NEP Canada ULC v MEC OP LLC, 2013 ABQB 540

Court of Queen ’ s Bench of Alberta Citation: NEP Canada ULC v MEC OP LLC, 2013 ABQB 540 Date: 20130917 Docket: 1201 09690 Registry: Calgary Between: NEP Canada ULC Plaintiff/Applicant - and - MEC OP LLC, MEC OP TRANSACTION I ULC and MERIT ENERGY COMPANY LLC Defendants/Respondents Corrected judgment: A corrigendum was issued on May 6, 2014; the corrections have been made to the text and the corrigendum is appended to this judgment. _ ________________________________________ ______________ Memorandum of Decision of the Honourable Madam Justice K.M. Horner _________________________________________ ______________ Background

[ 1 ] This matter came before me as a special application for a declaration that certain documents in the possession of the Plaintiff are relevant and producible for the purpose of discovery. The relief sought, in the event the application is successful, is an order confirming that the documents in the Plaintiff’s possession are producible and that the Defendants produce certain records, answer certain questions, and provide unredacted copies of a number of documents which have already been produced. [ 2 ] Merit Energy Company LLC (“Merit”) was and is a corporate entity with head offices in Texas.

Among other assets, Merit was also the holder of 100% of all stock in MEC Operating Company ULC (“MEC”), an oil and gas company which operated, among other things, oil and gas properties and pipelines in Central Alberta. [ 3 ] The Plaintiff NEP Canada ULC (“NEP”) is the purchaser of Merit’s shares in MEC. The terms of the sale are set out in a certain Share Purchase and Sale Agreement (“the SPA”) dated August 18, 2012.

The SPA closed on October 1, 2011 and NEP amalgamated with MEC, carrying on its business as NEP. [ 4 ] The SPA contained numerous representations by Merit regarding MEC’s finances, liabilities, obligations, compliance with federal and provincial laws and regulations including (but not limited to) MEC’s compliance with environmental and other regulations and the state of MEC’s shut-in, suspended, abandoned, capped, injection and disposal wells. [ 5 ] In the course of closing, Merit transferred a significant amount of electronic data to MEC to allow for ongoing operations.

There is also data contained in a number of computers which were included among the assets sold by Merit. Merit now exerts a claim of privilege over a number of these records (the “Contested Data”). Although this data is in the hands of NEP, NEP has agreed not to review them pending the outcome of the within application. [ 6 ] In the underlying action, NEP alleges that Merit is in breach of several of its representations set out in the SPA, having failed to disclose significant non-compliance with regulatory and environmental laws, specifically: a.

Pipelines licensed for sweet fluid carrying sour fluids in the Leduc/Devon area of Alberta; b. Undisclosed surface casing vent flow locations; c. Incorrect and undisclosed well status information; d.

Incorrect and undisclosed facility status information. [ 7 ] NEP alleges that Merit had knowledge of all these issues (hereinafter the “Disclosure Issues”) prior to the closing of the SPA, such that its failure to disclose this information amounts to fraud, conspiracy, unjust enrichment and other claims including but not limited to breach of the SPA. [ 8 ] The parties are currently in the course of discovering records. The issue on this application is whether or not Merit can claim privilege over electronic records which are in the possession or control of NEP.

Merit’s position is that these records were inadvertently included with the delivery of MEC’s business documents but are subject to solicitor-client privilege. NEP’s position is that Merit shared these documents with MEC and, as the owner of MEC, NEP is entitled to review (and legally obligated to produce) the records which are in their possession. NEP is also arguing that any records that were created by or sent to MEC personnel are the property of NEP. [ 9 ] NEP has characterized the information in issue (“the Contested Data”) as falling within one of the following broad categories: a.

Communications to or from Merit and external legal counsel in relation to the SPA, the Disclosure issues, or other matters; b. Communications from or to internal legal counsel (specifically, Mr. Moffitt, corporate counsel to Merit, and Mr.

