AER dated March 12, 2013 (“Directive 006”). The LLR program is the liability management program governing most conventional upstream oil and gas wells, facilities and pipelines in Alberta. The liability management rating (“LM Rating”) is the ratio of a licensee’s eligible deemed assets in the LLR program to deemed liabilities in the program. For the purposes of calculating the ratio, the deemed asset values are calculated by the AER based on the trailing 12 months of reported oil and gas production from the various wells at a sales value per production unit established by the AER. The deemed liability values represent the AER’s estimate of the cost of abandoning the wells and facilities in the area where the licensee operates. Second Report at paras 10 and 11. Directive 006: Licensee Liability Rating (LLR) Program and Licence Transfer Process dated March 12, 2013 [Directive 006] [Tab 6].

24.

If the LM Rating of a licensee is less than 1.0, the AER will require that the licensee provide it with a security deposit in order to offset the estimated costs of suspending, abandoning or reclaiming a well or facility, providing care and custody for a well or facility, and carrying out any other activities necessary to ensure the protection of the public and the environment.

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Oil and Gas Conservation Rules, Alta Reg 151/1971, Rule 1.100(2) [OGCA Rules] [Tab 8].

25.

The AER conducts the LM Rating assessment for each licensee once a month and upon a licensee applying to the AER for the approval of a transfer of a licence. The amount of the security deposit is the difference between the deemed asset value (plus any previously provided security deposit) and deemed liabilities. In this Brief, the amount of that difference is referred to as the “LMR Deficiency”. Directive 006, Article 5 and Appendix 2, Article 8 [Tab 6]. Second Report at paras 11-12.

C. 26.

LM Rating of Redwater, Renunciation Letter and the Abandonment Orders Table 1 on page 7 of the Second Report shows that, as of September 2015, Redwater had an enterprise LM Rating of 0.93 and LMR Deficiency of $552,824. The LM Rating is broken down between producing and nonproducing Licensed Assets as follows: (a) producing Licensed Assets: the deemed asset value was $6,399,762 and deemed liabilities are $2,247,716 (which would notionally result in an LM Rating, if only those assets were considered, of 2.85); and (b) non-producing Licensed Assets: the deemed asset value was $547,107 and deemed liabilities are $5,251,977 (which would notionally result in an LM Rating, if only those assets were considered, of 0.10). Second Report at 7 and para 12.

27.

Upon its appointment, the Receiver conducted an assessment of the Licensed Assets to determine which ones it would take possession of pursuant to paragraph 3(a) of the Receivership Order. Upon the completion of that assessment, it advised the AER by letter dated July 3, 2015 and follow-up letters dated July 22, 2015 and August 6, 2015 (which letters, together with the renunciation letter from the Trustee referred to in paragraph 30, are collectively referred to as the “Renunciation Letters”) that it was only taking possession of Licensed Assets of Redwater consisting of 19 producing wells, facilities and associated pipelines listed therein (collectively, the “Retained Licensed Assets”), plus the Leaking Well. The Renunciation Letters also advised the AER that the Receiver and Trustee were not taking possession of any other Licensed Assets of Redwater (such other Licensed Assets being the “Renounced Licensed Assets”). Subsequently, the Receiver took possession of the Retained Licensed Assets but at no time took possession of the Renounced Licensed Assets with the exception of the Expired Lease Well.1

1

For the purposes of this Brief, the term “renounce” and any grammatical derivations thereof collectively means abandon, dispose of, release, renounce or divested, as these terms are used in section 14.06(4) of the BIA.

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Second Report at paras 15, 16, 17 and 21 and Appendix 7.

28.

One week after the Receiver sent its Renunciation Letters to the AER, the AER issued abandonment orders in respect of the Renounced Licensed Assets (which, as amended, are collectively referred to as the “Abandonment Orders”), pursuant to which: (a)

Redwater as licensee and the applicable working interest holders were ordered to abandon, reclaim and remediate the Renounced Licensed Assets in accordance with the requirements of the AER;

(b)

with respect to wells where there were other working interest participants, the Abandonment Orders required that the abandonment, reclamation and remediation operations be completed by September 18, 2015; and

(c)

with respect to wells where there were no other working interest participants, Redwater was not granted any time to complete the abandonment, reclamation and remediation operations. Second Report at para 21(i) and Appendix 9.

29.

Neither the Receiver nor Grant Thornton were named in the Abandonment Orders, and the AER and OWA have not taken the position that the Receiver has personal liability arising in connection with the Abandonment Orders. Second Report at para 20(k). Transcript of Questioning of Patricia Johnston of AER, held September 29, 2015 at 82. [P. Johnston Transcript]. Transcript of Questioning of David Wolf of OWA, held September 28, 2015 at 68-69 [D. Wolf Transcript].

30.

III.

Pursuant to a letter to the AER dated November 2, 2015, the Trustee gave notice to the AER that it was renouncing its interest in the Renounced Licensed Assets pursuant to section 14.06(4)(a)(ii) of the BIA. ISSUES

31.

Because the relief sought in the Receiver’s Application, and in the Receiver’s response to the AER’s Application, raise constitutional issues, the Receiver served notice of a constitutional question upon the Attorney General of Alberta and the Attorney General of Canada on October 5, 2015, as amended on October 13, 2015 and November 3, 2015 (such notice, as amended, being the “Notice of Constitutional Question”).

32.

The issues before this Honourable Court are as set out in the AER’s Application, the Receiver’s Amended Application and the Notice of Constitutional Question. In summary, they are:

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(a)

Are the Receiver and Trustee entitled to renounce the Renounced Licensed Assets or any interest therein?

(b)

Are the Receiver and Trustee required to fulfil the statutory obligations of Redwater under the OGCA and Pipeline Act and the rules and directives thereunder to abandon, reclaim and remediate Redwater’s Licensed Assets?

(c)

Are the Receiver and Trustee required to take possession and control of all of the Licensed Assets of Redwater?

(d)

Is the AER a creditor of Redwater for the purposes of the BIA and are the amounts payable by Redwater in connection with security deposits, the Abandonment Orders and its abandonment, reclamation and remediation obligations provable financial claims under the BIA?

(e)

Can the AER refuse applications to transfer licences of the Retained Licensed Assets made in connection with the Sales Process as a result of Redwater’s LM Rating or any other issues relating to the compliance of Redwater, the Receiver or the Trustee with the OGCA, the Pipeline Act or Directive 006?

IV.

LAW AND ARGUMENT

A.

The Receiver is permitted to renounce assets under section 14.06(4) of the BIA A.1

Positions of the AER and of the Receiver and Trustee

33.

The AER appears to argue that because a licensee is defined under the OGCA and the Pipeline Act to include a trustee and receiver-manager of the property of a licensee, the Receiver and Trustee are therefore subject to all of the duties and obligations under that legislation, including the obligation to comply with the Abandonment Orders.

34.

Neither the Receiver nor the Trustee (other than in the minor instance of the Expired Lease Well (see paragraph 17 of the Second Report)) ever took possession of the Renounced Licensed Assets, which had been shut in prior to the receivership. Nor did the Receiver collect any revenue from the Renounced Licensed Assets (other than in the minor instance of the Expired Lease Well, as described in paragraph 17 of the Second Report).

35.

The Receiver validly renounced such assets in the Renunciation Letters pursuant to section 14.06(4)(c) of the BIA. The Trustee validly renounced the Renounced Licensed Assets pursuant to section 14.06(4)(a)(ii) of the BIA.

36.

If the Receiver or Trustee were required to comply with the Abandonment Orders, various provisions of the OGCA would directly conflict with section

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14.06(6), 14.06(4)(a)(ii) and 14.06(4)(c) of the BIA, and would alternatively frustrate the valid purposes of these sections. In such circumstances, under the constitutional law doctrine of paramountcy, the BIA should be paramount to the extent of the frustration or conflict. 37.

Finally, the Abandonment Orders are also financial in nature, and constitute “provable claims” pursuant to section 14.06(8) of the BIA and the test prescribed by AbitibiBowater. They are not regulatory in nature. In such circumstances, the Receiver and Trustee are not required to comply with them. A.2

Doctrine of paramountcy

38.

Because of the constitutional issues raised in the Receiver’s Application, we will first review the constitutional doctrine of federal paramountcy.

39.

The division between the legislative powers of the federal and provincial governments is set out in sections 91 and 92 of the Constitution Act, 1867. The division of powers can be unclear and therefore it is difficult to prevent legislation of one level of government from affecting matters within the other’s jurisdiction. Legislation also does not necessarily fall within one head of power. The resulting overlap is generally acceptable so long as each level of government is pursuing objectives that fall within its jurisdiction based on the theory of cooperative federalism. That theory tries to balance unity within the federal sphere against diversity in the provincial theory. Where legislative overlap jeopardizes the balance, the powers of one level of government must be protected against intrusions by the other level. The courts have developed various constitutional doctrines to accomplish this. For the purposes of the Receiver’s Application, the relevant doctrine is that of federal paramountcy. Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, reprinted in RSC 1985, App II, No 5, ss 91, 92 [Constitution Act] [Tab 5]. Alberta (AG) v Moloney, 2015 SCC 51, para 15 and 16 [Moloney] [Tab 13].

40.

The doctrine of paramountcy states that when otherwise validly enacted federal and provincial laws cover the same or similar subject matter, and there is a conflict or a genuine inconsistency between those laws, or the operational effects of provincial legislation are incompatible with federal legislation, the federal legislation applies and the provincial law is rendered inoperative or inapplicable, but only to the extent of the conflict or inconsistency. Dr Janis P Sarra, “Of Paramount Importance: Interpreting the Landscape of Insolvency and Environmental Law”, Annual Review of Insolvency Law (Toronto: Thomson Reuters Canada Limited, 2013) 453 at 454 [Of Paramount Importance] [Tab 45]. Moloney at para 16 [Tab 13].

41.

For the doctrine to come into play, the overlapping federal and provincial laws must be independently valid. Courts will first determine the pith and substance

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of the impugned provisions by looking at their purpose and effect. If both laws are independently valid, the courts will then determine whether their concurrent operation results in a conflict. Moloney at para 17 [Tab 13].

42.

There are two branches of or tests for the doctrine of paramountcy: (i) there is an operational conflict, where it is impossible to comply with both laws; or (ii) although it is possible to comply with both laws, the operation or effect of the provincial law frustrates the purpose of the federal law. In the context of environmental legislation and insolvency proceedings, courts have considered and applied both the “operational conflict” and the “frustration of purpose” test. Of Paramount Importance at 453-454 [Tab 45]. Moloney at para 18 [Tab 13]. Peter Hogg, “Constitutional Law of Canada”, 5th ed supplemented (Toronto: Thomson Reuters Canada Limited, 2007) at 16-4 – 16-10 [Hogg] [Tab 51].

43.

In the “operational conflict” test, the court examines the provincial legislation to determine whether its effect directly conflicts with the operation of the federal legislation. There is a conflict of operation where dual compliance with the federal and provincial laws is not possible, or one law says yes and the other no so that compliance with one entails defiance of the other. The court examines whether there is a direct conflict in operation, or whether laws can operate side by side without conflict. There must be an actual, clear, direct or definite conflict in operation, as opposed to an indirect or imprecise one. Moloney at para 19 [Tab 13]. Of Paramount Importance at 468 [Tab 45]. Multiple Access v McCutcheon, [1982] 2 SCR 161 [Tab 31]. British Columbia (Attorney General) v Lafarge Canada Inc, 2007 SCC 23 at para 77 [Lafarge] [Tab 14]. Of Paramount Importance at 471 [Tab 45]. Smith v Queen, [1960] SCR 776 [Tab 42]. Saskatchewan (Attorney General) v Lemare Lake Logging Ltd., 2015 SCC 533 at para 18 [Lemare] [Tab 39].

44.

With respect to the second test, a federal legislative purpose is frustrated where dual compliance with federal and provincial legislation is possible, but the effect of or compliance with the provincial law is incompatible with the purpose of federal legislation. This is the case even if there is no direct violation of the provisions of the federal law.

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Of Paramount Importance at 476 and 482 [Tab 45]. Québec (Attorney General) v Canadian Owner and Pilots Association, 2010 SCC 39 [Pilots Association] [Tab 35]. Moloney at para 25 [Tab 13].

45.

The constitutional doctrine of federal paramountcy is narrowly construed so as to not unduly interfere with the constitutional principle of cooperative federalism, under which harmonious interpretations of federal and provincial legislation are favoured over interpretations that result in incompatibility. The party alleging a conflict has the burden of proof under both tests, as Parliament is presumed to intend its laws to co-exist with provincial laws. Absent genuine inconsistency, courts will favour an interpretation that allows concurrent operation. The conflict must be defined narrowly, so that each level of government may act as freely as possible within its respective sphere of authority. Hence, the party seeking to invoke the frustration of purpose test must first establish the purpose of the relevant federal statute, and then prove that the operation or effect of the provincial legislation is incompatible with this purpose. Moloney at para 27 [Tab 13]. Of Paramount Importance at 477 and 484 [Tab 45]. Pilots Association [Tab 35]. Lemare at paras 21-23 [Tab 39]. Canadian Western Bank v Alberta, 2007 SCC 22 [Canadian Western] [Tab 17]. Hogg at 16-5 [Tab 51].

46.

The Supreme Court of Canada has held that the starting point for statutory interpretation in Canada is Driedger’s formulation in Construction of Statutes: the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament. Dr Janis P Sarra, The Honourable Lloyd W Houlden & The Honourable Geoffrey B Morawetz, 2015 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell, 2015) at A§5 [Annotated BIA] [Tab 46].

47.

Courts will infer legislative purpose using a variety methods, including: reference to the express statement of purpose included in the relevant legislation; reference to non-legislative statements of purpose (such as Law Reform Commissions, Parliamentary Commissions and statements made about a statute in the legislature); a reading of the text of the legislation to be interpreted; a determination of the ‘mischief’ to be cured by enacting the

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legislation; descriptions of purpose offered by legal scholars in textbooks and law review articles; and by tracing the legislative evolution. Ruth Sullivan, Sullivan on the Construction of Statutes, 6th ed (Markham: LexisNexis Canada, 2014) at 274 to 287 [Tab 54].

48.

To assess the purpose of a particular piece of legislation, the courts may consider both intrinsic evidence, such as the legislation’s preamble, purpose clauses and the general structure of the act, and extrinsic evidence, such as Hansard or minutes of parliamentary debates. Canadian Western at para 27.

49.

In determining the purpose of a piece of legislation, the court must nevertheless seek to ascertain the true purpose of the legislation, as opposed to its mere stated or apparent purpose. Canadian Western at para 27.

50.

In determining purpose, the courts may also take into account the effects of the legislation, including the legal effect of the text as well as the practical consequences of the application of the statute. Canadian Western at para 27.

51.

The focus of the paramountcy analysis is on the effect of the provincial law rather than its purpose, which requires looking at the substance of the law rather than its form. A province is not permitted to do indirectly what it is precluded from doing directly. That said, in the decision of the Supreme Court of Canada in 407 ETR Concession Co. v. Canada (Superintendent of Bankruptcy) (“407 ETR”), Gascon J. said that while the focus of paramountcy is the effect of the provincial law, its purpose cannot be ignored. It forms part of the interpretative exercise that allows the substantive effect of the provincial law to be ascertained. Moloney at para 28 [Tab 13]. Husky Oil Operations Ltd v Minister of National Revenue, [1995] SCJ No 77 at para 39 [Husky] [Tab 26]. Of Paramount Importance at 477 [Tab 45]. Pilots Association [Tab 35]. 407 ETR Concession Co. v. Canada (Superintendent of Bankruptcy), 2015 SCC 52 28 [407] [Tab 10].

52.

The BIA should not be interpreted in an overly narrow, legalistic manner. Annotated BIA at A§5 [Tab 46].

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A.3

Power of the Receiver and Trustee to renounce the Renounced Licensed Assets under section 14.06(4) of the BIA

A.3.1 Competing federal and provincial legislation 53.

In the AER Application, the AER and OWA request an order declaring that the renunciation by the Receiver and the Trustee of the Renounced Licensed Assets is void and unenforceable. They also allege that the Receiver and the Trustee improperly renounced their respective interests in the Renounced Licensed Assets without justifiable cause. Further, they argue that the Receiver has a public duty to remain in possession and control of all of the assets of Redwater for safety and environmental reasons, and to comply with the Abandonment Orders.

54.

Under section 1.1(cc) of the OGCA, a licensee is defined to include a trustee and receiver-manager of the property of the licensee. Likewise, under section 1(1)(n) of the Pipeline Act, a licensee is defined to include a trustee and receiver-manager of the property of the licensee. Hence, under the OGCA and the Pipeline Act, the Receiver and Trustee are deemed to be licensees. OGCA, s 1.1(cc) [Tab 7]. Pipeline Act, s 1(1)(n) [Tab 9].

55.

Neither the OGCA nor the Pipeline Act contain any provision pursuant to which the Receiver or Trustee is entitled to renounce the Licensed Assets, which appears to be the basis for the position taken by the AER and OWA.

56.

Under section 14.06(4)(c) of the BIA: (4) Notwithstanding anything in any federal or provincial law ..., where an order is made which has the effect of requiring a trustee [or receiver] to remedy any environmental condition or environmental damage affecting property involved in a bankruptcy ... or receivership, the trustee [or receiver] is not personally liable for failure to comply with the order, and is not personally liable for any costs that are or would be incurred by any person in carrying out the terms of the order, (c) if the trustee [or receiver] had, before the order was made, abandoned or renounced or been divested of any interest in any real property ... affected by the condition or damage.

As indicated in paragraph 27 of this Brief, the Receiver renounced its interest in the Renounced Licensed Assets pursuant to the Renunciation Letters before the issuance of the Abandonment Orders. BIA, section 14.06(4)(c) [Tab 4].

57.

Under section 14.06(4)(a)(ii) of the BIA, the trustee is not personally liable:

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... (a) if, within ... ten days after the appointment of the trustee, if the order is in effect when the trustee is appointed ..., the trustee (ii) on notice to the person who issued the order, abandons, disposes of or otherwise releases any interest in any real property ... affected by the condition or damage;

As indicated in paragraph 30 of this Brief, the Trustee renounced its interest in the Renounced Licensed Assets pursuant to its Renunciation Letter to the AER within ten days of its appointment. BIA, s 14.06(4)(a)(ii) [Tab 4].

A.3.2 Are the competing federal and provincial laws validly enacted? 58.

The first step in analysing these positions under the constitutional doctrine of federal paramountcy is to ascertain whether the competing provisions of the provincial and federal legislation are validly enacted.

59.

The regulation of insolvency matters falls within the jurisdiction of Parliament under section 91(21) of the Constitution Act, 1867. Similarly, section 14.06 of the BIA falls within Parliament’s jurisdiction to determine the rights of a trustee and a receiver and the priority of costs in relation to environmental liabilities. Thus, such sections of the BIA are valid enactments and are intra vires the federal Parliament. Constitution Act, s 91(21) [Tab 5].

