Production Enhancement Group Inc. (Re), 2011 ABQB 350

Court of Queen ’ s Bench of Alberta Citation: Production Enhancement Group Inc. (Re), 2011 ABQB 350 Date: 20110526 Docket: BK01 093889 Registry: Calgary In the Matter of the Bankruptcy of Production Enhancement Group Inc. _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C. A.

Kent _______________________________________________________ [ 1 ] On application by Quest Energy Services (Canada) Ltd. (Quest), this Court issued a Bankruptcy Order judging Production Enhancement Group, Inc. (PEG) a bankrupt. [ 2 ] PEG was in the business of providing oil and natural gas well services. The claims filed in the bankruptcies proceedings included $200,678 by Quest and $2,686,494 of unsecured claims. [ 3 ] The trustee obtained a legal opinion with respect to the Quest claim. The relevant facts surrounding that claim are as follows.

On July 16, 2009 PEG issued to Quest a Convertible Secured Debenture Agreement (the Debenture) secured by a General Security Agreement granted by PEG in favor of Quest also dated July 16, 2009 (GSA). The Debenture purports to be a Convertible Secured Debenture but there is no charging language in the Debenture which creates a security interest over the assets of PEG. The Debenture points to the GSA as creating a security interest in the assets of PEG.

Section 2 of the Debenture under the heading “Security”, says the following:

As security for the payment of the principal sum, interest and all other moneys from time to time secured hereby and as security for theperformance and observance of the covenants and agreements on the part of the Corporation herein contained, the Corporation shallexecute and deliver for the benefit of the Holder, as continuing collateral security, and shall keep and maintain in full force and effect aGeneral Security Agreement over all present and after acquired personal property of the Corporation in form and substance satisfactory tothe Holder. (The security granted pursuant to this

Section 2 above shall hereinafter collectively be referred to as the “Security”). [4]

Section 2 of the GSA sets out the obligations and the indebtedness that are to be secured by the security interest as follows: The Security Interest granted hereby secures payment and performance of the obligations, indebtedness and liability of the Debtor to theSecured Party (including interest thereon) present or future, direct or indirect, absolute or contingent, matured or not, extended orrenewed, under that certain Loan Agreement dated July ____, 2008 between the Debtor and the Secured Party and any ultimate unpaidbalance thereof and whether the same is from time to time reduced and thereafter increased or entirely extinguished and thereafterincurred again and whether the Debtor be bound alone or with another or others and whether as principal or surety (hereinaftercollectively called the “Indebtedness”).

If the Security Interest in the Collateral is not sufficient, in the event of default, to satisfy allIndebtedness of the Debtor, the Debtor acknowledges and agrees that the Debtor shall continue to be liable for any Indebtednessremaining outstanding and the Secured Party shall be entitled to pursue full payment thereof.” [5] Quest registered the security agreement against PEG at the Alberta Personal Property Registry on June 9, 2009. [6] Following receipt of the Security Opinion, the Trustee advised Quest that in the opinion of their legal counsel the purportedsecurity interests of Quest were not valid and enforceable.

After Quest provided further materials to the Trustee, the Trustee now advisesthat it is arguable that Quest has an equitable security interest and has referred the matter to this Court for decision. [7] Quest argues that notwithstanding the apparent defect in the GSA, the language of the Debenture, together with all of theother circumstances create an equitable assignment or equitable charge against all present and after acquired property of the bankrupt.The provenance of Quest’s argument begins with the statement by Lord Truro in Rodick v.

Gandell [1851] 1 De G.M., 763 at 777wherein he says: The extent of the principal to be deduced from them [the cases cited] is that an agreement between a debtor and the creditor that the debtowed shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing moneyor holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitablecharge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers. [8] Quest also notes that where moneys are granted under a potentially defective legal chattel mortgage there is nonetheless anenforceable equitable mortgage so long as the defective mortgage reflects an agreement to grant a mortgage. (Fisher v.

Brad Shaw[1902] O.J. No. 124). [9] As a result of those principles of law, Quest argues that the Debenture created an equitable charge because there is a debtcreated by the Debenture with repayment obligations on the part of PEG, there is an enforceable agreement between Quest and PEG thatPEG will deliver collateral security and keep in force a GSA and the collateral identified all present and after acquired personal propertyof PEG. Quest then argues that an equitable charge can be registered at the personal property registry.

Quest says that the PersonalProperty Security Act, RSA, 2000, CP-7 (PPSA) does not preclude the registration of an equitable charge. In 356447, British ColumbiaLtd. v.

Canadian Imperial Bank of Commerce (BC CA), [1998] BCJ No.417, the British Columbia Court of Appeal,after finding that a valid equitable assignment of funds was created said the following at paragraph 11: The introduction of the Personal Property Security Act has subjected assignments of choses in action to a new registration scheme, but noreason was suggested to us why words that created a valid assignment at equity should not be construed as creating “a security interest”for the purposes of the new regime.

In this regard, I note that section 68 (1) of the act purports to preserve the principles of equity exceptinsofar as they’re inconsistent with the statute. [10] The Alberta PPSA preserves equitable principles pursuant to section 66 (3) of the Act in like manner to that of the BritishColumbia statute.

[ 11 ] I agree that although the GSA is defective because the date is missing in

section 2, the GSA read with the Debenture creates an equitable change. That change was properly registered pursuant to the PPSA . Quest has an enforceable secured claim. Heard on the 18 th day of April, 2011. Dated at the City of Calgary, Alberta this 26 th day of May, 2011. C.A. Kent J.C.Q.B.A. Appearances: Dean Anthony Hutchison MacPherson Leslie & Tyerman LLP for the Trustee R. J. Daniel Gilborn Borden Ladner Gervais LLP for Quest Energy Services (Canada) Ltd.