Hagge, general counsel to Merit) relating to the SPA, the Disclosure Issues or other matters. [ 10 ] In the course of bringing this matter before the Court, Merit has agreed to release to NEP all of the Contested Data except records of communications between Merit and counsel (internal or external) specifically in relation to the SPA and the Disclosure Issues. [ 11 ] To facilitate this, MEC and NEP have agreed that NEP may review any records which do NOT arise from a search based on the following: a.

Records referencing any of the names or selected key words which would tend to indicate that particular record was created for the purpose of seeking or providing legal advice in relation to the SPA or Disclosure Issues. The names and key words are as set out in Appendix A to NEP’s brief of argument in this application; and b. Any emails that contain subject lines which would tend to indicate that the email in question was created for the purpose of seeking or providing legal advice in relation to the SPA or Disclosure Issues.

The specific subject lines are as set out in Appendix B to NEP’s brief of argument in this application. [ 12 ] Despite this concession by Merit, NEP continues to take the position that any record in NEP’s possession belongs to NEP as a result of the common interest exception to the rules of privilege, which states that where two parties with a common interest share otherwise privileged information, that sharing does not amount to a waiver of the privilege with regard to third parties but as between themselves there is no privilege.

NEP maintains that there was a common interest between Merit and MEC in relation to the SPA and negotiations leading up to it prior to the closing of the SPA and as MEC continues to exist as an amalgamated company within NEP, MEC continues to have rights over this information. Further, NEP asserts that any legal advice given or sought from internal legal counsel (Moffitt and Hagge) is not subject to solicitor-client privilege as neither Moffitt nor Hagge are licensed solicitors in Alberta.

Issues [ 13 ] The overarching issue is whether or not records within the Contested Data, which contain or seek legal advice from internal or external counsel, is subject to privilege which excludes NEP. In order to determine the answer to that issue, a number of sub-issues must first be determined. Specifically: a. Were Moffitt and Hagge solicitors whose advice attracts privilege? b. If so, then as regards Moffitt, Hagge and the external solicitors, who was the client? c. If MEC was a client, with rights to have access to the Contested Data, does it retain those rights post-closing?

Discussion Moffitt and Hagge/Client [ 14 ] Solicitor-client privilege is the strongest form of confidentiality in law. It was developed for the purpose of facilitating full and frank disclosure as between a lawyer and his client. Refinements to the law of privilege have led to the creation of other kinds of legal privilege – most notably, “litigation privilege” – and narrowed the absolute privilege that is solicitor-client (or “legal advice”) privilege. [ 15 ] Solicitor client privilege was once thought to belong to the solicitor.

This is no longer the case: it is the client who “owns” the privilege and the solicitor cannot, except subject to instructions from the client, waive, sell or give away the privilege. [ 16 ] Moreover, solicitor-client privilege does not apply to all communications between a lawyer and client. Only those communications which seek or provide legal advice, and which are intended to be confidential, are privileged. Communications on a business or other issue will not be privileged. [ 17 ] It is certain that in order to attract solicitor-client privilege, there must be a solicitor.

NEP has asserted that Moffitt and Hagge are not solicitors whose communications might attract privilege because they are not subject to regulation as lawyers in Alberta. NEP has cited Minister of National Revenue v Newport Pacific Financial Group SA (2010), 34 Alta.

LR (5th) 285 (QB) and Procter & Gamble Co. v Calgon Interamerican Corporation , [1980] FCJ No. 1141 in support of this proposition. [ 18 ] The Procter & Gamble decision is distinguishable from the present case in that there, the communications over which privilege was being claimed arose from communications with a patent agent, not a lawyer. [ 19 ] Newpor t, on the other hand, deals with privilege over communications exchanged between a Canadian client, a Bahamian lawyer and various people employed by Newport Pacific Financial. The client, represented by a Mr.

O’Byrne, a lawyer in Edmonton, retained the services of Renee McKay, a Bahamian lawyer, to help set up an offshore trust. Later, O’Byrne transferred the trust from the Bahamas to Newport, a company which offered offshore financial services to its clients. In the course of conducting an audit of Newport, the Canadian Revenue Agency (“CRA”) seized a number of documents and electronic records. Individual clients of Newport claimed privilege over these documents but eventually all but two clients (Edmonton lawyer Casey O’Byrne and Sunny Shores Ltd., represented by O’Byrne) abandoned those claims. Mr.