60.

In relation to the OGCA and the Pipeline Act, the Receiver does not question that the Province of Alberta has the power to enact legislation and regulate with respect to the exploration for and development, conservation and management of non-renewable natural resources such as oil and gas. Constitution Act, s 92A(1) [Tab 5].

61.

In the absence of an insolvency that engages the provisions of the BIA, the Receiver does not dispute that the OGCA and the Pipeline Act are validly enacted and intra vires to the province. A.3.3 Review of sections 1.1(cc) of the OGCA, 1(1)(n) of the Pipeline Act and 14.06 of the BIA

62.

As discussed in paragraph 53 and 55 of this Brief, the operational effect of sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act is that the Receiver and Trustee are deemed to be licensees of the Licensed Assets. The effect, and apparent purpose, of these provisions is to ensure that notwithstanding the appointment of a Receiver or Trustee, some person remains responsible for the care and custody of the Licensed Assets. OCGA, s 1.1(cc) [Tab 7].

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Pipeline Act, s 1(1)(n) [Tab 9].

63.

There is no provision in the OGCA or the Pipeline Act permitting a licensee to renounce licensed wells and associated facilities and pipelines. A licensee can only sell them and transfer the licence, or suspend, abandon, reclaim or remediate them in accordance with the OGCA and the Pipeline Act.

64.

Subsections 14.06(4)(a)(ii) and (c) of the BIA, on the other hand, expressly permit the Receiver and Trustee to renounce the Renounced Licensed Assets, notwithstanding anything in any federal or provincial law.

65.

In interpreting section 14.06 of the BIA, it is useful to review its legislative history. As a result of a series of judicial decisions in the early 1990’s which raised concerns among lenders and insolvency professionals about potential increased exposure to liabilities for environmental matters, various amendments were made to section 14.06 of the BIA in 1997. Such amendments: (a)

expanded the personal protection from environmental matters given to trustees in 1992 to include receivers and interim receivers;

(b)

changed the standard for personal liability of trustees from negligence to gross negligence or willful misconduct prior to such liability arising; and

(c)

introduced the concept that estates could abandon contaminated sites, which also had the affect of shielding trustees and receivers from personal liability for remedial orders relating to such sites. An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act and to make consequential amendments to other Acts, SC 2005, c 36 [An Act to Amend] [Tab 1]. Dianne Saxe, Trustees’ and Receivers’ Environmental Liability Update, (1998) 49 CBR (3d) 138 at 15 [Saxe] [Tab 47] Panamericana De Bienes Y Servicios (Receiver of) v Northern Badger Oil & Gas Ltd, [1991] AJ No 575 (Alta CA) [Panamericana] [Tab 34]. Lamford Forest Products Ltd, 1991 CanLII 2246 at para 4 (BC SC) [Tab 27].

66.

Ms. Saxe wrote that the latter right was one of the most significant granted to receivers and trustees in the 1997 amendments to the BIA: The most important substantive change is that trustees (including receivers) have acquired the qualified right to abandon contaminated property. When property has been abandoned, the trustee cannot be required to comply with any remedial order relating to that property.... [emphasis added] Saxe at 14 [Tab 47]. BIA, section 14.06 [Tab 4].

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67.

As a result of the 1997 amendments, sections 14.06(1.1), and section 14.06(2) to 14.06(8) of the BIA provide: (a)

a right to receivers and trustees to renounce property, after which they cannot be compelled to comply with any remedial order in relation to such property;

(b)

the costs of remedying environmental conditions or damage affecting real property:

(c)

(i)

are claims provable in a bankruptcy pursuant to section 14.06(8) of the BIA, whether or not the real property has been renounced,

(ii)

cannot rank as costs of administration in a receivership or bankruptcy pursuant to section 14.06(6) where the property has been renounced;

the amount actually expended by the Crown in right of Canada or of a province for “remedying any environmental condition or environmental damage affecting real property of the debtor” is secured by security on that property (and on any contiguous property related to the activity that caused the condition or damage). That security ranks in priority to any other claim, right, charge or security against that property, but against no other property; BIA, s 14.06(7) [Tab 4].

(d)

the court may grant a stay of proceedings of a remedial order to give a receiver or trustee time to assess the economic viability of complying with the order. BIA, s 14.06(5) [Tab 4].

68.

In testimony given before the Standing Committee on Industry on June 11, 1996 by David Tobin, Director General, Corporate Governance Branch, Department of Industry, Mr. Tobin stated that the purpose of the pending amendments to 14.06 was as follows: I repeat that the purpose of such provision is to encourage practitioners to accept mandates and to reduce the number of abandoned sites in the country. If there are any environmental difficulties, there will be someone on the spot to inform the appropriate authority. The other provisions I have described will also apply, including the priority status granted to environmental claims. [emphasis added] House of Commons Debates, Evidence of the Standing Committee on Industry, 35th Parl, 2nd Sess, No 16 (11 June 1996) at 1549 to 1555 (David Tobin) [June 11 Debate] [Tab 49].

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69.

The purpose as expressed by Mr. Tobin is consistent with the interpretation of section 14.06 suggested by the Receiver, rather than the interpretation the Receiver anticipates will be advanced by the AER. If the Receiver had not been appointed, it is almost a certainty that all of the Licensed Assets (including the producing properties) would have been abandoned. The Receiver’s appointment introduced a level of order and control in relation to Redwater’s Licensed Assets which would not have existed if Redwater simply had closed its doors and gone dormant.

70.

In his testimony, Mr. Tobin went on to confirm that if compliance with an order to remediate a property has “...absolutely no economic viability, he [a receiver] may give notification that he has renounced the real property to which the order applies.” This testimony confirms that the intention behind the section 14.06 amendments was to, inter alia, permit receivers and trustees to make rational economic assessments of the costs of remedying environmental conditions, and give receivers and trustees the discretion to determine whether or not to comply with orders to remediate property affected by these conditions. June 11 Debate at 1549 to 1555 [Tab 49].

A.3.4 Is there an operational conflict? 71.

If a Licensed Asset is to be disposed of, under the OGCA or the Pipeline Act it must either be sold, for which sale the consent of the AER is required, or it must be abandoned, reclaimed and remediated in accordance with the provisions of the OGCA or the Pipeline Act. Whether the abandonment, reclamation and remediation is carried out by the licensee or by the AER or OWA, the AER and OWA would argue that under section 29 of the OGCA and section 25 of Pipeline Act, the licensee remains liable for these costs. As such, the operational effect of these provisions is that the Receiver and Trustee remain liable for the abandonment, reclamation and remediation obligations of Redwater in respect of the Renounced Licensed Assets notwithstanding that they renounced them under section 14.06(4) of the BIA.

72.

The first question to ask is whether these laws can operate concurrently? Is there a way of interpreting them so that there is no conflict?

73.

As discussed paragraphs 149 to 157 of this Brief, pursuant to paragraph 3(a) of the Receivership Order, the Receiver has the discretion to determine which Licensed Assets it will take possession of. After investigating the Licensed Assets, the Receiver determined that it would take possession only of the Retained Licensed Assets and would not take possession of the Renounced Licensed Assets. Because a receiver is a receiver of assets rather than entities, by not taking possession of property, and then renouncing it, the Receiver was excluding such property (the Renounced Licensed Assets) from the scope of the receivership.

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74.

Section 1.1(cc) of the OGCA only deems a receiver-manager of property of a licensee to be a licensee. If the Retained Licensed Assets were never included in the receivership, and the Receiver never took custody or possession of them, then the Receiver is not a receiver of that property and has no obligations with respect to it under the OGCA and Pipeline Act.

75.

If that interpretation was accepted, then with regards to the Receiver, section 14.06(4) of the BIA and sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act could operate concurrently without conflict.

76.

However, under section 71 of the BIA, upon the Bankruptcy Order being made, Redwater ceased to have any capacity to dispose of or otherwise deal with its property. Such property immediately passed to and vested in the Trustee, subject to the BIA and the rights of secured creditors. BIA, s 71 [Tab 4].

77.

There is no interpretation with regards to the Trustee that would permit section 14.06(4) of the BIA to operate concurrently with sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act without conflict. The reason for this is that all of the property of Redwater vested in the Trustee upon bankruptcy, and sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act deem a trustee to be a licensee simply on the basis of its capacity as trustee, rather than on the basis of the property in its possession.

78.

But for the interpretation referred to in paragraphs 73 and 75 of this Brief with respect to the Receiver, the operational effect of sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act is either that the Receiver and Trustee remain responsible for all abandonment, remediation and reclamation obligations of Redwater notwithstanding the renunciation of the Renounced Licensed Assets, or that they simply cannot renounce the Renounced Licensed Assets at all and must comply with those provincial enactments.

79.

Under subsections 14.06(4)(a)(ii) and (c) and section 14.06(6) of the BIA neither the Receiver nor the Trustee can be held liable for these costs personally and cannot be required to pay these costs as costs of administration in the receivership or bankruptcy. These provisions expressly operate notwithstanding federal or provincial law to the contrary.

80.

The effect of sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act, as interpreted and enforced by the AER, is to purport to deny the Receiver and the Trustee their renunciation rights. These rights are expressly given to them in section 14.06(4) of the BIA, and therefore the operation and effect of the provincial legislation directly contravenes section 14.06(4). It is impossible for the Receiver and Trustee to have renounced any interest in the Renounced Licensed Assets, and yet under sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act to be licensees in respect of the Renounced Licensed Assets.

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81.

There is therefore an operational conflict between sections 14.06(4)(a)(ii) and 14.06(4)(c) of the BIA and sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act. Those sections of the provincial legislation should be declared to be inapplicable to the extent that they would have the operational effect of preventing the Receiver and Trustee from renouncing the Renounced Licensed Assets or of making the Receiver and Trustee liable for costs of remediation of the Renounced Licensed Assets notwithstanding their renunciation. A.3.5 Is there a frustration of a federal legislative purpose?

82.

Even if the effect of sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act do not operationally conflict with sections 14.06(4)(a)(i) and 14.06(4)(c) of the BIA, they frustrate the legislative purpose underlying those provisions of the BIA and therefore should be inapplicable to the extent of such frustration.

83.

As discussed in paragraph 45 of this Brief, a party seeking to invoke the frustration of purpose test must first establish the purpose of the relevant federal statute, and then prove that the operation or effect of the provincial legislation is incompatible with this purpose.

84.

As discussed in paragraphs 65 to 70 of this Brief, a core purpose embodied in section 14.06 the BIA is to ensure that insolvency professionals have sufficient protection from personal liability so as to encourage them to accept mandates. Without such protection, insolvency professionals would not accept mandates where there are potential statutory and environmental liabilities, leaving no mechanism to resolve insolvent entities in an orderly manner. Such a vacuum would result in unnecessary disorder with broad ranging ramifications. June 11 Debate at 1549 to 1555 [Tab 49]. BIA, s 14.06 [Tab 4]. Saxe [Tab 47].

85.

The inclusion of sections 14.06(1.2) and 14.06(2) in the BIA reflects the decision of Parliament to limit the risk of liability on receivers and trustees to circumstances where they have acted with gross negligence or wilful misconduct. Requiring the Receiver or Trustee to assume possession of the Renounced Licensed Assets and comply with the Abandonment Orders is clearly contrary to the federal purpose behind section 14.06(4)(c) of the BIA. BIA, s 14.06(1.2), (2) [Tab 4].

86.

The power of a receiver and trustee to renounce assets is also intimately linked to this federal purpose. Section 14.06(4) of the BIA permits a receiver and trustee to renounce assets to achieve the purpose of both limiting potential exposure to personal liability, and section 14.06(6) prevents the estate from being eroded through certain forms of liabilities as costs of administration.

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87.

The policy rationale for receivers and trustees having the power to renounce assets (and disclaim agreements) is discussed by Professor Goode in Principles of Corporate Insolvency Law as follows: The purpose of the disclaimer provisions is twofold: first, to allow the liquidator (whether in a solvent or an insolvent liquidation) to complete the administration of the liquidation without being held up by continuing obligations on the company under unprofitable contracts, or continued ownership and possession of assets which are of no value to the estate; and, secondly, in an insolvent liquidation to avoid the continuance of liabilities in respect of onerous property which would be payable as expenses of the liquidation to the detriment of unsecured creditors. Roy Goode, Principles of Corporate Insolvency Law, 4th ed (London: Sweet & Maxwell, 2011) at 200 at para 6-27 [Tab 52].

88.

Typically, property is renounced for one of four reasons: (a)

the property has no intrinsic value;

(b)

the property is not expected to sell for a price sufficiently in excess of mortgages or judgment liens against it to offset the interest and costs of administration;

(c)

claims of the debtor where the possibility of obtaining, or collecting upon, a judgment is not sufficiently substantial to justify the expense involved in litigation, or where despite the validity of the claim there are not sufficient funds in the estate with which to litigate; and

(d)

contracts which cannot be performed by the receiver or where performance will not provide an economic benefit to the creditors. “Abandonment of Assets” (1953) 53 Colum L Rev 415 at 416 [Abandonment of Assets] [Tab 44].

89.

The power of a receiver or trustee to renounce property is discretionary. This is a reflection of the fact that the BIA is a statute governed by business principles, and that receivers and trustees are duty bound to “...maximize the yield from all the assets legally available to the trustee, subject to practicalities and honesty.” In such circumstances, courts are reluctant to interfere with reasonable business decisions by trustees and receivers. Abandonment of Assets at 417-418 [Tab 44]. Russell, Re, 1999 ABCA 232 at paras 12-13, 34 [Tab 37]. Brown, Re, 2003 ABQB 899 [Tab 16].

90.

The importance of the ability to renounce property is illustrated in Re Celtic Extraction Ltd. (in liquidation), in which the English Court of Appeal considered whether the liquidator of two companies which held waste 20

A151101\CAL_LAW\ 2373066\ 8

management licences under the English Environmental Protection Act 1990 (the “UK EPA”) was able to disclaim such licences under section 178 of the Insolvency Act 1986. Under that section, a liquidator was entitled to disclaim any “onerous property” upon the provision of notice and was entitled to do so “…notwithstanding that he has taken possession of it, endeavoured to sell it, or otherwise exercise rights of ownership in relation to it.” That legislation defines onerous property as any unprofitable contract and any other property of the company which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act. Re Celtic Extraction Ltd (in liquidation), [2001] Ch 475 (CA) at para 21 [Re Celtic] [Tab 38].

91.

In the court below, the trial judge held that section 35(11) of the UK EPA, which provided that a licence shall continue in force until it is revoked entirely by the waste regulation authority under section 38… or its surrender is accepted under section 39...” acted to effectively prevent a disclaimer. However, the Court of Appeal disagreed with the trial judge’s ruling and held that the liquidator was entitled to disclaim the licence at issue. Re Celtic [Tab 38].

92.

In that regard, the Court held at paragraph 42: The affirmative reasons for disagreeing with the judge start with the consideration of the very considerable and oft repeated public policy requirement that the property of insolvents should be divided equally amongst their unsecured creditors. An important aspect of the implementation of that policy is the ability to disclaim onerous property; otherwise the available assets are, in practice, appropriated to the future or prospective creditor who holds the right corresponding to the onerous property [citation omitted] This is no doubt why the restriction on the ability to disclaim thrown up by the decision of Harman J. in In re Potters Oil Ltd (No. 2) [1985] BCLC 203 was so swiftly removed in section 178 of the Insolvency Act 1986. In my view it would require clear words to exclude the operation of section 178 of the 1986 Act from specific items of property or specific insolvents. [emphasis added] Re Celtic at para 42 [Tab 38].

93.

The English Court of Appeal also went on to hold that the principle behind certain directives for environmental legislation, which required that polluters pay for environmental contamination, should not require that the unsecured creditors instead pay such liabilities, to the extent of the assets available for distribution amongst them.

94.

As demonstrated by the Re Celtic case, there is no justifiable policy reason why the Receiver should be required to fulfill the statutory abandonment obligations of the Renounced Licensed Assets, when the competing policy reasons in favour of permitting the Receiver to renounce the Renounced Licensed Assets are considered.

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95.

As noted by Ms. Saxe: ...Provincial regulators must be aware that clean-up costs expended by the trustee while in possession of contaminated property will rank as costs of administration, and therefore will be paid out of all the assets of the estate in priority to all other claims. If the trustee renounces the property, the Crown is still free to do the work itself and attempt to recover the funds, but it will have priority only as against the affected property and its neighbours, which is often an asset of dubious value. The Crown is also increasingly unwilling to fund clean-ups out of its own purse, as it would be required to do once the trustee abandons it. Saxe at 14 [Tab 47].

96.

Based on the forgoing, the legislative purpose of section 14.06(4) is to protect receivers and trustees from personal liability for the costs of remedying environmental conditions and damage, except in the limited circumstances contemplated in section 14.06(2) (where damage results from the gross negligence or wilful misconduct of the receiver or trustee).

97.

If the operational effect of sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act is to prevent the Receiver and Trustee from renouncing the Renounced Licensed Assets under sections 14.06(4) of the BIA, or to impose, notwithstanding such renunciation, the obligation to pay the costs of remedying the environmental conditions and damage, then these sections frustrate the legislative purpose underlying section 14.06(4).

A.4

Do the Receiver and the Trustee have to comply with the Abandonment Orders? A.4.1 Relief being requested by the AER and the OWA

98.

In the AER Application, the AER and OWA request an order requiring the Receiver and Trustee to comply with the Abandonment Orders and to fulfill the statutory obligations as licensee in relation to abandonment, reclamation and remediation of all of the Licensed Assets. A.4.2 Is the competing federal and provincial legislation validly enacted?

99.

The first stage of the paramountcy analysis requires consideration of whether the federal and provincial laws at issue are validly enacted. In paragraph 59 of this Brief we reviewed the question of whether section 14.06 of the BIA is validly enacted, and in paragraphs 60 and 61 of this Brief, we reviewed whether the OGCA and Pipeline Act were validly enacted. A.4.3 Does the concurrent operation of section 14.06 of the BIA, sections 1.1(cc), 27, 28, 29 and 30 of the OGCA and section 1(1)(n), 25 and 26 of the Pipeline Act result in a direct conflict?

100.

The effect of the provisions of the OGCA and Pipeline Act is that the Receiver and Trustee are required to comply with the Abandonment Orders. If the

22 A151101\CAL_LAW\ 2373066\ 8

Receiver incurs costs in complying, such costs come out of the estate and are therefore costs of administration. Section 14.06(6) of the BIA provides that those costs cannot be costs of administration. If the Receiver pays the costs personally, this conflicts with section 14.06(2) because such costs cannot be personal liabilities of the Receiver and Trustee except in limited circumstances. 101.

