Brealta Energy Inc. v. First Capital Management Ltd., 2011 ABQB 284

Court of Queen ’ s Bench of Alberta Citation: Brealta Energy Inc. v. First Capital Management Ltd., 2011 ABQB 284 Date: 20110426 Docket: BE01 406754 Registry: Calgary Between: Brealta Energy Inc. Applicant - and - First Capital Management Ltd. and Alger & Associates Inc., in its capacity as Proposal Trustee for First Capital Management Ltd. Respondent _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice G.C.

Hawco _______________________________________________________ [ 1 ] Brealta Energry Inc. (“Brealta”) and First Capital Management Ltd. (“FCM”) entered into a loan and option agreement dated March 28, 2007. Pursuant to the terms of that agreement, Brealta provided FCM with a term loan of $650,000 with interest at the rate of 12% per annum, by way of a promissory note attached as

Schedule A, thereto, and an Option to acquire shares in Oil Sands Underground Mining Corp. (“OSUM”)(“the escrow shares”). The loan and option were set to expire on the maturity date and the expiry date, both being the same date of March 28, 2009. The terms of the option agreement were fairly detailed as to exactly how the option was to be exercised. [ 2 ] The expiry date for exercise of the option was, through a number of subsequent agreements, ultimately extended to

September 26, 2010. [ 3 ] The principal of Brealta, Mr. Richard MacDermott had had an investment relationship with Mr. Robert Wilfur, the director of FCM, for some time. [ 4 ] In March of 2010, Mr. MacDermott let it be known to Mr. Wilfur that he did want to exercise his options but was told the option shares were not available at that time. [ 5 ] Brealta alleges that a number of attempts were made prior to the expiry date to communicate with Mr. Wilfur that it wished to exercise its option, but that Mr. Wilfur was “unavailable, not responsive and had become non-communicative”.

The only communication from Brealta that has been produced is an email to Mr. Wilfur dated September 15, 2010, in which Mr. MacDermott makes no mention of an intention on the part of Brealta to exercise the options. [ 6 ] On September 15, 2010, FCM filed a Notice of Intention (“NOI”) that it intended to file a proposal made under the Bankruptcy and Insolvency Act . [ 7 ] On September 16, 2010, Mr. MacDermott says he spoke with David Lewis, a representative of the Trustee under the proposal. He says that he communicated Brealta’s intention to exercise the option to Mr. Lewis but that Mr.

Lewis informed him that the option was unavailable for exercise at that time because FCM had filed the NOI. Mr. MacDermott went on in his affidavit to say that Mr. Lewis told him he would look further into the matter and would get back to him and that he never did. Mr. MacDermott further stated in his affidavit that because of what Mr. Lewis told him, Brealta refrained from taking formal steps to exercise its option prior to September 26. [ 8 ] When cross-examined on his affidavit, Mr. MacDermott stated that he spoke with Mr. Lewis because he had been referred to him by Mr. Herman who had worked for FCM. Mr.

Herman had told Mr. MacDermott that Mr. Wilfur, who Mr. MacDermott had called to speak to, was at the courthouse “filing to get protection from the courts”. Mr. MacDermott then said this: And I said, What? So I said, What does that mean for my options? He said, I have no idea. He said, You’ll have to refer – he referred me to Mr. Lewis. I phoned her [ sic ] Lewis, asked him what’s going on with them. He said, Rick, I just got the file. We’re just getting into this. Give me some time, I’ll get back to you, by all means. That was the only conversation that Mr. MacDermott had with Mr.

Lewis, although he did try to get in touch with him again, without success. [ 9 ] It should also be noted that in his cross-examination on his affidavit Mr. MacDermott said that between September 16, when he had this conversation with Mr. Lewis, and September 26, he did not courier or fax the signed Notice to Exercise to anyone because he was in no place to be able to do that. During that period he was on his farm in Saskatchewan trying to take off his harvest.

As a result, neither the signed Notice to Exercise nor the $3 per option was tendered to anyone prior to September 26, 2010. [ 10 ] On September 29, 2010, the Trustee requested the creditors of FCM, including Brealta, to submit proofs of claim “... to confirm the balance owing to each of the creditors ...”. [ 11 ] On October 8, 2010, Mr. Grant Stapon of Bennett Jones wrote to Mr. Wilfur and FCM and made a formal demand on both parties that the OSUM shares be delivered. He went on to say: “Our client is prepared to tender and submit the $3 price per share to obtain delivery of his option shares immediately.”

[ 12 ] On the same day, Mr. Doug Nishimura, of Burnet, Duckworth & Palmer replied to Mr. Stapon by email, stating: With respect to the demand in your letter regarding the options for OSUM shares, FCM is unable to comply, for several reasons. First, the demand is caught by the stay of proceedings set forth under the BIA during the pendency of proposal proceedings. Second, the condition for the exercise of the option has failed because of the proceedings.