O’Byrne’s privilege claim was that: … various communications between them and Newport are subject to solicitor client privilege because: 1. They believed Michael Ritter, the CEO and guiding mind of Newport, to be a lawyer; 2. They believed that other persons identified with Newport, including Dr. Leslie Green, were lawyers; 3. There were lawyers on staff at Newport such as Ms. Spencer and Sharon Crooks; 4. There were articling students at Canadian Off Shore Financial Services, a related entity to Newport, who were believed to be articled to staff lawyers at Canadian Off Shore Financial Services; 5.

The records relate to transactions involving Mr. O'Byrne and Sunny Shores Ltd. and they are protected because Mr. O'Byrne was the solicitor for Sunny Shores Ltd.; and 6. The names of beneficiaries of offshore trusts are confidential, having been disclosed firstly to a Bahamas lawyer and then to NPC. [ 20 ] Graesser J. determined that none of the communications in issue were privileged, and noted, at para. 43: In my view, the essence of solicitor client privilege is that it must involve a lawyer who is regulated as part of the legal profession. People can seek advice from anyone they choose.

But if they want legal advice, and the protection of solicitor client privilege with respect to their communications for the purpose of obtaining legal advice, the person they communicate with must be part of the recognized legal profession in the jurisdiction where they seek the advice. [ 21 ] Mr. O’Byrne had initially retained the service of a Bahamian lawyer, Renee McKay, but her files were eventually sent to Newport. The facts were that neither Ritter nor Green were lawyers, and Newport was not a law firm, even though it employed lawyers.

Sharon Crooks was a lawyer employed by Newport and licensed to practice in Alberta, thus communications with her could attract privilege. However, Mr. O’Byrne had never communicated directly with Ms. Crooks for the purpose of giving or receiving legal advice.

Accordingly, no privilege attached to his communications with Newport. As to his communications with Ms. McKay, they would have been privileged but lost that status when they were disclosed to Newport, a third party non-lawyer. [ 22 ] In short, Newport is not authority for the proposition that only communications with lawyers licensed to practice in a particular jurisdiction can attract privilege. The Court noted that communications with Ms. McKay would have been privileged even though she was not licensed to practice in Alberta: No disclosure of any communications between Mr. O'Byrne and Ms.

McKay in the Bahamas is sought here. So long as she was a barrister and solicitor in the Bahamas at the time of the communications, communications for the purposes of legal advice would be privileged. The fact that such communications might be physically located in Alberta would not by itself cause the privilege to be lost. If such communications remained in Mr. O'Byrne's possession, or in the possession of Alberta lawyers who were given the communications for the purpose of giving him legal advice here, the documents would still be privileged: Mutual Life v.

A.G. , (1988), 88 D.T.C. 6511 . [ 23 ] In short, to the extent that Moffitt and Hagge were lawyers, licensed to practice law in Texas, any legal advice given by them (even advice given in Alberta) could attract privilege. [ 24 ] It is also of note that neither Moffitt nor Hagge were “just” in-house lawyers for the Merit group of companies. Moffitt, for example, was corporate counsel for Merit, but also acted as Vice-President of Merit and Vice-President of MEC. He participated in the negotiations leading to the SPA and signed the SPA on behalf of both Merit and MEC.

NEP has argued that due to his non-legal work for Merit, and particularly due to his position as VP of MEC, communications between him and Merit do not attract privilege or, if they do, the privilege is waived in that disclosure to him is disclosure to MEC and, as the owner of MEC, NEP is entitled to any information disclosed to MEC, pre- or post-closing. [ 25 ] Modern business requires that the separate identity of different legal persons or entities be maintained. There is a significant difference between the owner of a company and the company itself.

