Kasten Energy Inc. v. Shamrock Oil & Gas Ltd., 2013 ABQB 63

Court of Queen ’ s Bench of Alberta Citation: Kasten Energy Inc. v. Shamrock Oil & Gas Ltd., 2013 ABQB 63 Date: 20130128 Docket: 1203 15035 Registry: Edmonton Between: Kasten Energy Inc. Applicant - and - Shamrock Oil & Gas Ltd. Respondent _______________________________________________________ Memorandum of Decision of the Honourable Mr.

Justice Donald Lee _______________________________________________________ Introduction [ 1 ] This is an application by Kasten Energy Inc. ("Kasten" or "Applicant") against Shamrock Oil & Gas Ltd. ("Shamrock" or "Respondent") seeking an Order of this Court, as a secured creditor, for the appointment of a Receiver and Manager of the Respondent's assets and undertaking. Facts

[ 2 ] Kasten is incorporated in Alberta as body corporate involved in the business of exploring and developing oil and gas; and a successor in interest to Premier CAT Service Ltd. ("Premier CAT"). [ 3 ] Shamrock is incorporated in Alberta and has a petroleum and natural gas lease used to develop an oil well located at 2-02-90-13-W5 in the Sawn Lake region of Red Earth, Alberta ("Sawn Lake Well"). [ 4 ] The Respondent, Shamrock entered into a contract with Premier CAT on or about June 1, 2010 which required Premier CAT to construct a road to Shamrock's well site.

Following services provided under the contract, Shamrock became indebted to Premier CAT in the principal sum of $567,267.76.

The debt was payable 60 days from the date of invoice at the interest rate of 24% per annum. [ 5 ] On or about July 22, 2010, a General Security Agreement ("GSA") was granted by Shamrock to Premier CAT for a security interest in all present and after acquired personal property of Shamrock as security for repayment of the outstanding debt. [ 6 ] By a Debt Assignment Agreement dated January 20, 2011 ("Debt Assignment"), Premier CAT assigned Shamrock's outstanding debt, along with the underlying security, to Kasten.

The registration of the GSA at the Personal Property Registry was amended on February 4, 2011 to delete Premier CAT and substitute Kasten as the secured creditor.

As a result, Shamrock became indebted to Kasten, the successor in interest to Premier CAT. [ 7 ] As of July 30, 2012, the outstanding indebtedness of Shamrock to Kasten was $777,216.26 based on the amount owed to Premier CAT at the date of the Debt Assignment, plus accrued interest at the agreed rate of 24% per annum. [ 8 ] On or about October 31, 2011, Shamrock issued a Notice of Intention to Make a Proposal pursuant to the Bankruptcy and Insolvency Act, RSC 1985, c B-3, s 50.4 [ BIA ]. Later, on November 25, 2011, Shamrock submitted a BIA ,

Part III, Division 1 Proposal addressed to all its secured and unsecured creditors. Under the Proposal, Stout Energy Inc. ("Stout"), a grandparent company to Shamrock would retain BDO Canada Limited as proposal trustee; and Stout would operate the Sawn Lake Well under a joint operating agreement with Shamrock.

This agreement contemplated that after recovery of Stout's capital investment, 80% of the net revenue generated from operations would be paid to secured creditors until full payment while unsecured creditors would receive 20% until full payment. [ 9 ] At a meeting of Shamrock's creditors convened by the trustee on December 15, 2011, Kasten, a secured creditor voted against the proposal but all the unsecured creditors voted in favour of the proposal. Subsequently, on January 31, 2012, Shamrock made an application to the Court of Queen's Bench for an approval of the Proposal.

Kasten opposed the application before Master Breitkreuz, the presiding Registrar. Ultimately, the Proposal was approved by the Court. [ 10 ] On February 25, 2012, a Demand for Payment was issued to Shamrock on Kasten's instruction, along with a Notice of Intention to Enforce a Security, pursuant to the BIA , s 244. The total amount of indebtedness as at this demand date was $760,059.18. As of October 9, 2012, the indebtedness had climbed to $799,595.06 taking into account the sum of $45,130.58 which was the only cheque that Kasten received from Shamrock since the Court approved the Proposal.

Issue [ 11 ] The issue before me is whether a Receiver and Manager of Shamrock's assets and undertaking should be appointed. Law [ 12 ] The test for the grant of an Order of this Court appointing a Receiver is set out in the Judicature Act , RSA 2000, c J-2, s 13(2) which provides that:

An order in the nature of a mandamus or injunction may be granted or a receiver appointed by an interlocutory order of the Court in all cases in which it appears to the Court to be just or convenient that the order should be made, and the order may be made either unconditionally or on any terms and conditions the Court thinks just.