The operational effect of sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act were reviewed in paragraphs 53 and 55 of this Brief. Under section 27(1) of the OGCA, the licensee is required to suspend or abandon a well or facility when directed by the AER or required by the regulations or rules. Under section 27(3), the AER may order a well or facility suspended or abandoned when it considers it necessary in order to protect the public or the environment. A working interest participant may also be required to suspend or abandon a well under section 28. Under section 29, the abandonment of a well or facility does not relieve the licensee or working interest participant from responsibility for the costs of doing that work. Under section 30(1), these costs must be paid by working interest participants in accordance with their proportionate share in the well, which under section 30(2) can be allocated by the AER. The costs under sections 30(4) and 30(5) constitute a debt owing to the licensee or working interest participant who carried out the work, or if the AER or a person authorized by it carried out the work, it is a debt owing to the AER or such person, as the case may be. OGCA, sections 27, 28, 29 and 30 [Tab 7].

102.

Under section 23 of the Pipeline Act, the AER can order that a pipeline be discontinued or abandoned where the AER considers that it is necessary to do so in order to protect the public or the environment. Under section 25, the abandonment of a pipeline does not relieve the licensee from the responsibility for further abandonment work with respect to the pipeline that may become necessary, or from the responsibility for the costs of the further work. Under section 26(1),when a pipeline is discontinued or abandoned, the AER may determine the discontinuance or abandonment costs. The licensee of the pipeline must pay the costs determined by the AER. Under section 26(2), a licensee who fails to pay the costs of discontinuance or abandonment within the time period required by the AER must pay a penalty equal to 25% of the discontinuance or abandonment costs, unless the AER directs otherwise. The discontinuance or abandonment costs and any applicable penalty constitutes a debt payable to the AER. Pipeline Act, ss 25 and 26 [Tab 9].

103.

By virtue of sections 1.1(cc) of the OGCA and 1(1)(n) of the Pipeline Act, because the Receiver and Trustee are deemed to be licensees of the Licensed Assets under those enactments, they are obliged by sections 27, 28, 29 and 30 of the OGCA and sections 25 and 26 of the Pipeline Act to comply with the Abandonment Orders with respect to the Renounced Licensed Assets (such

23 A151101\CAL_LAW\ 2373066\ 8

provisions, collectively, being referred to as the “Conflicting Provisions”). Read together, in the context of the receivership and bankruptcy, the operational effect of the Conflicting Provisions is to make the Receiver and Trustee liable to comply with the Abandonment Orders and responsible for the abandonment, reclamation and remediation obligations of Redwater in respect of the Renounced Licensed Assets. 104.

As discussed in paragraph 27, the Abandonment Orders relate only to the Renounced Licensed Assets, which the Receiver and the Trustee renounced pursuant to the Renunciation Letters. They do not relate to the Retained Licensed Assets, which the Receiver continues to have possession of.

105.

If the Abandonment Orders are binding on the Receiver and Trustee pursuant to the Conflicting Provisions, the Conflicting Provisions conflict directly with sections 14.06(4) and 14.06(6) of the BIA. As discussed in paragraph 79 of this Brief, section 14.06(6) of the BIA provides that the costs of remediating an environmental condition affecting or environmental damage to real property renounced by a trustee [or receiver] shall not rank as costs of administration.

106.

The assertion by the AER that the Receiver and Trustee are required to comply with the Abandonment Orders, notwithstanding the renunciation of the Renounced Licensed Assets, by virtue of them being licensees under the OGCA and Pipeline Act, results in a direct conflict for constitutional purposes between the abandonment and reclamation obligations imposed upon licensees pursuant to the Conflicting Provisions and section 14.06(6) of the BIA.

107.

Potentially, there is also a direct conflict with section 14.06(2). While the AER has not yet alleged that the Receiver and Trustee are personally liable to comply with the Abandonment Orders, they have also not waived that argument. Section 14.06(2) reads: Notwithstanding “any federal or provincial law, a trustee [or receiver] is not personally liable in that position for any environmental condition that arose or environmental damage that occurred (a) before the trustee’s [or receiver’s] appointment; or (b) after the trustee’s [or receiver’s] appointment unless it is established that the condition arose or the damage occurred as a result of the trustee’s [or receiver’s] gross negligence or wilful misconduct. BIA, s 14.06(2) [Tab 4].

A.4.4 This direct conflict constitutes an operational conflict 108.

Compliance with both section 14.06(6) and the Abandonment Orders is impossible. If the Receiver or Trustee complied with the Abandonment Orders using funds of the estate, these would be costs of administration and therefore it would be in breach of section 14.06(6). If the Receiver or the Trustee pays for the cost of compliance personally, its rights under section 14.06(2) and 14.06(4) are violated, because these are not personal obligations absent gross negligence

24 A151101\CAL_LAW\ 2373066\ 8

or wilful misconduct. Sections 14.06(2) and (4) operate notwithstanding any federal or provincial law to the contrary. 109.

Neither the Trustee nor the Receiver ever took possession of the Renounced Licensed Assets, and therefore they could not possibly have acted with gross negligence or wilful misconduct since their appointment because they never took possession of those shut-in assets. Any abandonment, reclamation and remediation liabilities would have been incurred and accrued prior to then.

110.

Under the Conflicting Provisions of the OGCA and Pipeline Act, the Receiver and Trustee are liable for those costs. If they do not comply, they are in breach of the Abandonment Orders, the OGCA and the Pipeline Act.

111.

The Conflicting Provisions and section 14.06(2), (4) and (6) are simply incompatible and cannot operate concurrently. As such, the Conflicting Provisions should be inoperative to the extent that they are inconsistent with sections 14.06(2), (4) and (6) of the BIA. There is no interpretation of these provisions which would result in their not being directly in conflict. A.4.5 Do the Abandonment Orders frustrate purposes of the BIA?

112.

If a Court finds that there is no operational conflict between the Conflicting Provisions and the BIA, the Conflicting Provisions frustrate two important legislative purposes underlying the BIA and therefore should be inoperative to the extent of the conflict. A.4.5(a)

113.

As discussed in paragraphs 65 to 70 and 84 to 87 of this Brief, a core purpose of sections 14.06(2) and 14.06(4) of the BIA is to limit the liability of receivers and trustees for the environmental condition of or environmental damage to property of the debtor. By requiring the Receiver and Trustee to comply with the Abandonment Orders, the Conflicting Provisions frustrate this important federal purpose. A.4.5(b)

114.

Federal Purpose of Protecting Receivers and Trustees

Federal Purpose of Equitable Distribution to Creditors

In Moloney, Gascon J. said that the provisions of the BIA examined in that case furthered two purposes: the equitable distribution of the bankrupt’s assets among the creditors and the bankrupt’s financial rehabilitation. The equitable distribution of assets is achieved through the single proceeding model, which requires creditors wishing to enforce a provable claim against the bankrupt to participate in one collective proceeding. As a general rule, creditors will rank equally and share rateably in the bankrupt’s estate unless the BIA specifically contemplates a different ranking. The single proceeding model avoids the inefficiency and chaos that would attend an insolvency if each creditor individually proceeded to recover its debts, and places all creditors on an equal footing, all with the goal of maximizing the global recovery for all creditors. 25

A151101\CAL_LAW\ 2373066\ 8

Moloney, para 33 [Tab 13].

115.

For the collective proceeding model to be viable, creditors must not be allowed to individually enforce their claims outside the collective proceeding. For this reason, stays are imposed in all types of federal insolvency proceedings. Moloney, para 33 [Tab 13].

116.

Under the principle of equitable distribution, creditors must receive distributions in accordance with the priorities assigned to them under, or contemplated by, the BIA. Annotated BIA at A§2 [Tab 46].

117.

If the Abandonment Orders, and the abandonment and reclamation obligations in general in respect of the Renounced Licensed Assets, are in substance financial claims which are provable in bankruptcy rather than regulatory obligations that must be complied with regardless of the bankruptcy or insolvency, then they will defeat or frustrate the principle of equitable distribution if they are not subject to the priority and distribution schemes of the BIA. For the purposes of this Brief, claims that are provable in bankruptcy and subject to the priority and distribution schemes set out in and contemplated by the BIA are referred to as “Financial Claims”. A.4.5(b)(i)

118.

Financial Claims

The Receiver will argue, based upon the evidence, that the Abandonment Orders are Financial Claims. For the reasons discussed below, a debtor subject to regulatory obligations to comply with environmental legislation will continue to be subject to those obligations during and after emerging from restructuring insolvency proceedings where, upon emergence, it will continue the activities that gave rise to the environmental obligations. Generally, such regulatory obligations will not be characterized as Financial Claims subject to compromise and being stayed in restructuring proceedings under the BIA or the Companies’ Creditors Arrangement Act (the “CCAA”). Newfoundland and Labrador v AbitibiBowater Inc, 2012 SCC 67 at paras 26 and 73 [AbitibiBowater] [Tab 32].

119.

A broad range of claims are treated as Financial Claims in insolvency proceedings to ensure fairness between creditors and finality in insolvency proceedings. Where the insolvency proceeding is a corporate liquidation process (ie., a receivership or bankruptcy), Deschamps J. said that it is more equitable to allow as many creditors as possible to participate in the process and share in the liquidation proceeds. AbitibiBowater at para 35 [Tab 32].

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120.

In determining whether a regulator is seeking to enforce a Financial Claim, the court will carry out the following analysis: These provisions highlight three requirements that are relevant to the case at bar. First, there must be a debt, a liability or an obligation to a creditor. Second, the debt, liability or obligation must be incurred before the debtor becomes bankrupt. Third, it must be possible to attach a monetary value to the debt, liability or obligation. [emphasis added] AbitibiBowater at para 26 [Tab 32].

121.

Deschamps J. described how the first part of the test works as follows: ... Most environmental regulatory bodies can be creditors in respect of monetary or nonmonetary obligations imposed by the relevant statutes. At this first stage of determining whether the regulatory body is a creditor, the question of whether the obligation can be translated into monetary terms is not yet relevant. This issue will be broached later. The only determination that has to be made at this point is whether the regulatory body has exercised its enforcement power against a debtor. When it does so, it identifies itself as a creditor, and the requirement of this stage of the analysis is satisfied. AbitibiBowater at para 27 [Tab 32].

122.

Hence, for the first stage, the question depends upon whether the AER has exercised enforcement power. The issuance of the Abandonment Orders in respect of the Renounced Licensed Assets is clearly an enforcement action and therefore qualifies the AER as a creditor.

123.

Regarding the second stage, Deschamps J. notes as follows: The creditor’s claim will be exempt from the single proceeding requirement if the debtor’s corresponding obligation has not arisen as of the time limit for inclusion in the insolvency process. This could apply, for example, to a debtor’s statutory obligations relating to polluting activities that continue after the reorganization, because in such cases, the damage continues to be sustained after the reorganization has been completed. AbitibiBowater at para 29 [Tab 32].

124.

The second stage of the test focuses on the time when the claim arises. According to Deschamps J., where there is a bankruptcy, under section 121(1) of the BIA, the bankrupt must have incurred the obligation, or be subject to the obligation, before it becomes bankrupt. The Abandonment Orders were issued well before the bankruptcy of Redwater. In a receivership, the law does not specify when it must have arisen. However, the rule is that it must have arisen as of the time limit for inclusion in the insolvency process. For receivership, the time limit is likely when the priorities of claims are determined for distribution purposes.

125.

The Abandonment Orders were issued prior to the receivership and therefore the liability arose before the receivership began. They relate only to the Renounced Licensed Assets, and therefore there are no ongoing operations associated with them (they were shut in prior to the Receiver being appointed). According to

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the Receiver’s analysis, they have no economic value in the current climate and are therefore unlikely to be operated again. Therefore, the Abandonment Orders satisfy the second test in AbitibiBowater for Financial Claims. Second Report at para 14.

126.

Finally, with the third part of the test in AbitibiBowater, Deschamps J. had these comments: With respect to the third requirement, that it be possible to attach a monetary value to the obligation, the question is whether orders that are not expressed in monetary terms can be translated into such terms. I note that when a regulatory body claims an amount that is owed at the relevant date, that is, when it frames its order in monetary terms, the court does not need to make this determination, because what is being claimed is an “indebtedness” and therefore clearly falls within the meaning of “claim” as identified in s. 12(1) of the CCAA. AbitibiBowater at para 30 [Tab 32]. However, orders, which are used to address various types of challenges, may come in many forms, including stop, control, preventative, and clean-up orders (D. Saxe, “Trustees’ and Receivers’ Environmental Liability Update” (1998), 49 C.B.R. (3d) 138, at p. 141). When considering an order that is not framed in monetary terms, courts must look at its substance and apply the rules for the assessment of claims. AbitibiBowater at para 31 [Tab 32]. The criterion used by courts to determine whether a contingent claim will be included in the insolvency process is whether the event that has not yet occurred is too remote or speculative. ... In the context of an environmental order, this means that there must be sufficient indications that the regulatory body that triggered the enforcement mechanism will ultimately perform remediation work and assert a monetary claim to have its costs reimbursed. If there is sufficient certainty in this regard, the court will conclude that the order can be subjected to the insolvency process. AbitibiBowater at para 36 [Tab 32].

127.

In AbitibiBowater, Deschamps J. also noted that there are certain factors a court will examine in determining whether a regulatory order or decision satisfies the third test: (a)

Whether it is too remote or speculative. In the context of an environmental order in a CCAA proceeding, the court will determine whether there are sufficient indications that the regulator will ultimately perform the remediation work and assert a monetary claim to have its costs reimbursed. If there is sufficient certainty, the court will subject the claim to the insolvency process. AbitibiBowater at para 36 [Tab 32].

(b)

The court will consider such factors as whether, as a result of a reorganization, activities leading to the claim will continue, whether the

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property is no longer under the debtor’s control, and whether the debtor will have any means of complying with the order. AbitibiBowater at para 37 [Tab 32].

(c)

Where a regulator simply delays framing an order as a claim in order to improve its position in relation to other creditors, a court may well conclude that this course of action is inconsistent with the insolvency scheme and subject the regulatory order to the insolvency process. AbitibiBowater at para 37 [Tab 32].

(d)

The effect that requiring the debtor to comply with the order will have on the insolvency process. AbitibiBowater at para 38 [Tab 32].

(e)

Deschamps J. noted that since the appropriate analysis is grounded in the facts of each case, these indicators need not all apply, and others may also be relevant. AbitibiBowater at para 38 [Tab 32].

128.

The following factors indicate that the Abandonment Orders satisfy the third test for being Financial Claims: (a)

Redwater was given no time within which to comply with the Abandonment Orders relating to the Renounced Licensed Assets, and therefore the AER could not have had a reasonable expectation that Redwater would comply with those orders.

(b)

As evidenced by the Renunciation Letters, the Receiver and Trustee renounced, and never took possession of, the Renounced Licensed Assets.

(c)

Redwater is dormant and insolvent and will not operate or possess the Renounced Licensed Assets after the receivership has ended. It does not have the financial or operational ability to comply with the Abandonment Orders.

(d)

For over 80% of the Renounced Licensed Assets, there are no other working interest participants, and therefore there are no other parties against whom the AER and OWA might seek recourse.

(e)

Neither the Receiver nor the Trustee has the funding required to comply with the Abandonment Orders.

(f)

The monetary value attached to the Abandonment Orders is based on the deemed liability value estimated by the AER of the Renounced Licensed

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Assets. This value is also used in the calculation of Redwater’s LM Rating. 129.

In AbitibiBowater Deschamps J. indicated that where property is no longer under the debtor’s control, and the debtor does not realistically have the means of performing the remediation work, the court may conclude that it is sufficiently certain that the regulatory body will perform the work. AbitibiBowater at para 37 [Tab 32].

130.

As indicated in paragraph 128(d) this Brief, the Court will also consider the effect of requiring compliance with an order or decision on the insolvency process. Deschamps J. explained this factor as follows: Subjecting an order to the claims process does not extinguish the debtor’s environmental obligations any more than subjecting any creditor’s claim to that process extinguishes the debtor’s obligation to pay its debts. It merely ensures that the creditor’s claim will be paid in accordance with insolvency legislation. Moreover, full compliance with orders that are found to be monetary in nature would shift the costs of remediation to third-party creditors, including involuntary creditors, such as those whose claims lie in tort or in the law of extra-contractual liability. In the insolvency context, the Province’s position would result not only in a super-priority but in the acceptance of a “third-party-pay” principle in place of the polluter-pay principle. AbitibiBowater at para 40 [Tab 32].

131.

The OGCA provides that for its purposes, the obligations of the licensee do not become a debt until the AER and/or the OWA have carried out the abandonment and reclamation work. OGCA, s 30(5) [Tab 7].

132.

The definition of “debt”, however, for the purposes of the determining of whether it is a Financial Claim must be determined by the court in the insolvency proceeding and is not controlled by provincial legislation. Federal insolvency legislation must determine what constitutes a Financial Claim for the purposes of determining priority and distribution for the same reason the court must determine whether a statutory deemed trust or security interest is effective in a bankruptcy. Husky at para 33 [Tab 26]. Quebec (Deputy Minister of Revenue) c Rainville (sub nom Re Bourgault), [1980] 1 SCR 35 [Tab 36]. Deloitte Haskins & Sells Ltd v Alberta (Workers’ Compensation Board), [1985] 1 SCR 785 [Tab 19]. Québec (Commision de la santé & de la sécurité du travail) c Banque fédérale de développement, [1988] 1 SCR 1061 [Tab 20].

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British Columbia v Henfrey Samson Belair Ltd., [1989] 2 SCR 24 [Tab 15]. (Quebec (Deputy Minister of Revenue) c Rainville, Deloitte Haskins & Sells Ltd v Alberta (Workers’ Compensation Board), Québec (Commision de la santé & de la sécurité du travail) c Banque fédérale de développement, and British Columbia v Henfrey Samson Belair Ltd. Being collectively referred to as the “Quartet Decicsions”).

133.

The AER delays declaring wells and facilities orphans, and the OWA delays carrying out the work, until after receivers are discharged, on the basis that it is not until then that there is sufficient certainty that the AER has no other recourse with respect to the abandonment and reclamation liabilities. Affidavit of P. Johnston, sworn September 8, 2015 at para 11 [Second AER Affidavit]. P. Johnston Transcript at 25-26, 49-52, 113. D. Wolf Transcript at 21-27, 49.

134.

Redwater’s insolvency, the renunciation of the Renounced Licensed Assets, and the lack of any other parties that the AER and OWA could seek recourse against given that the vast majority of those assets have no other working interest participants, strongly suggest that it is sufficiently certain that the AER and/or OWA will have to perform this work. Further, the AER and OWA are only delaying these steps in a transparent attempt to improve their position in relation to other creditors. Not unlike in AbitibiBowater, under provincial legislation there is no “debt” owing to the AER until the AER, the OWA or a person authorized by them carry out the work. As indicated by Deschamps J., in such circumstances a court can conclude that this course of action is inconsistent with the insolvency scheme and decide that the order has to be subject to the claims process. By analogy, this reasoning should be applied to section 14.06 and the other priority provisions of the BIA. AbitibiBowater at para 37 [Tab 32].