Where an individual fills more than one role within a company or group of companies, the mere fact that the individual may happen to be a lawyer does not clothe all his acts with privilege. On the contrary, persons such as Messrs. Moffitt and Hagge are recognized as wearing several different “hats” and privilege will only arise when they are acting in their capacity as lawyers, giving advice or seeking instruction, to either Merit or MEC. [ 26 ] NEP did not simply purchase the assets of MEC from Merit, it purchased 100% of the shares of the corporation.

Nor did the closing of the share sale result in the discontinuance of MEC as an identifiable legal entity. This is due to the fact that immediately after purchasing MEC, NEP and MEC were amalgamated, pursuant to the Alberta Business Corporations Act, RSA 2000, c. B-9 . The legal effect of amalgamation is that where 2 or more companies amalgamate, each one continues to exist as one amalgamated corporation.

As such, NEP has argued, MEC still exists and is unchanged from its pre-sale, pre-closing, pre-amalgamated status such that any rights it had with regard to privileged information have become the rights of the amalgamated corporation. [ 27 ] In support of this proposition, NEP has argued that Moffitt, Hagge and the external counsel who acted for Merit in the SPA negotiations, Heenan Blaikie (hereinafter collectively referred to as “the SPA lawyers”) have all at one time acted as solicitors for MEC, either jointly with Merit or for MEC alone, and that at all times leading up to the closing of the sale there was a common interest as between MEC and Merit which survived the closing.

Accordingly, NEP has stepped into MEC’s shoes, such that Merit cannot claim privilege over documents generated in relation to those common interests. MEC did not at any point relinquish its interest in the privilege over the Contested Data, nor has MEC ceased to exist such that its privilege rights were terminated.

MEC and NEP amalgamated, and the legal effect of that is that both MEC and NEP continue to exist, albeit under the name of NEP. [ 28 ] Merit, on the other hand, takes the position that Merit, and Merit alone, was the client with regard to the SPA negotiations and is therefore the sole holder of any privilege arising in relation to solicitor-client communications regarding the SPA negotiations.

They argue that whether or not the SPA lawyers performed legal work for MEC in the past, the privity of the lawyer-client relationship between Merit and the SPA lawyers in regard to the transaction giving rise to the SPA is not affected. [ 29 ] The evidence put forward by the parties in this matter does not disclose any clear intent on the part of Merit, at any time prior to the closing, to exclude Merit from sharing privilege with MEC over the Contested Data.

On the contrary, MEC played a role in the SPA negotiations and appears as a party to the SPA, rather than merely its subject. [ 30 ] In the absence of a formal joint retainer it is clear to this court that Merit and MEC sought and received legal advice from all of Moffitt, Hagge and Heenan Blaikie and shared information between themselves in the common interest of negotiating the SPA and its closing. As such, Merit cannot now exclude MEC from the Contested Data on the basis that Merit alone was the client.

Rights of Privilege Post-Closing [ 31 ] Merit further takes the position that despite their position that MEC’s participation in the negotiations leading up to the SPA was as a separate entity, and despite its status as a named party to the SPA, and the further fact that confidential and privileged information flowed back and forth between the SPA solicitors, Merit and MEC, any common interest MEC had in regard to the Contested Data vanished upon closing, when MEC became adverse in interest to Merit.

Merit has described this as being on the “selling team” until closing, then moving to the “buying team” immediately after closing.

Accordingly, they say, even if MEC continues to exist as part of the amalgamated NEP, and even if MEC had rights to the privileged data, its change in interest is the point at which it ceases to be entitled to have access to the Contested Data as a common interest partner with Merit, and joins NEP as an adverse party with no rights to Merit’s privileged information. [ 32 ] Merit has not been able to point to any Canadian authority in support of this line of argument but has relied on the reasoning of the Court of Appeals of New York in Tekni-Plex v Meyner and Landis , 674 N.E. 2d 663 .

In that case, the Court addressed the issue of

who controls solicitor client privilege on post-closing documents. Tang was the owner of Tekni-Plex. Tang sold Tekni-Plex to Acquisition, a company that had been created as a shell corporation to hold Tekni-Plex and continue its operations. A dispute arose between the seller, Tang, and the buyer, Acquisition. Tang retained the services of Meyner and Landis (“M&L”), a firm which had often acted for both Tang and Tekni-Plex before Acquisition bought it (“old” Tekni-Plex).