Finally, under the loan and amending agreement dated March 18, 2010, the expiry date of the options was September 26, 2010, which has obviously passed. [ 13 ] On October 13, 2010, FCM applied for and was granted an extension by the court to file a proposal by November 29, 2010. That was subsequently extended further to January 13, 2011 and, on January 11, extended to January 31, 2011. [ 14 ] On November 3, 2010, Brealta filed a proof of claim with the Trustee for delivery of the option shares. [ 15 ] On December 7, 2010, Brealta received a Notice to Disclaim.

That notice informed Brealta that the loan and option agreement and the amending agreement were being disclaimed by FCM and that Brealta had been allowed an unsecured claim for the value of the option in the amount of $325,000. [ 16 ] On December 13, 2010, Brealta received a Notice of Disallowance from the Trustee which informed Brealta that its claim had been disallowed in its entirety because the options had never been exercised pursuant to the terms of the agreement. [ 17 ] On January 6, 2011, counsel for Brealta filed an application for an order to set aside the disallowance by the Trustee of the proof of claim filed by Brealta and an order seeking FCM and the Trustee to deliver the shares to Brealta. [ 18 ] On January 31, 2011, FCM filed its proposal.

Arguments [ 19 ] Brealta argues that the filing of the NOI itself constituted an anticipatory breach of the option agreement. By declaring itself insolvent and seeking statutory protection against its creditors, FCM reneged, repudiated and breached the option before it expired. Such an anticipatory breach of the option obviated the need for Brealta to deliver a formal exercise to notice its option. [ 20 ] Brealta says that the statement of Mr.

Nishimura on October 8 confirmed that this was indeed an anticipatory breach. [ 21 ] In the event the Court was to find that there was not an anticipatory breach, Brealta argues that the Trustee is estopped from asserting that the option expired because of both FCM’s and the Trustee’s representations that the option was not exercisable. [ 22 ] The Trustee argues that the NOI did not prohibit Brealta from exercising its option or attempting to do so. The agreement was clear as to how the options were to be exercised.

They were not and Brealta has thus no claim against FCM or the Trustee. [ 23 ] With respect to the estoppel argument, the Trustee simply says that there was nothing said by either FCM or the Trustee which persuaded Brealta to miss the expiry date. Issues 1. Was there an anticipatory breach by either FCM or the Trustee? 2. If not, was the Trustee estopped from arguing that there must be strict compliance?

Decision 1. There was no anticipatory breach, by FCM or the Trustee. 2. The doctrine of promissory estoppel is not applicable. 3. The agreement is clear as to how the option was to be exercised. It was not followed and the option has expired. Reasoning Anticipatory Breach [24] Anticipatory breach requires “a definite, unequivocal manifestation of intention on the part of the repudiator that he will notrender the promised performance when the time for it in the contract arrives.” Matthews v. Accent Lines

(1988) Ltd., 1988 ABQB 180 atpara. 37. [25] I am not satisfied that Mr. Lewis did tell Mr. MacDermott on September 16, 2010 that the option was unavailable for exerciseat that time because FCM had filed the NOI. Mr. MacDermott’s recital of the conversation in his cross-examination on his affidavit, andhis not being able to send a fax or communication between September 16 and 26 because he was in his combine, simply do not convinceme that either the statement was made nor that it was something that he relied upon to his detriment. [26] Even if I were to accept that Mr. Lewis told Mr.

MacDermott that the option was not available any longer, I would notconsider that statement to be a “definite, unequivocal manifestation of intention on the part of the repudiator that he will not render thepromised performance when the time for it in the contract arrives.” [27] In Matthews, Justice Rooke (as he then was) spoke of the antagonist, if you will, putting off Mr. Matthews. Justice Rookedid not consider attempts to put the plaintiff off in that case to be an anticipatory breach. It was not until Mr.

Hoefnagels (the antagonist)unequivocally declared that he would not honour the option to Matthews that Justice Rooke found there to be an anticipatory breach.That was not the case here. [28] Brealta seeks affirmation of its argument in Mr. Nishimura’s reply to Mr. Stapon, referred to above. Mr. Nishimura didindeed opine that the NOI prevented Brealta from exercising its option. He also said that the time for exercising the option had expired.With respect, this does not make the statements correct.

Further, he went on to say: “I have not seen any Exercise Notice as set forth inthe Loan Agreement which was delivered prior thereto. If you have such a document, could you kindly provide a copy to me.” Thesestatements were made after the expiry date had passed, so no one could have relied upon them to their detriment. [29] What happened in this case was not, in my respectful view, conduct which Professor Fridman would call “conduct whichamounts to a total rejection of the obligations of the contract.” (see G.H.L.