135.

This reasoning is supported by section 14.06(8) of the BIA, which provides that a claim against a debtor in a bankruptcy for the costs of remedying any environmental condition or damage affecting real property is a provable claim, whether the condition arose or the damage occurred before or after the date of bankruptcy. Hence, section 14.06(8) clearly contemplates that such claims are provable claims in bankruptcy.

136.

The factors discussed above overwhelmingly suggest that there is sufficient certainty that the AER will have to declare the Renounced Licensed Assets orphans and the OWA will have to carry out the abandonment and reclamation procedure in respect of them, and that the obligation to comply with the Abandonment Orders are Financial Claims that are subject to the priority rules under the BIA.

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A.4.5(b)(ii) 137.

Abandonment Orders are unsecured claims

By not permitting costs of environmental remediation of renounced properties to be a cost of administration, section 14.06(6) reflects Parliament’s choice of upholding the policy of “an equitable and fair distribution of assets amongst the unsecured creditors in insolvency situations.” Westerman (Re) (Trustee of), 1999 ABQB 708 [Tab 43]. Aircell Communications Inc v Bell Mobility Cellular Inc, 2013 ONCA 95 [Tab 12]. Re Celtic [Tab 38]. Moloney [Tab 13].

138.

In the 2015 Annotated Bankruptcy and Insolvency Act, the authors describe this purpose of the BIA as follows: The Act was passed to provide for the orderly and fair distribution of the property of a bankrupt among his or her creditors on a pari passu basis. ... The Act provides a regime whereby the creditors of the bankrupt will pursue their claims by collective action through the trustee so that the assets of the bankrupt can be realized and distributed on an equitable basis subject to the priorities of preferred creditors and the rights of secured creditors. [Citations omitted.] Annotated BIA at A§2 [Tab 46].

139.

Sections 14.06(6) and (7) of the BIA balance the important policy goals of protecting the environment and ensuring that creditors do not unduly bear the burden of a debtor’s environmental liabilities. This directly ties into the more general legislative purpose of the BIA of ensuring an equitable distribution of assets among the creditors in accordance with the priorities to which they are entitled. Section 14.06(7) grants the Crown a super-priority security for the costs of remedying environmental conditions affecting the real property charged. Under section 14.06(7)(b), that security ranks above any other claim, right, charge or security against the property despite any other provision of the BIA or any other federal or provincial legislation. It is essentially a super priority charge, but only against the affected property. BIA, s 14.06(7) [Tab 4].

140.

The purpose of the equivalent to sections 14.06(6) and (7) in the CCAA was discussed by Deschamps J. in AbitibiBowater. Parliament specifically granted provincial regulatory bodies a specific priority in respect of property affected by environmental conditions, but not a general priority against all assets (which would be the effect of remediation costs being payable as costs of

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administration). Therefore, by requiring the Receiver and Trustee to comply with the Abandonment Orders, the AER is attempting to obtain a practical priority over all other claims and this conflicts with the priorities under the BIA. The reason for this, according to Deschamps J., is as follows: Parliament recognized that regulatory bodies sometimes have to perform remediation work (See House of Commons, Evidence of the Standing Committee on Industry, No. 16, wnd Sess., 35th Parl., June 11, 1996). When one does so, its claim with respect to remediation costs is subject to the insolvency process, but that claim is secured by a charge on the contaminated real property and certain other related property and benefits from a priority (section 11.8(8) CCAA). Thus, Parliament struck a balance between the public’s interest in enforcing environmental regulations and the interest of third-party creditors in being treated equitably. If 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. In light of the legislative history and purpose of the reorganization process, the fact that the Crown’s priority under section 11.8(8) of the CCAA [equivalent to section 14.06(7) in the BIA ] is limited to the contaminated property and certain related property leads me to conclude that to exempt environmental orders would be inconsistent with the insolvency legislation. As deferential as courts may be to regulatory bodies’ actions, they must apply the general rules. AbitibiBowater at paras 32-33 [Tab 32].

141.

Hence, if the Abandonment Orders are enforceable as against the Receiver or Trustee, the legislative purpose of section 14.06(6) would be frustrated, as the Receiver would have to fund the costs of compliance in a manner that defeats that section.

142.

Any claim against a debtor for the costs of remedying any environmental condition or environmental damage affecting real property of the debtor is, pursuant to section 14.06(8) of the BIA, a provable claim notwithstanding section 121(1) of the BIA, whether the condition arose or damage occurred before or after the date of bankruptcy. Section 14.06(8) does not, however, specify what priority is assigned to amounts not secured by section 14.06(7), and therefore an analysis of other provisions is necessary.

143.

Under section 103 of the OGCA, the AER has a lien securing the indebtedness of any person to the AER for any costs, levy, fee, penalty or other amount. Under section 103, the lien: (a)

is against that person’s interest in any wells, facilities, pipelines, land or interests in land, and includes mines, minerals, equipment and petroleum substances.

(b)

has priority over all other liens, charges, rights of set-off, mortgages and other security interests.

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(c)

arises when the person fails to satisfy the debt due and expires on full satisfaction. OGCA, s 103 [Tab 7].

144.

For the purposes of the OGCA, under section 30(5) of the OGCA, however, the claim of the AER in respect of abandonment and reclamation obligations only becomes a debt, for the purposes of the OGCA, when the AER actually performs the abandonment and reclamation work. Therefore, the lien under section 103 has not arisen as the AER has not actually performed the work. For clarity, we note that this analysis is only relevant for the purposes of determining whether amounts are secured by the lien. It is not relevant for the purposes of determining whether it is a Financial Claim. OGCA, s 30(5) [Tab 7].

145.

Further, under section 86(1) of the BIA, any claim of the Crown, including a secured claim, ranks as an unsecured claim, subject to specific exceptions. The most significant exception under section 87 of the BIA is security in favour of the Crown that is registered under a prescribed system of registration before the date of the initial bankruptcy event (which under section 2 of the BIA is the date the application for the bankruptcy order was filed against Redwater (October 16, 2015)). Such security is subordinate to other properly registered and/or perfected security, and can only secure amounts owing at the time it was put in place plus interest. There is no evidence on the record that such a registration was ever made. OGCA, s 103 [Tab 7]. BIA, ss 86 and 87 [Tab 4].

146.

Hence, under section 86(1) of the BIA, except to the limited extent expressly provided in the BIA, claims of the Crown are unsecured claims. Unsecured claims are either granted a preferred ranking under section 136 of the BIA, rank pari passu with all other ordinary, unsecured claims under section 141 of the BIA, or are deferred under sections 139 and 140.1. There is no apparent preferred ranking applicable to the Abandonment Orders under section 136 of the BIA, and they are not deferred under sections 139 and 140.1. Hence, the Abandonment Orders, as Financial Claims, are most appropriately characterized as ordinary, unsecured claims which under section 141, to be are paid rateably with other unsecured claims upon being proven in accordance with the provisions of the BIA. BIA, ss 136, 139 and 140.1 [Tab 4].

147.

Hence, to the extent that the costs of complying with the Abandonment Orders are not secured by section 14.06(7), under sections 14.06(6), 14.06(8), 86 and 141 of the BIA, they are unsecured claims against Redwater, payable rateably

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with all other ordinary unsecured claims. The legislative purpose of ensuring equitable treatment of creditors in accordance with their respective priorities is entirely frustrated if the AER is permitted to collect its Financial Claim for performance of the Abandonment Orders in priority of any other claim. B.

Is the Receiver permitted to refuse to take possession of the Renounced Licensed Assets pursuant to paragraph 2 of the Receivership Order and the BIA? B.1

148.

Introduction

In the AER’s Application, it requested that this Honourable Court order that the Receiver’s renunciation of the Renounced Licensed Assets is void and contrary to paragraph 2 of the Receivership Order. B.2.

Renunciation Letters did not breach paragraph 2 of the Receivership Order

149.

The AER’s Application states that the renunciation of the Renounced Licensed Assets is contrary to paragraph 2 of the Receivership Order. This is a misunderstanding of the purpose of that paragraph, and the distinction between paragraphs 2 and 3 of the Receivership Order.

150.

Paragraph 2 of the Receivership Order provides that the Receiver was appointed as receiver of “all of the Debtor’s current and future assets, undertakings and properties of every nature and kind whatsoever, and wherever situate, including all proceeds thereof (the “Property”).” This provision gives the Receiver the authority to act in respect of all Property in order to ensure it is able, if it elects to do so, to take possession and control of and dispose the Property. Paragraph 2 of the Receivership Order does not put the Receiver in possession of the Property. Re Skyservice Airlines Inc, 2011 ONSC 703 at para 79, aff’d 2012 ONCA 283 [Re Skyservice Airlines Inc] [Tab 40].

151.

By contrast, paragraph 3 of the Receivership Order empowers the Receiver to take possession of Redwater’s assets, should it choose to exercise that power. Paragraph 3 states: 3. The Receiver is hereby empowered and authorized, but not obligated, to act at once in respect of the Property and…the Receiver is hereby expressly empowered and authorized to do any of the following where the Receiver considers it necessary or desirable [emphasis added]: (a) to take possession of and exercise control over the Property and any and all proceeds, receipts and disbursements arising out of or from the Property” [emphasis added]. Receivership Order of the Honourable Justice C.M. Jones, granted May 12, 2015 at para 2 and 3.

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152.

In Re Skyservice Airlines Inc, Justice Morawetz discussed the interaction between paragraphs 2 and 3 of the Ontario version of the Template Receivership Order (which are identical to the Receivership Order on relevant provisions) as follows: The combined effect of paragraphs 2 and 3 of the Receivership Order is that the Receiver has a role to play. The Receiver is empowered and authorized, but not obligated, to permit a lessor of Aircraft Objects (defined at paragraph 3(c) of the Receivership Order as “airframes, aircraft engines and related accessories, parts, equipment, manuals, records and other property”) to take possession and control of the Aircraft Objects. While this provision does not obligate the Receiver to take action, it also does not permit the lessors to take unlimited or unsupervised action to obtain possession and control of the Aircraft Objects... Re Skyservice Airlines Inc at para 78 [Tab 40].

153.

The distinction between a receiver being appointed as receiver over all property of a debtor, and a receiver having the power to take possession and control of such property, is recognized in the BIA. Section 245 requires that a receiver provide notice of his appointment as receiver “...in respect of property of an insolvent person...” no later than ten (10) days after becoming a receiver, by appointment or otherwise. However, a receiver is only required to issue a receiver’s statement under section 246(1) containing certain prescribed information when a Receiver takes possession or control of property of an insolvent person. BIA, ss 245 and 246 [Tab 4].

154.

The Renounced Licensed Assets are precisely the type of assets that one would expect a receiver to not take possession of, or to renounce. They have little economic value and are burdened with liabilities significantly in excess of their economic value. It is unlikely that they will be purchased in any realistic scenario.

155.

Further, section 243(1) of the BIA, under which the Receiver was appointed, provides: 243. (1) Subject to subsection (1.1), on application by a secured creditor, a court may appoint a receiver to do any or all of the following if it considers it to be just or convenient to do so: (a) take possession of all or substantially all of the inventory, accounts receivable or other property of an insolvent person or bankrupt that was acquired for or used in relation to a business carried on by the insolvent person or bankrupt; (b) exercise any control that the court considers advisable over that property and over the insolvent person’s or bankrupt’s business; or

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(c) take any other action that the court considers advisable. [emphasis added] BIA, s 243(1) [Tab 4].

156.

Section 243(1) gives the court the discretion, should it choose, to order that either a receiver take possession of assets, or not take possession of assets, or that a receiver has the discretion to determine whether or not to take possession.

157.

As such, the Receiver was not required to take possession of the Renounced Licensed Assets because it was empowered to refuse to take possession of them under paragraph 3(a) of the Receivership Order and section 243(1) of the BIA. Further, the Receiver in fact did not take possession of the Renounced Licensed Assets. B.3

158.

Duty to the public not breached – constitutional implications of AER assertion

The AER alleges that if the Receiver or Trustee is permitted to renounce the Renounced Licensed Assets, there would be no party responsible for the care and custody of such assets, or to respond to any emergency situation. On this basis, which is presumably being advanced based upon the Panamericana case, the AER alleges that the Receiver and the Trustee have breached a duty owed to the public. Panamericana [Tab 34].

159.

The AER also takes the position that it is required to wait before taking any steps in relation to the Renounced Licensed Assets because of the stay of proceedings and because the properties are not yet “orphans”. The basis for the AER’s view that the Renounced Licensed Assets are not orphans is that Redwater still exists as an entity, the Receiver remains undischarged and it is not sufficiently clear that, should the properties require abandonment, there will be insufficient financial means to fulfil the applicable abandonment and reclamation obligations.

160.

As will be discussed below, none of the AER’s positions or concerns withstand scrutiny. B.3.1 No public duty owed to take possession of Renounced Licensed Assets

161.

Neither the Receiver nor the Trustee owes a duty to the public that would require it to take possession of the Renounced Licensed Assets or would prevent it from renouncing such assets.

162.

None of the facts that in Panamericana formed the basis of the Court’s conclusion that the receiver had a duty to the public are present in this case. With the limited exception of the Expired Lease Well, neither the Receiver nor the Trustee has, or has ever had, control of the Renounced Licensed Assets. 37

A151101\CAL_LAW\ 2373066\ 8

Nor have they operated them, profited from them or carried on any activities in respect of them. The role of the Receiver and the Trustee in relation to the Renounced Licensed Assets in no way resembles that of a licensee. 163.

Further, the “public duty” cited by the AER originating from the Panamericana case has been effectively overturned as a result of: (a) the amendments to section 14.06 of the BIA (which followed shortly after the Panamericana decision); and (b) the decision of the Supreme Court of Canada in AbitibiBowater. Bankruptcy and Insolvency Act, 1992, c 27, section 9 [Tab 2]. Bankruptcy and Insolvency Act, 1997, c 12, section 15 [Tab 3]. An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act and to make consequential amendments to other Acts, SC 2005, c 36 [An Act to Amend] [Tab 22].

164.

In response to the Province’s argument in AbitibiBowater that, consistent with Panamericana, the duty of a receiver was not owed to the regulator but rather to the public at large, Deschamps J. overturned the concept of a duty owed to the public: The real question is not to whom the obligation is owed, as this question is answered by the statute, which determines who can require that it be discharged. Rather, the question is whether it is sufficiently certain that the regulatory body will perform the remediation work and, as a result, have a monetary claim. [emphasis added] AbitibiBowater at para 46 [Tab 32].

165.

Neither the Receiver nor the Trustee dispute that they are required to comply with the OGCA and the Pipeline Act, subject to their rights and powers under the BIA (including to renounce assets under section 14.06(4)), to the extent that they have possession of the Retained Licensed Assets.

166.

Once the Receiver or Trustee renounced the Renounced Licensed Assets pursuant to section 14.06(4) of the BIA, however, any common law duty to the general public arising out of the Panamericana decision ceased to apply to them. Otherwise, the Receiver or Trustee would be required to incur costs to remedy environmental damage or conditions as administration costs, which is directly contrary to section 14.06(6) of the BIA. BIA, s 14.06(6) [Tab 4]. Panamericana [Tab 34].

167.

By choosing to deal with the priority of claims for environmental remediation in sections 14.06(6), 14.06(7) and 14.06(8) of the BIA, Parliament left little room for provincial legislation to create a duty to the public that is in conflict with those sections.

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BIA, s 14.06(6), (7) [Tab 4].

168.

In Harbert Distressed Investment Fund, LP v General Chemical Canada Ltd., the Court considered the priority of a bankrupt’s environmental clean up costs. In reviewing the relative priorities in relation to the such costs, Justice Mesbur of the Ontario Superior Court of Justice held: As I read these provisions, and consider their interrelationships, I am drawn to the conclusion that first, none of General Chemical, the interim receiver or the trustee have any personal obligation to pay the cost of environmental cleanup; and second, the MOE can be nothing more than an unsecured creditor in the General Chemical bankruptcy for cleanup costs to the extent General Chemical's real property and the existing financial assurance are insufficient to meet those costs. As a result, I see no basis on which the court can delay the requested distribution on the bases advanced by the MOE. ... At first glance, the reasoning in Panamericana seems somewhat compelling. However, it must be kept in mind that it was decided before section 14.06(7) of the BIA was enacted. It seems to me that section 14.06(7) now specifically legislates concerning the issue of priority of any environmental cleanup costs. That being the case, the provisions of the BIA must take precedence over any provincial legislation. The field has now been occupied, and any provincial effort to extend further rights to the Crown in respect of environmental contamination must be viewed as being in conflict with the provisions of the federal statute. Harbert Distressed Investment Fund, LP v General Chemical Canada Ltd, [2006] OJ No 3087 (Gen Div) at paras 55 and 59 [Tab 22].

169.

At the Ontario Court of Appeal, the Court held as follows in relation to these issues: I agree with the motion judge that the reasoning in that case [Panamericana De Bienes Y Servicios (Receiver of) v. Northern Badger Oil & Gas Ltd.] has been overtaken because of the subsequent amendments to the BIA. Subsection 14.06(7) now expressly provides for priority to be accorded to environmental clean up costs and section 14.06(8) now ensures that a claim against the debtor for environmental clean up costs is a provable claim. Neither were in effect at the time of Panamericana. To give effect to provincial legislation in the face of these amendments to the BIA would impermissibly affect the scheme of priorities in the federal legislation. Harbert Distressed Investment Fund, LP v General Chemical Canada Ltd, 2007 ONCA 600 at para 46, leave to appeal to SCC refused [2007] SCCA No 539 [Harbert] [Tab 23]. AbitibiBowater at paras 73-76 [Tab 32].

170.

Harbert makes clear that, to the extent that Panamericana deals with priorities in relation to the payment of environmental remediation costs, it has no force or effect because section 14.06(7) and (8) of the BIA expressly stipulates the

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ranking of such claims. Section 14.06(6) is equally clear that the costs of complying with the Abandonment Orders do not rank as costs of administration. 171.

As such, there is no common law public duty, arising from the Panamericana decision or otherwise, that requires the Receiver and Trustee to take possession of, or to not renounce, the Renounced Licensed Assets. B.3.2 Public not at significant risk due to renunciation

172.

The AER suggests that unless the Receiver remains a “licensee” under the OGCA and Pipeline Act in relation to the Renounced Licensed Assets, the Renounced Licensed Assets will effectively “twist in the wind”, endangering the public. This position ignores the fact that the AER has the power to respond to emergency situations under the OGCA and Pipeline Act and is highly likely to do so in relation to Redwater if such a situation occurred.

173.