Upon Tang’s retainer of M&L to represent him as vendor in the dispute with Acquisition as buyer, “new” Tekni-Plex applied for an Order: 1. enjoining M&L from representing Tang in any action against new Tekni-Plex, 2. enjoining M& L from disclosing to Tang any information obtained from old Tekni-Plex, and 3. ordering M& L to return to new Tekni-Plex all of the files in the law firm's possession concerning its prior legal representation of old Tekni-Plex. [ 33 ] Merit has invited this Court to adopt the following statements of law from Tekni-Plex : ... new Tekni-Plex did not succeed to old Tekni-Plex’s right to control the attorney-client privilege.

New Tekni-Plex’s misrepresentation and breach of warranty claims do not derive from the rights it inherited from old Tekni-Plex but from the rights retained by the buyer, Acquisition, with respect to the transaction. Under the Merger Agreement, moreover, the rights of old Tekni-Plex with regard to disputes arising from the merger transaction remain independent from – and, indeed, adverse to – the rights of the buyer.

During this dispute stemming from the merger transaction, then, new Tekni-Plex cannot both pursue the rights of the buyer (Acquisition) and simultaneously assume the attorney-client rights that the buyer’s adversary (old Tekni-Plex) retained regarding the transaction. (at 671) [ 34 ] And: ... To allow new Tekni-Plex access to the confidences conveyed by the seller company to its counsel during the negotiations would, in the circumstances presented, be the equivalent of turning over to the buyer all of the privileged communications of the seller concerning the very transaction at issue.

The parties here, moreover, recognised the community between the selling shareholder and his corporation and expressly provided that it be preserved in any subsequent dispute regarding the acquisition. (at 671) [ 35 ] The Court ultimately concluded that: To allow new Tekni-Plex access to the confidences conveyed by the seller company to its counsel during the negotiations would, in the circumstances presented, be the equivalent of turning over to the buyer all of the privileged communications of the seller concerning the very transaction at issue.

The parties here, moreover, recognized the community between the selling shareholder and his corporation and expressly provided that it be preserved in any subsequent dispute regarding the acquisition. Indeed, to grant new Tekni-Plex control over the attorney- client privilege as to communications concerning the merger transaction would thwart, rather than promote, the purposes underlying the privilege. (at 671) [ 36 ] These principles, however, are out of context. The law on the passage of privilege in a share purchase agreement was set out by the US Supreme Court in Commodity Futures Trading Commission v.

Weintraub , 471 U.S. 343 (1985) (“ Weintraub ”), when it said: … when control of a corporation passes to new management, the authority to assert and waive the corporation's attorney-client privilege passes as well. New managers installed as a result of a takeover, merger, loss of confidence by shareholders, or simply normal succession, may waive the attorney-client privilege with respect to communications made by former officers and directors.

Displaced managers may not assert the privilege over the wishes of current managers, even as to statements that the former might have made to counsel concerning matters within the scope of their corporate duties. (at 349) [ 37 ] U.S. case law subsequent to Tekni-Plex has clarified that the New York Court of Appeals was not attempting to derogate from the basic principles set out in Weintraub , and in fact has tended to confine Tekni-Plex to its facts.

Foremost among those facts is that the agreement between Tang and Acquisition contained wording that suggested an intention on Tang’s part to retain exclusive rights to privilege concerning the legal advice surrounding the sale. Hechinger et al v Fleet Retail et al 285 BR 601 . [ 38 ] Merit acknowledges the impact of the Merger Agreement in Tekni-Plex on the court’s analysis.

