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A lawsuit launched by a bankrupt natural gas producer’s trustee that alleges Perpetual Energy Inc. contributed to the producer’s failure can proceed, an Alberta judge has ruled.

However, a simultaneous claim against Perpetual’s chief executive officer related to the failure of Sequoia Resources Corp. was dismissed, along with other parts of the trustee’s claim.

PricewaterhouseCoopers, the trustee in the bankruptcy of Sequoia, sued Calgary-based Perpetual and its CEO, Susan Riddell Rose, arguing that they knew assets they agreed to sell to Sequoia in 2016 would sink the buyer, and that the deal was not done as an arm’s-length transaction. Sequoia bought a Perpetual division that had thousands of aging gas wells along with nearly $134-million worth of reported environmental liability.

The suit, filed a year ago, also charged that Ms. Riddell Rose benefited personally from the deal, in which Sequoia, founded by financiers Harold Wang and Wentao Yang, paid $1.

She and the company applied last year to have the cases tossed out, arguing that Perpetual’s transfer of assets to Sequoia in 2016 was done properly and that the suit was an “opportunistic” attempt to place the blame and financial burden of the case on an asset seller amid growing public policy concern over unfunded environmental liabilities in the oil patch. Perpetual argued it went to great lengths to bolster Sequoia’s odds of thriving, including providing a gas-price risk management contract and office space.

Justice D. Blair Nixon ruled on Thursday that the trustee can pursue its case against the company because there wasn’t sufficient evidence for a summary dismissal. That part of the case alleges that the deal was done at well under the value of the assets to free Perpetual from the heavy abandonment obligations.

However, a release signed between the parties in the sale was done properly and bars the trustee from seeking the claim against Ms. Riddell Rose, he said. In addition, he noted that the negotiations were done by experienced deal-makers with sophisticated legal counsel on both sides.

PricewaterhouseCoopers has asked the judge to annul the 2016 sale. In absence of that, it sought $217-million in damages. Perpetual has a market capitalization of just $14-million.

Sequoia’s bankruptcy in March of 2018 brought into sharp focus a growing problem of underfunded cleanup liabilities in the Canadian oil industry, a crisis The Globe and Mail has reported on in depth. The insolvency left the Alberta Energy Regulator (AER) with a cleanup bill of $225-million. Some of the spent wells could end up in the province’s overburdened orphan well fund.

Ms. Riddel Rose said she and her company emerged mostly victorious in the matter, with the judge dismissing the bulk of the claims. She may decide to appeal the remaining matter, she said. “We had requested and filed a summary dismal application on the basis of one issue and that was whether the transaction had occurred at arm’s length. It’s very clear in [the judge’s] later arguments that the aggregate transaction occurred at arm’s length," she said.

For its part, the trustee will take time to consider the ruling and decide on its next move, said Paul Darby, the partner with PwC in charge of the case.

The company’s acquisition of Perpetual’s assets formed its foundation, and Sequoia subsequently acquired other assets despite having an asset-to-liability rating below the AER’s accepted minimum. Sequoia was able to acquire more wells by convincing the regulator that its financial plan was solid.

The plan assumed that natural gas prices would remain high enough to allow the cash flow from production to fund the cleanup of wells as they petered out. Instead, prices tumbled and the company collapsed.

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