Under the OGCA and the Pipeline Act, the AER is empowered to, inter alia: (a)

enter an area where an escaped substance has escaped and conduct any operations necessary for its containment and clean up;

(b)

suspend or abandon a well or pipeline on its own motion; or

(c)

for the purpose of enforcing an order, take any steps the AER deems necessary, including but not limited to forcibly or otherwise entering on, seizing and taking control of a well or facility; discontinuing all production; taking over the management and control of a well or facility; plug a well or take any steps to prevent the flow or escape of oil, gas, or other substance. OGCA, ss 28, 104, 105 [Tab 7]. Pipeline Act, ss 24, 29, 36 [Tab 9].

174.

The AER advertises its emergency response services to the general public on its website, stating: The AER is committed to protecting the public and the environment, and it monitors and responds to energy-related incidents 24 hours a day, 7 days a week. AER staff assist, coordinate, and support the activities of the responsible operator, as well as the local municipal authority and other provincial and federal responders, to ensure a coordinated, effective response and that AER requirements are followed. If an incident occurs, an operator must be prepared to respond quickly and effectively to protect the health, safety, and welfare of people and limit damage to property and the environment. Should an operator be inadequately prepared or incapable of handling an incident, the AER has staff trained in emergency response, environmental protection, air quality, and investigation who are able to assume control of response activities. P. Johnston Transcript at Exhibit 10.

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175.

In her questioning, Ms. Johnston also agreed that the AER would, in the event of an incident that required emergency response, act responsibly and take action to protect the public if such steps were required, and a licensee could not or would not respond. P. Johnston Transcript at 94.

176.

The evidence therefore suggests that, notwithstanding the AER’s concerns about there not being a licensee for the Renounced Licensed Assets (all of which are shut in), the AER will exercise its powers to protect the public should an issue arise that requires an emergency response. Ms. Johnston also admitted in her questioning that she was not aware of the existence of any health, environmental or safety concerns at this time in relation to the Renounced Licensed Assets. P. Johnston Transcript at 103-105.

177.

While Redwater remains the licensee, as a result of its insolvency and the receivership, it is essentially dormant. This state does not, in and of itself, materially increase any risk to the public. If a situation were to arise with respect to the Renounced Licensed Assets, there is nothing preventing the AER from undertaking appropriate action.

178.

As noted in an article by Dianne Saxe titled Trustees’ and Receivers’ Environmental Liability Update, in considering issues raised by regulators, it is important to balance the interests of a functioning and transparent insolvency regime with real and identifiable environmental risks. Ms. Saxe notes: Ten years ago, environmental issues in bankruptcy were presented to the courts as urgent requirements to take timely action to avoid threatened, substantial, irreversible harm to significant public interests. In these extreme cases, environmental requirements should, and did, “trump” the monetary allocation framework of the Bankruptcy Act. This conclusion, however, required and received, re-evaluation. Aggressive efforts by environmental regulators to extend liability to those without fault have met strong opposition, particularly from those with bargaining power, such as the lending community. It has become apparent that many environmental claims are directed at correction of past harms, or merely at the collection of money, rather than at urgent, future dangers to the public welfare. Moreover, the urgency and social value of environmental demands are sometimes modest in comparison with the other social values that must be balanced in a bankruptcy. It is therefore no surprise that environmental issues no longer automatically trump other priorities. Saxe [Tab 47].

179.

The AER’s position is, as Saxe noted, not directed towards protecting the public from urgent, substantial dangers. Rather, the AER is attempting to collect moneys for abandonment and reclamation liabilities that have already accrued in respect of the Renounced Licensed Assets. When those considerations are balanced within Redwater’s insolvency, the ability of the Receiver and Trustee

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to renounce the Renounced Licensed Assets and not comply with the Abandonment Orders should outweigh the concerns of the AER. 180.

Further, the AER’s concerns about the lack of “responsible party” is also out of touch with the practical reality of distressed oil and gas producers. In the period prior to the appointment of the Receiver, Redwater was insolvent and had limited ability to comply with emergency response obligations under the OGCA or Pipeline Act.

181.

The AER does not appear to recognize that its interests are advanced through a receiver promptly conducting an economic assessment of the assets of an insolvent licensee such as Redwater, and advising the AER of which assets it will take possession of and which assets it will renounce. If a receiver were not appointed, such assets could well “twist in the wind” until an incident occurred to which the licensee could not respond. By contrast, the receiver’s role facilitates a prompt and efficient separation of the assets that can be sold to a licensee in good standing from assets that should be abandoned. This approach is consistent with protecting public safety and the environment. B.3.3 AER free to proceed as against Renounced Licensed Assets

182.

Finally, the AER’s suggestion that it is somehow prevented from taking steps to declare the Renounced Licensed Assets “orphans” is simply incorrect. The Receiver advised the AER in writing on October 1, 2015 that the AER was free to take any steps it deemed fit in relation to the Renounced Licensed Assets. Any decision to not take any further enforcement steps as against the Renounced Licensed Assets lies solely at the feet of the AER. Second Report at Appendix 10.

C.

The Sales Process C.1

Introduction

183.

The Receiver is seeking this Honourable Court’s approval of the Sale Process in order to permit it to market and sell the Retained Oil and Gas Assets (which include the Retained Licensed Assets together with other assets).

184.

In order to convey the Retained Licensed Assets, the Receiver will have to apply for and obtain the transfer of the applicable licences pursuant to the OGCA and Pipeline Act. The AER has the discretion under the OGCA, the Pipeline Act and Directive 006 to approve any application to transfer licences, deny such application, or make its approval subject to any conditions, restrictions and stipulations that the AER may prescribe. OGCA, s 24(1), (2) [Tab 7]. Directive 006, Appendix 2, Article 10 [Tab 6].

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Pipeline Act, s 18(1), (3) [Tab 9].

185.

The AER exercises its discretion over applications to transfer licences under the OGCA, the Pipeline Act and Directive 006 in the following manner: (a)

If a licensee contravenes or fails to comply with an order of the AER (e.g., the Abandonment Orders), or has an outstanding debt to the AER, or to the AER to the account of the OWA, in respect of suspension, abandonment or reclamation costs, and the AER has issued a declaration in respect thereof under section 106(1)(a) of the OGCA, the AER may: (i)

refuse to consider an application to transfer a licence or approval issued under the OGCA or the Pipeline Act;

(ii)

require the submission of abandonment and reclamation deposits in an amount determined by the AER prior to approving a transfer; or

(iii)

require the submission of abandonment and reclamation deposits in an amount determined by the AER for any wells or facilities of the licensee.

OGCA, s 106(1)(a), (3) [Tab 7]. P. Johnston Transcript at 106.

(b)

If either the transferor or transferee of a licence will have a post-transfer LM Rating below 1.0, Article 8 of Appendix 2 of Directive 006 states that the AER must require a security deposit in an amount representing the LMR Deficiency (being the difference between the post-transfer deemed assets (plus any existing security) and deemed liabilities) prior to approving the transfer (the “Full LMR Deficiency”). Directive 006, Appendix 2, Article 8 [Tab 6]. OGCA, section 106(3) [Tab 7].

(c)

Apparently, notwithstanding Article 8, the AER has stated that it will approve an application by a receiver to transfer a licence where the posttransfer LM Rating and LMR Deficiency of the transferor, based on an assessment by the AER, does not deteriorate. If it does deteriorate, the AER has stated it will only require security deposits for the amount which the LMR Deficiency deteriorates (the “LMR Deficiency Deterioration”). P. Johnston Transcript at 106.

(d)

Where a licensee or transferee has a “Refer” or “Global Refer” status, or there is evidence of other significant non-compliances on the part of either the transferor or transferee, the application to transfer a licence is considered non-routine and the AER will consider the circumstances

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surrounding the proposed transfer, including the nature and complexity of the compliance issues, to determine whether the regulatory requirements have been satisfied and whether a security deposit will be required. The AER may determine it is not in the public interest to approve the transfer based on the compliance history of one or both parties or their directors, officers or security holders. Directive 006, Appendix 2, Article 4 [Tab 6].

(e)

The AER may determine that it is not in the public interest to approve a licence transfer application based on the compliance history of one or both of the transferor or transferee or their directors, officers or security holders; where there are numerous recent non-compliance events that have occurred; or a “named individual” for the purposes of section 106 of the OGCA is involved in the transfer; or the transfer poses a risk to the Orphan Fund. Directive 006, Appendix 2, Article 10 [Tab 6].

Security deposits required in any of the forgoing circumstances are referred to in this Brief as a “Security Deposit” or “Security Deposits”. 186.

As discussed in paragraphs 26 and 28 of this Brief, Redwater’s LM Rating was 0.93 and LMR Deficiency was $552,824 (as of September 2015) and Redwater is subject to the Abandonment Orders in respect of the Renounced Licensed Assets. Hence, based on the factors discussed in paragraph 185, the AER is entitled to either refuse applications to transfer licences, or to require that the Receiver deliver Security Deposits in respect thereof prior to the AER approving such transfers.

187.

The manner in which the OGCA, the Pipeline Act and Directive 006 operate, and the AER exercises its discretion, conflicts with two important legislative purposes of the BIA, and directly conflicts with the priority provisions of the BIA. Based upon the Second Report of the Receiver, the evidence shows that as a result of this, either the Receiver will be unable to carry out the Sales Process, or if it does, the AER’s ordinary, unsecured Financial Claims will be paid in priority to any other claim, regardless of their priority under the BIA. As a result of the direct conflict, and frustration of parliamentary purpose, the constitutional doctrine of federal paramountcy applies to make the provisions of the provincial enactments inapplicable in a bankruptcy and section 243 receivership to the extent of the conflict and frustration.

C.2 188.

Bundling of Licensed Assets to manage Redwater’s LM Rating The AER appears to argue that the Receiver can avoid any deterioration in the LM Rating by creative packaging of Licensed Assets. In particular, the AER theorizes that the Receiver can create packages consisting of Licensed Assets that have a LM Rating less than 1.0 (“LM Negative Assets”) and Licensed

44 A151101\CAL_LAW\ 2373066\ 8

Assets that have a LM Rating in excess of 1.0 (“LM Positive Assets”). The LM Negative Assets roughly correspond to the Renounced Licensed Assets, which were all shut in before the Receiver was appointed. The LM Positive Assets roughly correspond to the Retained Licensed Assets, which are still producing. 189.

As each package of Licensed Assets is sold, the deemed values associated with them will be subtracted from Redwater’s overall deemed asset value, and the deemed liabilities will be subtracted from Redwater’s overall deemed liabilities. As long as the deemed asset values and deemed liabilities of the Licensed Assets in the package are approximately balanced, Redwater’s LM Rating should not deteriorate. As a purely mathematical proposition, this idea could have the theoretical effect that the AER suggests. P. Johnston Transcript at 108.

190.

The Receiver has analyzed whether there was any realistic likelihood of finding purchasers who would purchase such bundled packages of LM Negative Assets and LM Positive Assets. Those packages would have to contain sufficient LM Negative Assets to offset the reduction of deemed asset values of the LM Positive Assets which are sold

191.

The Receiver does not believe that a rational purchaser would be willing to purchase packages of LM Negative Assets and LM Positive Assets that were balanced in a manner to at least maintain Redwater’s LM Rating and yield any benefit to the estate: (a)

The LM Negative Assets each have deemed liabilities that exceed their deemed asset values not including un-quantified abandonment and reclamation liabilities relating to the associated pipelines). Further, any deemed asset value of the LM Negative Assets is a theoretical rather than real value because it is a calculation of the trailing 12 month production volumes generated before they were shut in. This “calculated value” will decrease to zero over the ensuing months; Second Report at para 11 and 13(a).

(b)

Each of the LM Negative Assets has little or no economic reserve value associated with them and therefore there is no benefit in purchasing them. A purchaser would only be purchasing a liability; Second Report at para 13(b).

(c)

Without a purchaser, the LM Negative Assets have no market value. In fact, because of the associated abandonment and reclamation liabilities, a rational purchaser would not purchase them unless it received a credit for assuming such liabilities as against the purchase price of the package. Given the requirement, according to the AER’s suggestion, that the net

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deficiency associated with the LM Negative Assets must at least offset the net excess from the LM Positive Assets in the package, such a credit would likely eliminate any net benefit to the creditors of such sale; Second Report at para 20(c).

(d)

If the Receiver is permitted to renounce the Renounced Licensed Assets pursuant to section 14.06(4)(c), then it is no longer in a position to sell the Renounced Licensed Assets or bundle them with anything.

192.

Based on the forgoing, the Receiver believes that a Sales Process which attempts to force purchasers to buy bundled packages of LM Negative Assets and LM Positive Assets is either doomed to failure, or will provide no net benefit to the creditors. Further, since the LM Negative Assets roughly correspond with the Renounced Licensed Assets, the AER’s administrative position, that sales under the Sales Process cannot cause the LM Rating of Redwater to deteriorate, and therefore that those assets must be bundled with the Retained Licensed Assets, defeats the legislative purpose underlying the Receiver’s right to renounce assets pursuant to section 14.06(4) of the BIA.

193.

Conducting a Sales Process in the manner suggested by the AER would mean that rather than doing so in a commercially reasonable manner for the general benefit of the creditors, which the Receiver is obliged to do under section 247(b) of the BIA, the Receiver would be required to conduct the Sales Process so as to manage Redwater’s LM Rating. Such a Sales Process would be for the primary benefit of the AER and OWA and of dubious benefit for the creditors. BIA, s 247(b) [Tab 4].

C.3

Effect on priorities and Sales Process of selling only LM Positive Assets

194.

If, as the Receiver believes, willing purchasers will not be found for bundled packages balanced between LM Negative Assets and LM Positive Assets, then if it is to carry out a Sales Process that will realize value for the creditors, it must be able to market and sell the LM Positive Assets without the LM Negative Assets.

195.

However, any sale of LM Positive Assets will reduce the LM Rating of Redwater and increase its LMR Deficiency. As illustrated in Table 2 on page 13 of the Second Report, the Retained Licensed Assets (the LM Positive Assets) have higher deemed asset values and lower deemed liabilities than the Renounced Licensed Assets (the LM Negative Assets). Therefore, as the LM Positive Assets are sold: (a)

the decrease in the aggregate deemed assets of Redwater is significantly greater than the decrease in its aggregate deemed liabilities;

(b)

the LM Rating of Redwater rapidly deteriorates; and

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(c)

the size of the LM Deficiency rapidly increases. Second Report, at 13 and para 20(d).

196.

Table 2 in the Second Report illustrates what happens if the Receiver sells Redwater’s six most productive wells. These wells have the highest LM Ratings (the highest ratio of deemed asset value to deemed liabilities). The sales result in Redwater’s LMR Deficiency increasing from $552,824 to $4,265,204. The sale of additional wells would increase the LMR Deficiency still further. Second Report at para 20(c).

197.

According to the AER’s position, before approving the application to transfer the licences for these wells, Security Deposits could be required in the following circumstances: (a)

the AER is mandated to require a Security Deposit for the LMR Deficiency, which would amount to either: (i)

the Full LMR Deficiency, as is mandated by Article 8 of Appendix 2 of Directive 006, or $4,265,204; or

(ii)

the LMR Deficiency Deterioration, or $3,712,380; and

Second Report at para 20(d).

(b)

the AER has the discretion to require a Security Deposit in respect of the Abandonment Orders.

198.

Because the Security Deposit must be received by the AER before the AER approves the transfer of the licences and any rational purchaser will require the licenses to be transferred before it closes, the AER has to be paid even before there are any gross proceeds of sale. Hence, to close a sale, the Receiver will have to find a way to pay the Security Deposit. Since it does not have sufficient funds to do this, it would either require a party willing to fund them, or the AER would have to agree to accept a direction with respect to payment of the sale proceeds. Assuming the Receiver had to fund the payment and was able to find such a lender, that lender would have to be repaid out of the gross proceeds of sale.

199.

Hence, the AER’s claim in respect of the LMR Deficiency and the Abandonment Orders is effectively a practical super-priority ranking before all of those other claims. For any of those claims to be paid, the sale proceeds would have to exceed the Security Deposit. Second Report at para 20(d).

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200.

There are a number of reasons why a Receiver would not even commence a Sales Process in these circumstances: (a)

The Receiver believes that potential purchasers are well aware that unless the AER approves an application to transfer a licence, a purchase transaction cannot be completed. Where it is unclear whether the proceeds of sale will be sufficient to pay the Security Deposit, which is the case here, it will be difficult to convince a potential purchaser to invest the time and incur the professional and other expenses necessary to participate in the Sales Process.

(b)

A receiver expends a great deal of time and professional resources in preparing, obtaining the court approval for, and administering a sales process. Because, based on the AER’s argument, the Security Deposits must be paid before the fees and costs that the Receiver incurs in running the Sales Process, it will not know until it has actual offers whether those fees and costs will even be paid. In these circumstances, the Receiver is unlikely to accept the economic risk implicit in the Sales Process.

(c)

If there are no net proceeds available for distribution to creditors, there is no point to the Sales Process or indeed the receivership.

(d)

As discussed in paragraph 41 of the Second Report, the Receiver has incurred net costs of administration requiring borrowings of approximately $500,000 as of August 31, 2015 (which has since increased to $1.2 million) in order to fund the performance of its duties and Redwater’s operations. Given the significant risk that there will be no proceeds available for distribution after payment of the Security Deposits and/or compliance with the Abandonment Orders, the ATB is unlikely to provide funding to the Receiver for the Sales Process. Since the operations of Redwater are cash flow negative, and the Receiver has no cash to pay for the Sales Process, the Receiver would be unable to carry out the Sales Process without such funding. Second Report at para 44.

(e)

Because the Security Deposit must be paid before the approval of a licence transfer application, such payment would have to be funded up-front by ATB or another party. Given the issues discussed above, it is unclear why any lender would fund such a payment.

(f)

If the sale proceeds arising from the Sales Process are less than the Security Deposit, then, assuming the AER even agreed to approve the licence transfer applications in those circumstances, it would obtain the ENTIRE benefit of the Sales Process and bear NONE of the costs.

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C.4

Implications of the paramountcy doctrine C.4.1 Are the Security Deposits and Abandonment Orders Financial Claims?

201.

Whether there is a paramountcy issue in the application of certain provisions of the OGCA, the Pipeline Act, and Directive 006 to a section 243 BIA receivership depends upon whether the claim of the AER for payment of the Security Deposit and/or compliance with the Abandonment Orders constitutes a Financial Claim. As discussed in paragraphs 118 to 136 of this Brief, the Abandonment Orders are clearly Financial Claims. In this part of the Brief, we review whether the obligation to pay Security Deposits in respect of Redwater’s LMR Deficiency and the Abandonment Orders are Financial Claims.

202.

For the first stage of the analysis, it must be determined whether there is a debt, liability or obligation owed to a creditor, which depends on whether the AER has exercised enforcement power. By requiring payment of the Security Deposit for the LMR Deficiency as a condition precedent to approving a licence transfer application, the AER is exercising its statutory enforcement power against Redwater and is thereby identifying itself as a creditor with a provable Financial Claim. AbitibiBowater at para 27 [Tab 32].