Fridman, “The Law of Contract in Canada”, 5th ed.(Toronto:Caswell, 2006) at p. 606. [30] With respect to whether the mere filing of an NOI is itself

an act which amounts to a total rejection of the obligations of thecontract, I am of the view that it does not do so. The filing of a NOI is but an intention to file a proposal under the Bankruptcy andInsolvency Act. It gives notice that a debtor is seeking protection under the BIA from claims against its creditors for a period of time inorder that it might avoid bankruptcy. The purpose of it is to enable the debtor to continue to carry on its business. It does not refer toFCM’s unwillingness or inability to fulfill any particular contractual obligations.

The NOI did not prevent or prohibit Brealta from filinga notice to exercise its option. What it did was to advise its creditors and others that business would carry on as usual except a personwith a claim would not be able to enforce a remedy with respect to that claim. Promissory Estoppel [31] As stated by the Supreme Court of Canada in Maracle v. Travellers Indemnity Co. of Canada, (SCC),[1991] 2 S.C.R. 50 at p. 57:

The principles of promissory estoppel are well settled. The party relying on the doctrine must establish that the other party has, by wordsor conduct, made a promise or assurance which was intended to affect their legal relationship and to be acted on. Furthermore, therepresentee must establish that, in reliance on the representation, he acted on it or in some way changed his position. [32] In so far as the statement or conduct which is to be relied upon, the Ontario Court of Appeal in Sales Promotions ServicesInc. v.

Ultramar Canada Inc. (1998), (ON CA), 2 B.L.R. (3d) 243, at para. 4 stated: In order to ground an estoppel, there must be a promise or a representation in the nature of a promise; the promise must be intended bythe promisor to affect the legal relationship between the parties; and, by the promise, the promisor must indicate that it will not insist onits strict legal rights arising from its relationship with the promisee.

Even assuming that such a promise or representation may be madeby silence, the promise must be an unequivocal representation that the promisor does not intend to enforce his strict legal rights againstthe promisee. To bring the legal doctrine into operation, the promise or representation must be "clear" or "unequivocal" or "precise andunambiguous": Treitel, The Law of Contract, 8th ed. 1991 at p. 103. [33] As with the statement of Mr. Lewis which Mr. MacDermott says was made to him to support Brealta’s argument foranticipatory breach, I am not satisfied that it was made.

If it were, it certainly does not amount to an unequivocal representation thateither FCM or the Trustee would not be intending to enforce the terms of the option agreement. [34] Mr. MacDermott may not have submitted his notice to exercise and the necessary accompanying cash because he believed itwould be futile. That does not establish grounds for succeeding on a plea of promissory estoppel. Such a belief must be based upon an“un equivocal representation” by FCM or the Trustee that neither would intend to enforce their strict legal rights against Brealta. [35] Further, if any such statement was made by Mr.

Lewis, I have even greater difficulty accepting that it was said for thepurposes of inducing Mr. MacDermott not to file his notice and tender his money. I can see nothing which can be legitimately held out asany type of a promise by Mr. Lewis that if Mr. MacDermott did not file his notice and tender his money by September 26 that theTrustee would not take the position that it was too late to do so. Conclusion [36] Brealta had agreed to lend money to FCM upon certain conditions.

Brealta was to receive 12% per annum on its money.Brealta was given the right to acquire a certain number of shares in OSUM that would today, and was then, an extremely favourableprice. Brealta did receive the money which it lent plus its 12%. It had the opportunity of acquiring the OSUM shares. It did not attempt todo so. It did not attempt to deliver the exercise. It did not tender any money. It failed to comply with the option agreement in any manner. [37] As I said in NAL GP Ltd. (Applicant) v.

BP Energy Company, BP Canada Energy and Apache Corporation (Respondents),2010 ABQB 626, at para. 16: The law is clear that the terms of an option must be strictly complied with and that time is of the essence. See 364021 Alberta Ltd. v.361738 Alberta Ltd.

(1990) CarswellAlta 208 (QB). [38] In the end result, Brealta has no claim for any shares of OSUM. It is not entitled to specific performance. It is not a securedcreditor. It is not an unsecured creditor. Heard on the 10th and 17th day of March, 2011. Dated at the City of Calgary, Alberta this 26th day of April, 2011.

G.C. Hawco J.C.Q.B.A. Appearances: Josef G.A. Krüger, Q.C. Borden Ladner Gervais LLP for the Applicant Howard A. Gorman and D.Aaron Stephenson Macleod Dixon LLP for the Respondent