It submits that the SPA here similarly contemplates a reservation of community interest for post-closing disputes. [ 39 ] The court in Tekni-Plex does not set out the precise wording of the agreement that leads it to conclude that new Teckni-Plex became adverse in interest to old Tekni-Plex except to say that the agreement contained representations and warranties that were the subject matter of the arbitration... and further that the agreement provided that the seller would indemnify the buyer for any misrepresentation or breach of warranty made by the seller or the sold company, old Tekni-Plex. [ 40 ] The court concluded that the parties contemplated a unity of interest between old Tekni-Plex and Tang should a dispute arise between Tang and Acquisition regarding the representations and warranties. [ 41 ] Here however,

article 7.1 of the SPA makes it clear that in the case of a Merit default, it agrees to be liable to NEP and its Related Entities of which MEC is one. Post-closing MEC was deemed to be a Related Party of NEP. Using the same language as Tekni- Plex, the seller is indemnifying the buyer and the buyer expressly includes old MEC. Therefore, the SPA here does not contemplate an ongoing community of interest between Merit and MEC in the event of a post-closing dispute and the reasoning of Tekni-Plex does not apply. [ 42 ] A set of facts more analogous to the case at bar is In re Santa Fe Trail Transp.

Co., 121 BR 794 - Bankr. Court, ND Illinois 1990; 121 B.R. 794 (1990): Prior to July 6, 1984, SFTT was a wholly-owned subsidiary of SFI. On July 6, 1984, SFI sold the stock of SFTT to SFTT, Inc. ("SFTT,

Inc."), which was owned by Avery Eliscu and Leonard Lewensohn. It is undisputed that SFI's legal department was counsel to both the parent SFI and the subsidiary SFTT prior to the Closing... (at 796) … SFI's in-house counsel served as counsel for both SFI and SFTT prior to the sale of SFTT. It is clear to the court that during those days prior to the Closing no one in the legal department of SFI thought in terms of the privilege as respects SFI and SFTT or intended for the privilege to exist as between SFI and SFTT. (See Affidavit of Donohoe).

The claim of privilege as to those outside the family is a totally different problem. SFI made a conscious choice to have separate entities within its family and to have these separate entities represented by its lawyers. The officers of these separate corporations must have consented to this arrangement either by inaction or by taking advantage of the counseling provided by the legal department. The lawyers as officers of the parent SFI must also be deemed to have consented to this arrangement by their actions.

If indeed there was ever an intent that a privilege exist, once the controversy arose between the jointly represented parties (SFI and SFTT) that the privilege could not be claimed for the period prior to the Closing. SFI does not now have the power or authority to withhold the Documents prepared on or before the Closing and prevent the Trustee from examining them.

Moreover, what went on before the Closing must be disclosed if for no other reason than the fact that SFI's lawyers know all about SFTT before the Closing and so should the lawyers for SFTT know all about SFI. (at 799-800) [ 43 ] The same reasoning should apply in this matter. The fact that, in Santa Fe, SFTT was bankrupt does not affect the outcome. The privilege was shared by SFI and SFTT, and at least insofar as SFTT is concerned, passed along with control of that corporation to the Trustee in Bankruptcy.

Conclusion [ 44 ] Merit and MEP, as the result of sharing the services of both in-house and external counsel in the course of their actions prior to the closing, held a common privilege over the Contested Data. When Merit sold MEC to NEP, they could have inserted a provision into the SPA under which any rights MEC had to exercise or waive privilege over documents relating to the SPA negotiations would terminate on closing, leaving Merit in sole possession of the privilege. They did not.

On the contrary, Merit forwarded the documents to the newly amalgamated company which, despite the name change, was a continuation of the legal persona of MEC. Accordingly, Merit cannot claim privilege over the Contested Data as against the amalgamated company. The documents in issue belong to and are producible to and by NEP in this action. Heard on the 28 th day of March, 2013. Dated at the City of Calgary, Alberta this 17 th day of September, 2013. K.M. Horner J.C.Q.B.A. Appearances: Lenard M. Sali, Q.C. for the Plaintiff Michael Mysak for the Plaintiff Roger F. Smith and Kelly Moffet-Burima

for the Defendants D. Robb Beeman for the Defendants _______________________________________________________ Corrigendum of the Memorandum of Decision of The Honourable Madam Justice K.M. Horner _______________________________________________________ At the end of paragraph [43] delete the comma following the last word “Bankruptcy” and insert a period.