203.

The second part of the test focuses whether the debt, liability or obligation to a regulatory body had arisen either before the bankruptcy, or prior to the determination of priorities or distribution proceeds in the receivership.

204.

The obligation to pay Security Deposits for the post transfer LMR Deficiency ought not to pose a timing issue. As soon as Redwater acquired or developed Licensed Assets subject to the OGCA and the Pipeline Act, it became liable for the abandonment and reclamation liabilities associated therewith. These are the deemed liabilities that on a monthly basis, during the entire life of these Licensed Assets, the AER assesses in order to calculate the LM Rating. The LMR Deficiency is directly derived from the deemed liabilities, which are the estimate by the AER of the quantification of the suspension, abandonment, reclamation and remediation liabilities in respect of the Licensed Assets. Directive 006 [Tab 6]. P. Johnston Transcript at 99-100.

205.

Regarding the second test, the question is whether the obligation arose as of the time limit for inclusion in the insolvency process. Since there is no ongoing production from the Renounced Licensed Assets, and the liabilities have been quantified, this test is satisfied. AbitibiBowater at para 29 [Tab 32].

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206.

Finally, with respect to the third part of the test enunciated in AbitibiBowater, Deschamps J. noted that where a regulatory body frames its order in monetary terms, the court does not even have to consider whether it is possible to attach a monetary value to the obligation because what is being claimed is “indebtedness” and therefore clearly falls within the meaning of a claim. Unlike the orders of the provincial environmental regulator being examined in AbitibiBowater, the obligation to provide a Security Deposit under Directive 006 and the OGCA represents a monetary quantification by the AER of the cost of suspending, abandoning, remediating and reclaiming the Renounced Licensed Assets that is in excess of the deemed asset value thereof. It is fundamentally a Financial Claim. In the examination of Patricia Johnston on her affidavit evidence in these proceedings, she conceded this point. Directive 006, Article 6 [Tab 6]. P. Johnston Transcript at 95. AbitibiBowater at para 30 [Tab 32].

207.

Since the Renounced Licensed Assets are no longer in either the Receiver’s or the Trustee’s control, any abandonment, reclamation and remediation work to be carried out will likely have to be carried out by the OWA, except to the extent that there are working interest participants able to pay their share of such costs. Such participants have interests in less than 20% of the Renounced Licensed Assets. Under sections 30 of the OGCA and 26 of the Pipeline Act, those participants, to the extent they were required to pay in excess of their share, would have a Financial Claim against Redwater. AbitibiBowater at para 37 [Tab 32]. Second Report at 20(g).

208.

Courts will also consider the effect on the insolvency process of requiring compliance with an order or decision. In particular, if the result of not subjecting a claim to the insolvency process is to shift the costs of remediation to the creditors, essentially elevating the regulator’s claim to a super-priority status, this would inappropriately replace the “polluter-pay” principle with a “third party pay” principle. AbitibiBowater, para 40 [Tab 32]. British Columbia v Henfrey Samson Belair Ltd, [1989] 2 SCR 24 [Tab 15].

209.

As discussed in paragraphs 198 and 199 of this Brief, because the Security Deposits would have to be paid as a condition to the completion of any sale, the practical effect of this is that the AER is paid in priority to all other creditors, and in priority to the Receiver. This practical super-priority exists notwithstanding that the Financial Claims of the AER are ordinary unsecured claims (see the discussion in paragraphs 137 to 147 of this Brief). Hence, the

50 A151101\CAL_LAW\ 2373066\ 8

effect of not treating the obligation to pay the Security Deposit as a Financial Claim is that the AER has a super-priority and the economic burden of the abandonment, reclamation and remediation obligations are shifted to the Receiver and the creditors. 210.

The obligation to pay a Security Deposit in respect of the Abandonment Orders is also a Financial Claim. First, the Security Deposit secures and therefore arises from the obligation to comply with the Abandonment Orders, and the amount of the Security Deposit would be at least notionally equivalent to the deemed liabilities associated with the Renounced Licensed Assets to which they relate.

211.

In terms of the tests in AbitibiBowater, the Security Deposit is a debt, liability or obligation owed to the AER, which by exercising enforcement powers in requiring its payment as a condition to approving licence transfers is identifying itself as a creditor. Second, for the reasons discussed above in paragraphs 203 and 204, the abandonment, reclamation and remediation obligations to which the Security Deposit relates arose upon the commencement of the life cycle of the Renounced Licensed Assets to which they relate and have been, all along, quantified monthly by the AER. Third, as discussed in paragraph 206, because the obligation to provide a Security Deposit is monetarized, there is no need to determine the likelihood of the AER carrying out the work.

212.

Based on the forgoing, as Financial Claims, the obligations to provide Security Deposits in respect of the LMR Deficiency of Redwater and the Abandonment Orders are ordinary, unsecured claims against Redwater, except to the extent that they are secured against the Renounced Licensed Assets under section 14.06(7) of the BIA. C.4.2 Operational conflict

213.

As discussed in paragraph 185 of this Brief, the AER may deny approval of an application to transfer licences because the Abandonment Orders are not being complied with, or because of the non payment of Security Deposits in respect of the Abandonment Orders or the post transfer LMR Deficiency.

214.

If, as argued above, the obligations in respect of Abandonment Orders and Security Deposits are Financial Claims, which must be paid and/or complied with prior to the AER approving any application to transfer licences, then the AER will obtain a practical, super-priority over all other claims.

215.

The costs of suspending, abandoning, remediating and reclaiming wells and facilities are within the scope of costs to remedy environmental conditions and damage. Since they relate to the Renounced Licensed Assets, their payment would in substance be a cost of administration (a disbursement to permit the completion of sales under the Sales Process) and therefore would be contrary to section 14.06(6) of the BIA.

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216.

Further, section 14.06(7) of the BIA grants a super-priority security interest in favour of regulators such as the AER for these type of Financial Claims, but it is strictly limited to the real property affected by the environmental condition or damage, or to any contiguous real property related to the activity that caused such condition or damage. BIA, s 14.06(7) [Tab 4].

217.

For any portion of the AER’s Financial Claim not secured by Section 14.06(7), section 14.06(8)) provides it is a provable claim in bankruptcy and section 86(1) provides that it ranks as an unsecured claim, to be paid rateably with other ordinary unsecured claims under section 141 of the BIA. BIA, ss 14.06(8), 86(1) and 141 [Tab 4].

218.

219.

Hence, if the Receiver were to pay or perform the Security Deposits and/or the Abandonment Orders: (a)

the Receiver will have made a payment of remediation costs as a cost of administration in direct violation of section 14.06(6) of the BIA; and

(b)

the AER would have received payment in full of its Financial Claims, in priority to all other claims against the estate of Redwater.

If the AER is correct, its Financial Claims for Security Deposits would, practically, rank in priority to: (a)

the fees and disbursements of the Receiver;

(b)

the obligations of the Receiver to repay its borrowings under receiver’s certificates;

(c)

the claims of secured and unsecured creditors, notwithstanding that it is an ordinary, unsecured creditor;

(d)

the “deemed trust” claims of Her Majesty in right of Canada under section 224(1.2) of the Income Tax Act, and any claims under provisions of the Canada Pension Plan or of the Employment Insurance Act that refer to section 224(1.2) of the Income Tax Act, all of which are recognized as exceptions to the rule in section 86(1) of the BIA deeming statutory security to be unsecured claims, and which therefore rank in priority to all other secured and unsecured claims against debtors;

(e)

claims of employees for unpaid wages, which are secured as of the date of bankruptcy to the extent of $2,000, which security ranks under section 81.3 of the BIA above every other claim, right, charge or security against a bankrupt’s current assets, regardless when they arose (section 81.4 of the BIA provides a similar right in receiverships); and

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(f)

under sections 81.5 and 81.6 of the BIA, certain unpaid amounts payable to a fund established for the purposes of a pension plan, which are secured by security on all assets of the debtor in a bankruptcy or receivership which ranks in priority to any other claim, right, charge or security other certain trust claims under section 67(3) of the BIA or secured claims under sections 81.3 and 81.4 of the BIA in favour of employees. BIA, ss 81.3, 81.4, 81.5, 81.6 and 86(1) [Tab 4].

This extraordinary priority proposition of the AER is without foundation under the BIA and frustrates the federal legislative purpose underlying the BIA of treating creditors equitably in accordance with their respective priorities. 220.

By preventing the completion of sales by the Receiver pursuant to the Sales Process unless the Security Deposits and Abandonment Orders are paid and complied with, the AER is attempting to accomplish indirectly what it cannot accomplish directly by way of granting its claims a super priority that will survive in a bankruptcy. The Supreme Court of Canada has consistently not permitted provinces to re-arrange priorities in this manner.

221.

In the 1995 decision of the Supreme Court of Canada in Husky Oil Operations Ltd. v. Minister of National Revenue (“Husky”), Gonthier J. adopted academic commentary on the Quartet Decisions from that court on statutory liens and deemed trusts. Gonthier J. articulated the following principles: In my opinion, the quartet embodies a consistent general philosophy as to the purpose of the federal system of bankruptcy and its relation to provincial property requirements. The quartet is better stated, in my view, as standing for a number of related propositions which are themselves part of a consistent philosophy… (1) provinces cannot create priorities between creditors or change the scheme of distribution on bankruptcy under s. 136(1) of the Bankruptcy Act; (2) while provincial legislation may validly affect priorities in a non-bankruptcy situation, once bankruptcy has occurred section 136(1) of the Bankruptcy Act determines the status and priority of claims specifically dealt with in that section; (3) if the provinces could create their own priorities or affect priorities under the Bankruptcy Act this would invite a different scheme of distribution on bankruptcy from province-to-province, and an unacceptable situation; and (4) the definition of terms such as “secured creditor”, if defined under the Bankruptcy Act, must be interpreted in the bankruptcy cases as defined by the federal parliament, not the provincial legislatures. Provinces cannot effect how such terms are defined for the purposes of the Bankruptcy Act. Finally, I would observe that while in agreement with the above four propositions as embodying the reasoning of the quartet, in my view the list would be complete with the addition of a fifth and sixth, as follows: (5) in determining the relationship between provincial legislation and the Bankruptcy Act, the form of the provincial interest created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are prohibited from doing directly; (6) there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with the order of priorities of the Bankruptcy Act in order to render the provincial law inapplicable. It is sufficient that the effect of provincial legislation is to do so.

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Husky at paras 32, 33 and 40 [Tab 26].

222.

Gonthier J. adopted analysis in an article by Andrew J. Roman and M. Jasmine Sweatman that the Quartet Decisions of the Supreme Court of Canada had determined that the provinces could not indirectly influence the priorities under the BIA. Quoting from Roman and Sweatman at page 78 of their article: … the reasoning and [the Quartet Decisions] is not limited to trusts, nor to situations of colourable legislation attempting to give an artificial preference to government. Rather, these rulings are broad and often encompass any potential area of conflict between provincial power to legislate in the area of property and civil rights, and exclusive federal jurisdiction. Husky at para 35 [Tab 26].

223.

While the ability of the AER to withhold approval of an application to transfer licences is not a deemed trust or statutory security per se, the Supreme Court of Canada has shown that it is willing to look behind such devices to determine the effect on the estate and the general body of creditors. For instance, in Husky the Court was not examining a traditional “deemed trust” or statutory lien. The Court examined a provision of provincial worker compensation legislation that made a third party principal liable for claims against its contractor, but provided the principal had an indemnity claim against the contractor. When a contractor to whom a principal owed money went bankrupt, the principal attempted to exercise a right of set off against the contractor’s estate for the amount the principal paid to the workers compensation board. The Court held that this had the effect of reducing the estate and giving the board a priority against the estate and therefore the principal was not permitted to exercise the right of set off against the estate. The Court stated: At this point, I should perhaps stress that nothing I have said detracts from a province’s authority to impose liability on a third party for a bankrupt’s debt. What a province cannot do, however, is create a statutory security device which has the effect of reordering the priorities of distribution of the assets in the bankrupt’s estate. In such a case, what is otherwise valid provincial legislation is simply without application upon the occurrence of bankruptcy. To repeat, it is the combined effect of the statutory deemed debt and the right to withhold [and then set off against] property of the bankrupt which secures the Board's claim against property of the bankrupt…. this is nothing but a straightforward security device triggered by the province for securing the Board's claim against the estate, in exactly the same way that breaking a contract of pledge into debt and bailment and examining the validity of these legal interests separately would obscure the essential character of pledge as a security device. Husky at para 79 [Tab 26].

224.

To summarize, the BIA provisions stipulate that the claims of the AER for payment of the Security Deposits are ordinary unsecured claims. Under section 141, it is only entitled to be paid rateably with all other ordinary unsecured creditors. The provisions of the OGCA, the Pipeline Act and Directive 006 discussed above have the effect of requiring payment of the Security Deposits

54 A151101\CAL_LAW\ 2373066\ 8

before any other claims and without regard to their priority under the BIA. This is a clear and direct conflict with the BIA. 225.

Based on the forgoing discussion, there is a direct operational conflict between sections 14.06(4)(a)(ii), 14.06(4)(c), 14.06(6), 14.06(7), 14.06(8), 86(1) and 141 of the BIA, sections 24(1), 24(2) and 106(3) of the OGCA, section 18(1) and 18(3) of the Pipeline Act, Article 6 of Directive 006 and Article 4, 8 and 10 of Appendix 2 of Directive 006, and the forgoing provisions of the BIA must prevail to the extent of the conflict. It is impossible for the Receiver to comply with those priority provisions in the BIA and yet pay the Security Deposits or comply with the Abandonment Orders in the context of securing the AER’s approval of application to transfer licences. C.4.3 Frustration of purpose of BIA

226.

The manner in which the AER exercises its power to approve licence transfer applications under the OGCA, the Pipeline Act and Directive 006 frustrates the purposes of sections 14.06(6), 14.06(7), 14.06(8), 86, 87, 136, 141 and 243 of the BIA. The effect of requiring that the Security Deposits are paid and/or the Abandonment Orders are complied with, as a condition to any approval, is that either: (a)

the Sales Process cannot practically be carried out; or

(b)

the AER obtains effective priority over all Receivership and Creditor Claims.

227.

One of the legislative purposes of the BIA in general, and of the sections referred to in paragraph 226 in particular, is to ensure equitable distribution of the bankrupt’s assets among its creditors. What the AER is doing frustrates this fundamental purpose and negates any benefit to the creditors of the receivership.

228.

Under the BIA, different procedures are available depending upon the characteristics of the debtor, the claims against it, and whether the goal is reorganization or liquidation. However, these procedures share many common characteristics, including most fundamentally that they are collective proceedings on behalf of all of the stakeholders. Under the collective proceeding model, the insolvency proceeding supersedes the exercise by creditors of individual remedies and proceedings against the debtor, thereby preventing the resulting inefficiency and chaos, and putting all creditors on an equal footing so that more aggressive creditors cannot achieve an undue advantage. The collective proceeding permits the equitable distribution of a debtor’s assets amongst its creditors. Century Services Inc v Canada (Attorney General), 2010 SCC 60, at para 22 [Century Services] [Tab 18].

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Husky at para 8 [Tab 26].

229.

Different policies underlie different types of insolvency proceedings: (a)

In a liquidation, the equitable treatment of creditors in accordance with their legal entitlements and the priorities accorded to them under federal law is of primary importance; and

(b)

In a restructuring, the courts balance the mitigation of the negative social consequences of insolvency in the form of unemployment and loss of operating businesses with the equitable treatment of creditors.

In either case, it is critical that the insolvency professionals and/or debtors and creditors, as applicable, have the ability to carry out the transactions necessary to give effect to the liquidation and/or restructuring for the benefit of the creditors, debtor and other stakeholders. 230.

In Century Services, the Court noted that the contemporary thrust of legislative reform has been towards harmonizing aspects of insolvency law common to these procedures. While the Court was referring to the restructuring schemes under the BIA and the CCAA, in principal this should apply to other types of insolvency proceedings such as receiverships and bankruptcies. Century Services at para 24 [Tab 18].

C.4.3(a) 231.

232.

Frustration of Section 243 of the BIA

The right of a secured creditor to apply to the court under section 243 of the BIA for an order appointing a receiver of the property of an insolvent debtor is a critical protection for secured creditors, which also benefits all other stakeholders of the debtor. Section 243 provides a court supervised collective proceeding with the following key attributes: (a)

the receiver is an officer of the court with a fiduciary duty to all creditors and stakeholders, including the debtor, and an obligation under section 247 of the BIA to act honestly and in good faith and deal with the property of the debtor in a commercially reasonable manner;

(b)

a single, collective proceeding where all persons are stayed from exercising remedies against the debtor, its property or the receiver, and the receiver is empowered to sell the debtor’s property for the general benefit of the creditors;

(c)

the proceeds of the debtor’s assets are distributed to the creditors in accordance with their priorities and entitlements under the law.

Frank Bennett in Bennett on Receiverships wrote that, in most cases, the purpose of a court-appointed receiver is to enhance and facilitate the

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preservation and realization of the debtor’s assets for the benefit of all creditors. In other words, in standard commercial receiverships, the only purpose for a receiver is to realize upon the debtor’s property for the general benefit of the creditors. Professor Wood wrote that the objectives of receivership law include the replacement of inefficient management, the enforcement of the secured party’s security interest, and facilitating a going-concern sale of the business. Frank Bennett, Bennett on Receiverships, 3rd ed (Toronto: Thomson Reuters Canada Limited, 2011) at 6 [Tab 48]. Hamilton Wentworth Credit Union Ltd. (Liquidator of) v Courtcliffe Parks Ltd, [1995] OJ No 1482 (ONSC) [Tab 21]. Roderick J Wood, Bankruptcy and Insolvency Law (Toronto: Irwin Law Inc, 2009) at 467 [Tab 52].

233.

If the AER makes the implementation of a Sales Process impractical, then there is no point to appointing a receiver under section 243 because it then effectively has nothing to do.

234.

For a Sales Process to be effective and benefit creditors, at a minimum the Receiver must be able to accomplish the following:

235.

(a)

the Receiver must be able to sell those saleable assets in its possession (which largely corresponds to the LM Positive Assets) without being obliged to bundle them with the unsaleable assets such as the LM Negative Assets;

(b)

the Receiver must have reasonable assurance that if a proposed purchaser is a licensee in good standing, the AER will approve an application to transfer licences notwithstanding the effect of the transaction on Redwater’s LM Rating, LMR Deficiency, and notwithstanding the failure of the Receiver, the Trustee or Redwater to pay Security Deposits and/or comply with the Abandonment Orders; and

(c)

the AER must not be permitted to obtain the gross proceeds of sale on account of the Security Deposit and Abandonment Orders in priority to all other claims.

