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Orphan Well Association v. Trident Exploration Corp., 2022 ABKB 839

Do abandonment and reclamation obligations rank in priority to claims of municipalities for unpaid property taxes? 

Trident is a group of privately-owned oil and gas exploration and production companies and partnerships. On April 30, 2019, Trident issued a press release which advised that it had engaged in discussions with the Alberta Energy Regulator (AER) and its lenders regarding restructuring without success, and had since ceased operations and terminated all employees and contractors. The effect of Trident’s decision was to walk away from its obligations. Its licences were turned back to the AER, and its abandonment and reclamation obligations (ARO) would be assumed by the Orphan Well Association (OWA).

The OWA took the unusual step of applying to this Court for an order appointing a receiver. The primary objective of the receivership was to reduce the Trident ARO that would ultimately rest with the OWA. This was to be accomplished by selling the Trident assets to solvent oil and gas companies who were willing and able to assume environmental liability for the assets involved. The receiver sought advice and directions regarding the distribution of approximately $900,000 in remaining funds, generated through the sale. The AER/OWA contended that they should receive the funds pursuant to their super priority status recognized in recent case law. The County of Kneehill, the County of Stettler and Woodland County (the “Municipalities”) argued that they should share in the proceeds as they also have a priority arising out of unpaid municipal taxes for Trident wells, pipelines and production facilities that accrued post-receivership.

The Municipalities argued that the remaining funds should be shared with them because:

  1. This case involved competing entitlements to proceeds by entities having non-provable claims, with both claimants having a public interest mandate and neither having priority over the other;
  2. The receiver was obligated to pay property tax on Trident’s assets from its appointment to the date of sale or transfer back to the AER, as a receivership expense. Accordingly, as an officer of the Court, the receiver was bound to pay those as they accrue during the receivership; and
  3. Receivers are appointed pursuant to the Judicature Act, so the court may order an equitable division of remaining proceeds in the proportions it sees fit.

The AER/OWA did not dispute that the municipal taxes continued to accrue post-insolvency. Rather, they argued that the receiver was not required to pay the municipal taxes outside of the priority scheme because:

  1. The AER/OWA do not compete with the municipal taxes for priority. ARO is paid in priority because it is a non-monetary regulatory order, not a non-provable claim. Municipal taxes, as a non-provable claim, are subject to the priority sequence;
  2. The receiver is not liable to pay the municipal taxes because they are not “necessary costs of preservation” as the assets were not operated and payment of the taxes would not be for the benefit of all parties. In any event, it was too late for the Municipalities complain that economic assets were sold without adjustment for municipal taxes. The time for such complaints was when the sales process was presented to the Court for approval; and
  3. Fairness and equity were not justifications to disregard clear and established principles which govern insolvency.

The Court acknowledged that municipal governments provide necessary and valuable services to their communities. But it was not clear that the payment of municipal property taxes had any higher public interest component than obligations such as paying a farmer surface lease rentals for an expropriated wellsite or pipeline right-or-way post-insolvency, paying trade creditors for pre-insolvency debts, or even paying municipalities for outstanding pre-insolvency municipal taxes.

The OWA’s entitlement is addressed outside of the insolvency regime because it is a non-monetary obligation which cannot be not reduced to a provable claim through the test in Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67 [Abitibi], not because it is non-provable. Producers, like Trident, have a legal obligation to ensure their wells are safely abandoned and reclaimed. The OWA acts as a safety net to ensure that those obligations are satisfied by ensuring that reclamation work is ultimately performed. The cost is not levied to generate revenue for the program. That is why the OWA entitlements “define the contours of the bankrupt estate available for distribution”. Municipal taxes, on the other hand, are neither a non-monetary obligation nor incompatible with the Abitibi test. The purpose of municipal taxes is to generate revenue for the municipality. The only obligation on the taxpayer is to pay tax. There is no other corresponding regulatory obligation.

The Court held that payment of post-insolvency municipal taxes was not necessary to preserve Trident’s exploration and production assets. On the contrary, the non-payment of such taxes made the assets more marketable to solvent companies, and hence more likely to generate economic benefits (and taxes) for host municipalities and landowners following resumption of production. The proceeds of sale of Trident assets were from the outset intended to be used to reduce Trident’s legacy abandonment and reclamation obligations, and by extension, those of the Orphan Well program under Alberta’s scheme for management of a province and industry wide problem. The OWA applied for the receivership of Trident with that objective being clearly stated. The Court approved the proposed plan, including the sales process and individual sales, free and clear of claims and encumbrances.

Had the Municipalities taken issue with the sales process when first proposed, it is possible that municipal taxes may have been treated differently within this receivership proceeding. The Municipalities may have proposed a formula that may have been acceptable to the OWA and others, and, if not, may have been approved by the Court over the OWA’s objection. They did not do so.

Accordingly, the Court concluded that the remaining funds were to be distributed to the AER for use by the OWA.

Judge: Justice R.A. Neufeld

Counsel: Kelsey Meyer and Adam Williams of Bennett Jones for PwC as receiver; Kelly Bourassa of Blakes for ATB Financial; Gregory Plester and Curtis Auch of Brownlee for Woodlands County and Stettler County; Shauna Finlay and Moira Lavoie of Reynolds Mirth for Kneehill County; Robyn Gurofsky and Jessica Cameron of Fasken and Garrett Finegan of BLG for the OWA; and Candice Ross for the AER

Fullcase: https://canlii.ca/t/jtjk3

By Matilda Lici