The Court has the authority to intervene in the exercise by a regulator of its authority to collect a Financial Claim. According to Justice Deschamps in AbitibiBowater: While generally a regulatory body has discretion to decide how best to ensure that regulatory obligations are met, and the court should avoid interfering with that discretion, the action of a regulatory body is nevertheless subject to scrutiny in insolvency proceedings. AbitibiBowater at para 48 [Tab 32].

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236.

As such, where the AER is using its authority to approve licence transfers to prevent the completion by the Receiver of asset sales or make impractical the carrying out of a Sales Process, the Court may scrutinize its decisions to determine if they frustrate the purposes of the BIA.

237.

The AER has broad discretion over whether or not to accept an application to transfer a licence. The intent of that discretionary power is to ensure that wells, facilities and pipelines are developed, operated and abandoned in a manner consistent with safe practices and in accordance with the obligations of licensees under the OGCA and the Pipeline Act. On the other hand, the AER is exercising its discretion so as to collect its Financial Claims where the decision of whether to approve a licence transfer, or impose conditions on such transfer, is based on:

238.

239.

(a)

the LM Rating or LMR Deficiency of Redwater;

(b)

whether a Security Deposit has been provided in respect of the LMR Deficiency or to assure compliance with the Abandonment Orders; and

(c)

whether the Receiver has complied with the Abandonment Orders.

With respect to the sale of the Retained Licensed Assets, as long as the AER is focussed on the qualifications and attributes of the purchaser, then it is carrying out its function as a regulator in a way that cannot be said to frustrate the purposes of the BIA, as it does not constitute an attempt to collect Financial Claims. The qualifications and attributes of the purchaser that the AER needs to be able to examine in order to effectively carry out its regulatory mandate include: (a)

whether the purchaser is a licensee in good standing;

(b)

whether, immediately after the transfer of Retained Licensed Assets to a purchaser, its LM Rating will be in excess of 1.0;

(c)

whether there are compliance issues with respect to the purchaser or its directors, officers or security holders; and

(d)

whether the sale to the purchaser will pose undue risk to the Orphan Fund.

Unless the Receiver is able to obtain an order of this Honourable Court restricting the exercise by the AER of its discretion to matters of the nature described in paragraph 237, the Receiver will be unable to sell the Retained Licensed Assets, where the vast majority of the value of Redwater resides, and the AER will have defeated the federal legislative policy underlying section 243 of the BIA of permitting the realization of the debtors assets in collective receivership proceedings for the benefit of the creditors.

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C.4.3(b)

Case discussion on provincial powers to compel payment of discharged debts in a bankruptcy

240.

In a recent series of cases, courts considered whether the refusal by regulators to issue or renew licences to discharged bankrupts on the basis of unpaid Financial Claims could be set aside. They are relevant to the question of whether this Court can restrict the exercise of the AER’s discretion in approving licence transfers. In those cases, the courts found that regulatory decisions regarding whether or not to grant or renew licences in favour of discharged bankrupts could be set aside where the regulator was using the legislative scheme in order to collect a Financial Claim and defeat the policies underlying the BIA.

241.

Rather than fulfilling a regulatory purpose under the OGCA and Pipelines Act, the AER is attempting to collect Financial Claims against Redwater, contrary to the validly enacted federal priority regime under the BIA. Two recent cases from the Supreme Court of Canada are instructive on this issue, as the court considered whether provincial regulatory regimes that enforced debts against discharged bankrupts conflicted with s. 178(2) of the BIA, which provided that bankrupts are released from such debts.

242.

In Moloney v. Alberta (Administrator, Motor Vehicle Accident Claims Act), the discharged bankrupt failed to pay a judgment for a motor vehicle accident while uninsured. Under section 102 of Alberta’s Traffic Safety Act, (“TSA”) the province could suspend Mr. Maloney’s drivers licence and permits until he paid the amount of the compensation. Mr. Maloney made an assignment in bankruptcy and was eventually discharged. Pursuant to section 178(2) of the BIA, upon discharge Mr. Maloney is released from all debts that are claims provable in bankruptcy. As a result of his bankruptcy and discharge, Mr. Maloney did not pay the amount of the compensation in full; because of this failure to pay, Alberta suspended his vehicle permits and driver’s licence. Mr. Maloney contested this suspension. The Court of Queen’s Bench and the Court of Appeal found that there was a conflict between the federal and provincial laws. Relying on the doctrine of federal paramountcy, they declared section 102 of the TSA to be inoperative to the extent of the conflict. Moloney [Tab 13]. Moloney v Alberta (Administrator, Motor Vehicle Accident Claims Act), 2014 ABCA 68 [Tab 30].

243.

On appeal, the Supreme Court of Canada agreed that section 102 of the TSA is constitutionally inoperative to the extent that it is used to enforce a debt discharged in bankruptcy.

244.

The majority of the Supreme Court of Canada held that the BIA furthered two purposes, being the equitable distribution of the bankrupt’s assets among his or her creditors and the bankrupt’s financial rehabilitation. The equitable distribution of assets is achieved through a single, collective debt recovery

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proceeding, to ensure that the assets of the bankrupt are distributed fairly amongst creditors. As a general rule, all creditors rank equally and share rateably in the bankrupt’s assets. Recoveries are maximized, and inefficiencies and chaos are avoided, through an orderly collective process. Moloney at paras 32 and 33 [Tab 13].

245.

For a collective debt process to be viable, parties cannot be allowed to enforce provable claims individually, outside of a collective proceeding. The Court held that the payment which the province sought to recover was a provable claim, which the province cannot enforce after discharge under section 178(2). Moloney at para 67 [Tab 13].

246.

In Maloney, the provincial Attorney General argued that section 178(2) merely precludes civil enforcement of provable claims. In this instance if Mr. Maloney never sought a driver’s licence the debt could not be collected, which in turn does not give rise to any conflict between the BIA and TSA. In commenting on the payment scheme at issue, the Court specifically noted: Contrary to the appellant’s contention, nothing suggests that s. 178(2) merely precludes civil enforcement of provable claims. Accepting the appellant’s argument would amount to adding words to the provision that do not exist, and that the legislator did not include. While being expressly precluded from compelling payment of a discharged provable claim, the province could create an administrative scheme that had the effect of coercing a discharged debtor to pay a debt that has been released. The appellant’s argument must be rejected. Pursuant to s. 178(2) of the BIA, creditors are precluded from compelling payment of a claim provable in bankruptcy, through either civil or administrative processes. [emphasis added] Moloney at para 68 [Tab 13].

247.

In considering whether the fact that a licence to drive a vehicle is a “privilege” and thus outside of Parliament’s powers to legislate under the BIA, the majority held: Finally, Alberta’s other assertion, to the effect that Parliament’s power over bankruptcy and insolvency matters does not extend to the regulation of driving privileges, does not entail that the province can withhold those privileges on the basis of an unpaid released debt. In my view, the province is conflating the scope of Parliament’s authority and the consequences of the conflict between the BIA and the TSA. The financial responsibility of drivers is a valid matter of provincial concern and jurisdiction, and the province can set the conditions for driving privileges with this consideration in mind. Nonetheless, when the province denies a person’s driving privileges on the sole basis that he or she refuses to pay a debt that was discharged in bankruptcy, the province’s condition conflicts with s. 178(2) of the BIA and is, to that extent, inoperative. To so conclude does not transfer the power to regulate driving privileges to Parliament. The obligation to grant those privileges flows from the provisions of the provincial law that remain operative. [emphasis added]

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Moloney at para 82 [Tab 13].

248.

In Maloney, the majority held that the TSA and s. 178(2) of the BIA contradicted each other, and thus operationally conflicted. The court’s analysis in relation to the operational conflict is as follows: I therefore conclude that s. 102 of the TSA allows the province, or a third party creditor, to enforce a provable claim that has been released. To that extent, it conflicts with s. 178(2) of the BIA. It is impossible for the province to apply s. 102 without contravening s. 178(2) and, as a result, for the respondent to simultaneously be liable to pay the judgment debt under the provincial scheme and be released from that same claim pursuant to s. 178(2). … Section 178 is a complete code in that it sets out which debts are released on discharge and which debts survive bankruptcy. In effect, s. 102 creates a new class of exempt debts that is not listed in s. 178(1). Hence, in the words used by my colleague in her reasons (paras. 95, 110 and 128), “the provincial law allows the very same thing” — the enforcement of a debt released under s. 178(2) of the BIA — that “the federal law prohibits”. The result is an operational conflict between the provincial and federal provisions. [emphasis added] Moloney at para 75 [Tab 13].

249.

Notwithstanding that the majority found an operational conflict, it also examined whether section 102 of the TSA frustrated the purpose of section 178 of the BIA. In particular, the Court held that the province’s use of its administrative powers relating to driving privileges to burden Mr. Maloney until he repaid a discharged debt frustrates a purpose of the BIA, being the financial rehabilitation of the bankrupt, and which is the precise purpose of section 178(2). The Court also noted that Parliament considered which debts survived a bankrupt’s discharge, and the effect of section 102 was to create a new class of debts that survived discharge, leaving Mr. Maloney with a financial liability that was not contemplated by Parliament. The Court did not find that the requirement that this section of the TSA offended the purpose of the BIA requiring that assets be distributed in an equitable fashion, on the basis that other provisions of the BIA which served such purpose were not at issue, and in fact the money the province was attempting to collect did not reduce the amount available to the unsecured creditors. Moloney at para 77-79, 85 and 86 [Tab 13].

250.

Similarly, in 407 ETR Concession Co. v. Canada (Superintendent of Bankruptcy), the Court reviewed the provincial statute that permitted the withholding of a vehicle license and an individual license to drive on the basis of payment arrears of tolls for use of Highway 407. A trucker owed significant pre-bankruptcy tolls and then was later discharged from bankruptcy. 407 [Tab 10].

251.

The majority held that the legislation at issue (the “407 Act”) created, in substance, a “debt enforcement scheme”, which purpose was relevant to the

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paramountcy analysis. That provincial purpose forms part of the interpretative exercise that allows the substantive effect of the provincial law to be ascertained. 407 at paras 17, 19 and 20 [Tab 10].

252.

In that case the majority also found an operational conflict existed, and concluded that the operation of section 22(4) of the 407 Act to enforce a debt that was discharged in bankruptcy is in conflict with section 178(2) of the BIA, as section 178 is a complete code that sets out which debts are released on the bankrupt’s discharge and which debts survive the bankruptcy. Through section 22(4), the province creates a new class of exempt debts that is not listed in section 178(1). The Court also held that the operation of section 22(4) frustrates Parliament’s purpose of providing discharged bankrupts with the ability to financially rehabilitate themselves. 407 at paras 24 and 31 [Tab 10].

253.

In discussing the conflict between the BIA and 407 Act, the majority stated: In other words, while the provincial scheme has the effect of maintaining the debtor’s liability beyond his or her discharge, the federal law expressly releases him or her from that same liability. Both laws cannot “apply concurrently” (Western Bank, at para. 72) or “operate side by side without conflict” (Marine Services International Ltd. v. Ryan Estate, 2013 SCC 44 (CanLII), [2013] 3 S.C.R. 53, at para. 76); a debtor cannot be found liable under the provincial law after having been released from that same liability under the federal law: British Columbia (Attorney General) v. Lafarge Canada Inc., 2007 SCC 23 (CanLII), [2007] 2 S.C.R. 86, at para. 82; M & D Farm Ltd. v. Manitoba Agricultural Credit Corp., 1999 CanLII 648 (SCC), [1999] 2 S.C.R. 961, at para. 41; Multiple Access Ltd. v. McCutcheon, 1982 CanLII 55 (SCC), [1982] 2 S.C.R. 161, at p. 191. I respectfully disagree with my colleague that this conflict is “indirect” or concerns something that is merely “implicitly” prohibited by s. 178(2) of the BIA (Moloney, para. 92), or that I am resorting to a broad interpretation of s. 178(2) in order to find that an operational conflict exists (para. 36). Under the federal law, the debt is not enforceable; under the provincial law, it is. The inconsistency is clear and definite. One law allows what the other precisely prohibits. 407 at para 25 [Tab 10].

254.

Applying the above-referenced language to the case at bar, the Province has created an administrative scheme, including the OCGA, Pipeline Act and Directive 006, which has the effect of coercing a Receiver or Trustee to pay an amount to the AER, contrary to the aforementioned priority provisions of the BIA as a requirement of any licence transfer. This is an operational conflict.

255.

The exercise by the AER of its discretion in approving applications to transfer licences so as to require payment of and compliance with Security Deposits and Abandonment Orders falls squarely in these cases. Rather than fulfilling a

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regulatory purpose under the OGCA and Pipelines Act, the AER is attempting to collect Financial Claims in priority to all other claims against Redwater. 256.

Likewise, in Ontario (Minister of Finance) v. Clarke, R.F. Goldstein J. of the Ontario Superior Court of Justice considered the substance of the provincial licensing regime rather than its form and stated: A court must look at the substance of the provincial order rather than the form. In my view, if the Minister’s argument is accepted it would amount to creating a carve-out for provincial regulatory or licensing schemes to permit debt enforcement after discharge. In my view, the effect of AbitibiBowater in the context of this case is to confirm that regulatory bodies with provable claims that can be reduced to a monetary amount are subject to the bankruptcy process. The effect of the licensing scheme is to alter the scheme of distribution and re-arrange priorities among creditors by taking funds that would otherwise be available to other judgment creditors, because the Minister obtains funds outside the bankruptcy process. As Gonthier J. noted in Husky Oil, even if it is not the intent of the MVA Claims Act or the HTA to re-arrange priorities, there is no room for an incidental or ancillary effect of provincial legislation if it alters the priorities of creditors or affects the scheme of distribution. I also agree that the licensing scheme offends the “fresh start” principle”. Ontario (Minister of Finance) v Clarke, 2013 ONSC 1920 at paras 52 and 53 [Clarke] [Tab 33].

257.

The Court did not accept the argument that the Minister was withholding the licence in order to promote good driving habits and protect the public because the legislation and administrative practice made clear that the licence was only withheld because a debt was not paid. Clarke [Tab 33].

258.

The exercise by the AER of its discretion in approving applications to transfer licences so as to require payment of and compliance with Security Deposits and Abandonment Orders falls squarely in these cases. Rather than fulfilling a regulatory purpose under the OGCA and Pipelines Act, the AER is attempting to collect Financial Claims in priority to all other claims against Redwater. C.4.3(b)

259.

Does Lemare Lake limit the legislative purpose of section 243?

In Saskatchewan (Attorney General) v. Lemare Lake Logging Ltd., the Supreme Court of Canada considered whether Saskatchewan legislation which required creditors to wait 150 days before a receiver could be appointed in relation to farmers frustrated the purpose of section 243 of the BIA, which provided for notice of at least 10 days in relation to such application. Lemare [Tab 39].

260.

The Court and parties in that case agreed that there was no operational conflict between the laws, on the basis that the federal 10 day notice period is a

63 A151101\CAL_LAW\ 2373066\ 8

minimum notice period and thus permissive. In other words, compliance with both laws was possible by complying with the provincial law. Rather, the case turned on whether the provincial legislation frustrated the federal purpose of section 243. Lemare at para 25 [Tab 39].

261.

The amicus argued that the federal purpose of section 243 was frustrated through the provincial standstill period, on the basis that the appointment of a national receiver is only part of section 243’s broader purpose. The amicus argued that effective insolvency law requires flexibility and prompt and timely access to remedies such as a receivership, without regard to the idiosyncrasies of provincial law. The amicus argued that section 243 was intended to provide secured creditors with an entitlement to apply for the appointment of a receiver within a certain period of time, and to obtain such appointment exclusively in accordance with the substantive requirements found in the federal law. Lemare at para 40 [Tab 39].

262.

The court disagreed with the amicus, finding that based in part upon Hansard evidence, the purpose of section 243 was to establish a regime allowing for the appointment of a national receiver, thereby eliminating the need to apply for the appointment of a receiver in multiple jurisdictions. The Court held concerns of promptness and timeliness are valid concerns in any bankruptcy or receivership, but they cannot be used to trump the specific purpose of section 243 and to extend its purpose to create a conflict with federal legislation. Lemare at para 68 [Tab 39].

263.

The Court therefore held that the provincial law continued to operate, and the waiting period established thereunder was constitutional, and section 243 was not paramount.

264.

In Lemare Lake, the Court’s analysis in relation to the purpose of section 243 of the BIA was limited to a narrow procedural issue, which was whether the 10 day waiting period for the appointment of a section 243 receiver under the BIA was reflective of a valid federal purpose of timely access to remedial relief. The Court held it was not. In addition, it is important to note that the Court held that the evidence that was tendered by the amicus in support of its position was insufficient to establish the broad assertion that it was making in relation to its purpose. Then, after making that finding, the Court held that what the available evidence showed (which evidence was limited in scope) was that the purpose of section 243 was to allow for the appointment of a national receiver.

265.

The Receiver respectfully submits that the Supreme Court of Canada’s decision in relation to the purpose of section 243 is narrow, and only stands for the proposition that its federal purpose is not to ensure prompt and timely access to

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the remedy provided thereunder. The Lemare Lake decision does not mean that there can be no other valid federal purpose for section 243 on different facts. 266.

As referenced elsewhere in this Brief, without the power to sell assets of a debtor and distribute proceeds, a receiver’s traditionally known powers would be considered neutered. If the federal purpose of section 243 was only limited to the national power to appoint receivers, provincial legislation which sought to eliminate the rights of national receivers to exercise such fundamental powers as taking possession of and selling the assets of debtors could be eliminated. This would mean that while receivers could be appointed nationally, their powers would be so curtailed as to render their appointment meaningless. A broad interpretation of the Lemare Lake decision gives rise to this risk.

267.

In particular:

268.

(a)

The Court said that the available evidence illustrated that the purpose of section 243 was to allow for the appointment of a national receiver. This is obiter, as the Court only needed to find that the amicus failed to meet its burden of proving that the federal purpose was as alleged.

(b)

The Court did not foreclose the possibility of section 243 having additional federal purposes in other cases and on different facts. In that regard, the comments of Côté J. in dissent in paragraphs 120 and 121 note the danger of the majority’s use of extrinsic evidence to justify an interpretation of a statute in circumstances where such evidence may be incomplete or narrow.

The central issue before the Court was timing of access to the receivership remedy. In the case at bar, the central issue is once the receivership remedy is accessed, can it be meaningfully implemented. The Court in Lemare Lake was never faced with the question of whether powers of receivers that are widely understood as being central to their purpose can be curtailed through provincial action. C.4.6 Frustration of priority scheme set out in the BIA

269.

The policy of ensuring equitable treatment of various classes of creditors strongly suggests that the AER ought not to be able to exercise its authority to approve licence transfers, so as to ensure payment of and compliance with Security Deposits and Abandonment Orders before all other claims.

270.

A court ought to consider the substance of a regulatory action over its form in order to determine its true nature and whether the effect of the regulator’s actions is to create in its favour a higher priority than the one conferred under federal insolvency legislation. As stated by Deschamps J. in AbitibiBowater: Processing creditors’ claims against an insolvent debtor in an equitable and orderly manner is at the heart of insolvency legislation, which falls under a head of power

65 A151101\CAL_LAW\ 2373066\ 8

attributed to Parliament. Rules concerning the assessment of creditors’ claims, such as the determination of whether a creditor has a monetary claim, relate directly to the equitable and orderly treatment of creditors in an insolvency process. I see no reason why the Province’s choice of order should not be scrutinized to determine whether the form chosen is consistent with the order’s true purpose as revealed by the Province’s own actions. If the Province’s actions indicate that, in substance, it is asserting a provable claim within the meaning of the federal legislation, then that claim can be subjected to the insolvency process. ... Considering substance over form prevents a regulatory body from artificially creating a priority higher than the one conferred on the claim by federal legislation. AbitibiBowater at paras 18-19 [Tab 32].

271.

There is no statutory basis for the AER being paid its Financial Claims before a) the Receiver’s fees and disbursements, the repayment of the receiver’s certificates, the payment of deemed trusts for employee withholding taxes, and distributions to secured creditors.

272.

Hence, by making the payment of and compliance with these Financial Claims a condition of obtaining approval for the transfer of licences, the AER is indirectly elevating its ordinary unsecured claim to a super-priority claim, thereby defeating the priority structure contemplated in the BIA. This is contrary to and fundamentally frustrates the distribution scheme contemplated by the BIA.

C.4.7 Regulatory structure is left intact 273.

The relief sought in the Receiver’s Application does not undermine the regulatory objectives set out in the OGCA and the Pipeline Act, or unduly interfere with the AER’s regulatory powers. The order being sought by the Receiver does not prevent the following: (a)

the AER will be able to consider effect on any purchaser’s LM Rating of the purchase of Retained Licensed Assets;

(b)

the AER will be able to require a security deposit from the purchaser in the event that its post-transfer LM Rating is less than 1.0;

(c)

the AER will be able to consider the compliance record of the purchaser and of its directors, officers, employees, security holders and agents;

(d)

the AER will be able to consider any legitimate health, safety and environmental matters associated with Retained Licensed Assets being sold;

(e)

the AER will be able to consider the status of the purchaser under Directive 019, including whether it is in a “Global Refer” or “Refer” status;

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(f)

the AER will be able to consider whether the purchaser owes any debt to the Crown, to the AER in its own right or to the AER on behalf of the OWA; and

(g)

the AER will be able to consider whether approval of the proposed licence transfer application is in the public interest.

274.

The Retained Licensed Assets will therefore continue to be subject to and operated in accordance with the regulatory scheme set out in the OGCA and the Pipeline Act and the relief requested in the Receiver’s Application does not unduly interfere with the AER’s powers to regulate the purchased Licensed Assets. In accordance with the rule that under the paramountcy doctrine, provincial legislation must only be found to be inapplicable to the extent of the conflict, the Receiver is requesting that this Court declare inapplicable only those provisions of the relevant provincial enactments that improperly interfere with the Sales Process or improperly vault the AER’s ordinary unsecured claim to a practical super priority over all other claims.

275.

In fact, the AER’s positions as described in this Brief undermine their regulatory objectives and put at risk the Orphan Fund and the public. In particular: (a)

If the Receiver is unable to sell the Retained Licensed Assets, the Receiver and Trustee will likely renounce them pursuant to section 14.06(4) of the BIA because it would be unable to realize any value from them. This will increase the number of wells and facilities that the OWA is required to abandon, notwithstanding that the Retained Licensed Assets may be able to be sold to other licensees in good standing. Second Report at para 20(e).

(b)

The AER and OWA are unable to sell or transfer any of the surface or underlying mineral interests of Redwater to any prospective purchaser. As such, all of the Licensed Assets would end up with the OWA or working interest participants. As shown in Table 3 of the Second Report, working interests are held by persons other than Redwater with respect to 20.9% of the Licensed Assets. Hence, the majority of the abandonment and reclamation liabilities with respect to the Licensed Assets would rest with the OWA. Second Report at para 20(f), (g).

(c)

Even if the Retained Licensed Assets are sold, the payment of Redwater’s LMR Deficiency has no effect on whether any purchaser of Retained Licensed Assets will have the required LM Rating going forward.

(d)

The AER’s approach, which makes inevitable the abandonment and reclamation of all Licensed Assets where there is no working interest

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participant, is contrary to its stated goal in Article 1 of Directive 006, which is to prevent the costs to suspend, abandon, remediate and reclaim a well, facility or pipeline in the LLR Program from being borne by the public of Alberta should a licensee become defunct, and to minimize the risk to the Orphan Fund posed by the unfunded liability of licensees in the program. In fact, the AER’s approach maximizes the costs to and risks borne by the Orphan Fund. Second Report at para 20(g).

(e)

If Retained Licensed Assets are abandoned rather than sold, the government of Alberta loses future royalty and lease revenue associated with them. Second Report at para 20(g).

D.

276.

Directive 006 constitutes an inflexible policy that improperly fetters (or preempts) the AER’s discretion concerning the approval of licence transfers, and should therefore not be considered on any licence transfer applications contemplated by the Sales Process In addition to the issues discussed in Section C, the policy of the AER expressed in Directive 006 inappropriately fetters its discretion with respect to applications to transfer licences. The AER has adopted and implemented Directive 006 to aid it in exercising its authority to approve licence transfers under the OGCA and Pipeline Act. Directive 006 [Tab 6].

277.

As noted in paragraph 25 of the Affidavit of Patricia Johnston, sworn August 13, 2015, the AER “has been consistent in dealing with all receivers of its position that the AER will not approve the transfer of well licences if the abandonment liabilities of the remaining assets of the licensee are not properly addressed as per the requirements of the AER’s LLR Program and related regulatory requirements.” Affidavit of Patricia Johnston, sworn August 13, 2015 at para 25 [First AER Affidavit].

278.

Notwithstanding the AER’s delegated discretion to transfer licences, the First AER Affidavit makes clear that the AER “will not approve” the transfer of licences if the “requirements” of the LLR Program are not met. First AER Affidavit at para 25.

279.

Ms. Johnston also made it clear during questioning on her Affidavits that in order for the AER to approve the transfer of any licences, Redwater’s LMR rating must not further deteriorate. The relevant excerpt from page 106 of the transcript of the P. Johnston Transcript is as follows:

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Q:

So if there was a sale that was presented to the regulator in relation to a well transfer licence application in which the LLR deposit of Redwater was to be worsened…

A:

[The Receiver] has three options: It can abandon some properties, so that would reduce the liability; it can post security, which would also reduce the liability; or it can transfer some liabilities with those assets.

Q:

And that is the extent of the options.

A:

Correct.

Q:

And if those options are not exercised in that circumstance, the AER is not going to approve a licence transfer which deteriorates Redwater’s LLR rating.

A:

Correct.

P. Johnston Transcript at 106.

280.

Section 10 of Appendix 2 in Directive 006 reiterates the AER’s statutory discretion to approve the transfer of licences, stating that it may approve, approve with conditions, or deny a licence transfer application. Directive 006, Appendix 2, s 10 [Tab 6].

281.

Section 5 of Directive 006 directs that a LM Rating assessment be conducted on receipt of a licence transfer application, and prior to a decision concerning the transfer. Directive 006, s 5 [Tab 6].

282.

Importantly, section 8 of Appendix 2 uses mandatory language in stating that the AER “will” conduct an LM Rating assessment of both the transferor and transferee, and if this mandatory assessment results in an LM Rating below 1.0, the AER “will require a security deposit” which “must” be received before a licence transfer application is approved. Directive 006 thus establishes a condition precedent to the successful transfer of any licence whose transfer requires the consent of the AER. Directive 006, Appendix 2, s 10 [Tab 6].

283.

The effect of the LLR scheme and specifically section 5 of Directive 006 and section 8 of Appendix 2 of Directive 006 is that a failure to comply with its mandatory security deposit requirements means that the AER will not consent to a licence transfer, notwithstanding any other relevant considerations the AER must take into consideration in the exercise of its delegated discretion pursuant to section 10 of Appendix 2.

284.

The exercise of a discretionary statutory power requires that it not be improperly fettered by the adoption of an inflexible policy. The existence of discretion implies the absence of a rule dictating the result in each case.

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Discretion requires that each case be determined on its own specific merits and relevant considerations. Jones & de Villars, Principles of Administrative Law, 6th ed (Toronto: Thomson Reuters Canada, 2014) at 206-207 [Tab 50].

285.

The LM Rating and licence transfer scheme in Directive 006, and specifically Section 8 of Appendix 2, is an inflexible policy which requires that the AER exercise its discretionary power in a particular way when the LM Rating is below 1.0, notwithstanding any other relevant facts or merits of the particular application before it.

286.

As noted in the First AER Affidavit, the AER “has been consistent in dealing with all receivers of its position that the AER will not approve the transfer of well licences if the abandonment liabilities of the remaining assets of the licensee are not properly addressed as per the requirements of the AER’s LLR Program and related regulatory requirements.” Not only is Directive 006 an inflexible policy which requires the AER to exercise its discretion in a particular way, the AER is “consistently” applying it with “all receivers”, notwithstanding the merits of an individual receiver’s case. First AER Affidavit at para 25.

287.

The Supreme Court of Canada has been clear that a delegated authority cannot fetter its discretion by treating policies as binding upon them and excluding other valid or relevant reasons for the exercise of its discretion. The Supreme Court cited with approval the following: The Minister may validly and properly indicate the kind of considerations by which he will be guided as a general rule in the exercise of his discretion (see British Oxygen Co. Ltd. v Minister of Technology, [1971] AC (HL) 610; Capital Cities Communications Inc. v Canadian Radio-Television Commission, [1978] 2 SCR 141, at pp 169-171), but he cannot fetter his discretion by treating the guidelines as binding upon him and excluding other valid or relevant reasons for the exercise of his discretion (see Re Hopedale Developments Ltd. and Town of Oakville, [1965] 1 OR 259 (CA). [emphasis added] Maple Lodge Farms Ltd v Canada, [1982] 2 SCR 2 at para 6 [Tab 29].

288.

The LM Rating assessment scheme in Directive 006 is clearly not just a guideline or a high-level principle or policy. Even if that were the case, it would be a guideline that dictates the result of a licence transfer application in certain circumstances, including those faced by the Receiver, and usurps the AER’s discretion. The LM Rating assessment scheme constitutes an unwarranted fettering of the AER’s delegated discretion. The Ontario Court of Appeal has commented on guidelines for administrative tribunals as follows: The right of an administrative tribunal to formulate general principles by which it is to be guided is undoubted...

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[...] The tribunal, however, where it has announced considerations by which it is to be guided and where it has original jurisdiction, must not fetter its hands and fail, because a guide has been declared, to give the fullest hearing and consideration to the whole of the problem before it. Hopedale Developments Ltd v Oakville (Town) (1964), [1965] 1 OR 259 (Ont CA) at para 11 [Hopedale] [Tab 24].

289.

Referring to the consideration of principles by which a tribunal would be guided, the Court also stated: To lay them down as principles by which the Board would be guided may therefore be both reasonable and wise but to say that the appellant must comply with them before the Board will allow the application is clearly wrong and the Board if it so fettered its jurisdiction, would be in error. [emphasis added] Hopedale at para 13 [Tab 24].

290.

The Ontario Court of Appeal has recognized that policies cannot be used to preempt the exercise of a regulator’s discretion. The authority of a regulator, like the Commission, to issue non-binding statements or guidelines intended to inform and guide those subject to regulation is well established in Canada. The jurisprudence clearly recognizes that regulators may, as a matter of sound administrative practice, and without any specific statutory authority for doing so, issue guidelines and other non-binding instruments. [emphasis in original] Ainsley Financial Corp v Ontario (Securities Commission), [1994] OJ No 2966 (Ont CA) at para 11 [Ainsley] [Tab 11].

291.

However, the Court went on to say, Having recognized the Commission’s authority to use non-statutory instruments to fulfill its mandate, the limits on the use of those instruments must also be acknowledged. A non-statutory instrument can have no effect in the face of contradictory statutory provision or regulation.... Nor can a non-statutory instrument pre-empt the exercise of a regulator’s discretion in a particular case: Hopedale Developments Ltd., supra, at p 263. Most importantly, for present purposes, a non-statutory instrument cannot impose mandatory requirements enforceable by sanction; that is, the regulator cannot issue de facto laws disguised as guidelines. [emphasis added] Ainsley at para 14 [Tab 11].

292.

The mandatory requirements of the LLR scheme in Directive 006 have the effect of pre-empting and improperly fettering the exercise of the AER’s discretion.

293.

Because the LLR scheme pre-determines the outcome of the AER’s discretionary authority to the exclusion of other valid and relevant

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LEGISLATION

1.

An Act to establish the Wage Earner Protection Program Act, to amend the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act and to make consequential amendments to other Acts, SC 2005, c 36, s 17.

2.

Bankruptcy and Insolvency Act, 1992, c 27, section 9.

3.

Bankruptcy and Insolvency Act, 1997, c 12, section 15.

4.

Bankruptcy and Insolvency Act, RSC 1985, c B-3, ss 14.06, 71, 81.3, 81.4, 81.5, 81.6, 86, 87, 136, 139, 141, 243, 245, 246, 247.

5.

Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, reprinted in RSC 1985, App II, No 5, ss 91, 92, 92A.

6.

Directive 006: Licensee Liability Rating (LLR) Program and Licence Transfer Process dated March 12, 2013.

7.

Oil and Gas Conservation Act, RSA 2000, c O-6.

8.

Oil and Gas Conservation Rules, Alta Reg 151/1971, Rules 1.100(2), (4), 3.012, 16.530(1).

9.

Pipeline Act¸ RSA 2000, c P-15.

JURISPRUDENCE

10.

407 ETR Concession Co v Canada (Superintendent of Bankruptcy), 2015 SCC 52.

11.

Ainsley Financial Corp v Ontario (Securities Commission), [1994] OJ No 2966 (Ont CA).

12.

Aircell Communications Inc (Trustee of) v Bell Mobility Cellular Inc, 2013 ONCA 95.

13.

Alberta (Attorney General) v Moloney, 2015 SCC 51.

14.

British Columbia (Attorney General) v Lafarge Canada Inc, 2007 SCC 23.

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15.

British Columbia v Henfrey Samson Belair Ltd, [1989] 2 SCR 24.

16.

Brown, Re, 2003 ABQB 899.

17.

Canadian Western Bank v Alberta, 2007 SCC 22.

18.

Century Services Inc v Canada (Attorney General), 2010 SCC 60.

19.

Deloitte Haskins & Sells Ltd v Alberta (Workers’ Compensation Board), [1985] 1 SCR 785.

20.

FBDB v Comm de la santé et de la sécurité du travail, [1988] 1 SCR 1061.

21.

Hamilton Wentworth Credit Union Ltd. (Liquidator of) v Courtcliffe Parks Ltd, [1995] OJ No 1482 (Ont SC).

22.

Harbert Distressed Investment Fund, LP v General Chemical Canada Ltd, [2006] OJ No 3087 (Gen Div).

23.

Harbert Distressed Investment Fund, LP v General Chemical Canada Ltd, 2007 ONCA 600, leave to appeal to SCC refused [2007] SCCA No 539.

24.

Hopedale Developments Ltd v Oakville (Town) (1964), [1965] 1 OR 259 (Ont CA).

25.

Hover, Re, 2005 ABCA 101.

26.

Husky Oil Operations Ltd v Minister of National Revenue, [1995] SCJ No 77.

27.

Lamford Forest Products Ltd, 1991 CanLII 2246 (BC SC).

28.

M & D Farm v Manitoba Agricultural Credit Corporation, [1999] 2 SCR 961.

29.

Maple Lodge Farms Ltd v Canada, [1982] 2 SCR 2.

30.

Moloney v Alberta (Administrator, Motor Vehicle Accident Claims Act), 2014 ABCA 68.

31.

Multiple Access v McCutcheon, [1982] 2 SCR 161.

32.

Newfoundland and Labrador v AbitibiBowater Inc, 2012 SCC 67.

33.

Ontario (Minister of Finance) v Clarke, 2013 ONSC 1920.

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34.

Panamericana De Bienes Y Servicios (Receiver of) v Northern Badger Oil & Gas Ltd, [1991] AJ No 575 (Alta CA).

35.

Québec (Attorney General) v Canadian Owner and Pilots Association, 2010 SCC 39.

36.

Rainville c Québec (Sous-ministre du Revenu), [1980] 1 SCR 35.

37.

Rassell, Re, 1999 ABCA 232.

38.

Re Celtic Extraction Ltd (in liquidation), [2001] Ch 475 (CA).

39.

Saskatchewan (Attorney General) v Lemare Lake Logging Ltd, 2015 SCC 533.

40.

Skyservice Airlines Inc., Re, 2011 ONSC 703.

41.

Skyservice Airlines Inc., Re, 2012 ONCA 283.

42.

Smith v Queen, [1960] SCR 776.

43.

Westerman (Re) (Trustee of), 1999 ABQB 708.

SECONDARY SOURCES

44.

“Abandonment of Assets” (1953) 53 Colum L Rev 415 at 416.

45.

Dr Janis P Sarra, “Of Paramount Importance: Interpreting the Landscape of Insolvency and Environmental Law”, Annual Review of Insolvency Law (Toronto: Thomson Reuters Canada Limited, 2013) 453.

46.

Dr Janis P Sarra, The Honourable Lloyd W Houlden & The Honourable Geoffrey B Morawetz, 2015 Annotated Bankruptcy and Insolvency Act (Toronto: Carswell, 2015) at A§2 and A§5.

47.

Dianne Saxe, Trustees’ and Receivers’ Environmental Liability Update, (1998) 49 CBR (3d) 138 at 15.

48.

Frank Bennett, Bennett on Receiverships, 3rd ed (Toronto: Thomson Reuters Canada Limited, 2011) at 6.

49.

House of Commons Debates, Evidence of the Standing Committee on Industry, 35th Parl, 2nd Sess, No 16 (11 June 1996) at 1549 to 1555 (David Tobin).

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50.

Jones & de Villars, Principles of Administrative Law, 6th ed (Toronto: Thomson Reuters Canada, 2014) at 206-207.

51.

Peter Hogg, “Constitutional Law of Canada”, 5th ed supplemented (Toronto: Thomson Reuters Canada Limited, 2007) at 16-4 – 16-10.

52.

Roderick J Wood, Bankruptcy and Insolvency Law (Toronto: Irwin Law Inc, 2009) at 467.

53.

Roy Goode, Principles of Corporate Insolvency Law, 4th ed (London: Sweet & Maxwell, 2011) at 200.

54.

Ruth Sullivan, Sullivan on the Construction of Statutes, 6th ed (Markham: LexisNexis Canada, 2014) at 274.

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