Parties' Positions and Analysis [ 13 ] Both parties agree that the factors that may be considered in making a determination whether it is just and convenient to appoint a Receiver are listed in a non-exhaustive manner in Paragon Capital Corporation Ltd v Merchants & Traders Assurance Co , 2002 ABQB 430 at para 27 , 316 AR 128 [Paragon Capital], citing from Frank Bennett, Bennett on Receiverships , 2nd ed (Toronto: Thompson Canada Ltd, 1995) at 130] to include:

a) whether irreparable harm might be caused if no order were made, although it is not essential for a creditor to establish irreparable harm if a receiver is not appointed, particularly where the appointment of a receiver is authorized by the security documentation;

b) the risk to the security holder taking into consideration the size of the debtor's equity in the assets and the need for protection or safeguarding of the assets while litigation takes place;

c) the nature of the property;

d) the apprehended or actual waste of the debtor's assets;

e) the preservation and protection of the property pending judicial resolution;

f) the balance of convenience to the parties;

g) the fact that the creditor has the right to appoint a receiver under the documentation provided for the loan;

h) the enforcement of rights under a security instrument where the security-holder encounters or expects to encounter difficulty with the debtor and others;

i) the principle that the appointment of a receiver is extraordinary relief which should be granted cautiously and sparingly;

j) the consideration of whether a court appointment is necessary to enable the receiver to carry out its' duties more efficiently;

k) the effect of the order upon the parties;

l) the conduct of the parties;

m) the length of time that a receiver may be in place;

n) the cost to the parties;

o) the likelihood of maximizing return to the parties;

p) the goal of facilitating the duties of the receiver. See also, Lindsey Estate v Strategic Metals Corp, 2010 ABQB 242 at para 32, aff'd 2010 ABCA 191; and Romspen InvestmentCorporation v Hargate Properties Inc, 2011 ABQB 759 at para 20. Kasten's Submissions [14] The Applicant submits that the evidence before this Court is that since the Proposal was approved, the expenses on Shamrock'swell production have exceeded revenues by a substantial margin such that it's unlikely that Shamrock would be able to pay theoutstanding indebtedness in a timely manner.

The revenue accruing from the Sawn Lake Well, which is Shamrock's primary asset, hasnot been directed at paying the debt owed Kasten. [15] Kasten contends that it has the right to appoint a Receiver under the GSA (at para 8.2. It notes that on the basis of the evidence inthis case, Shamrock is insolvent and this situation is not improving.

The risk of waste under the joint operating agreement is palpablyreal as Stout is spending substantial amount of money as expenses for well operations while channelling revenues in a selective manner.Kasten submits that irreparable harm may result if a Receiver is not appointed, pending judicial resolution of this matter, to properlymanage and preserve the value of the well and its associated lease, as well as to distribute revenues equitably to all interested parties. [16] Kasten argues that the balance of convenience favours the appointment of a Receiver who would be better positioned todistribute revenues equitably to all interested parties and creditors since Shamrock is unable to comply with the payment schedule.Kasten reiterates that nothing demonstrates its good faith in pursuit of its legitimate interest to get paid the debt owed more than thepatience it has displayed towards Shamrock for nearly two years. [17] The Applicant notes that Shamrock's argument on the issue of whether the GSA covers the oil and gas in the ground along withthe right to extract the minerals distracts from the main issue of whether this Court should appoint a Receiver in the circumstances of thismatter.

Kasten argues that there is no doubt that a Crown oil-and-gas lease is a contract that contains a profit à prendre, which is aninterest in land: Amoco Canada Resources Ltd v Amax Petroleum of Canada Inc, 1992 ABCA 93 at para 10, [1992] 4 WWR 499.Nevertheless, leases have a dual nature as both a conveyance and a commercial contract; and as such, are subject to normal commercialprinciples: Highway Properties Ltd v Kelly, Douglas and Co Ltd, (SCC), [1971] SCR 562 at 576, [1972] 2 WWR 28.The contract is assignable and subject to seizure.

Shamrock's Submissions [18] The Respondent Shamrock submits that Kasten has not demonstrated that irreparable harm may result if this Court refuses toappoint a Receiver. Instead, Stout has injected huge sums of money to improve the revenue potential of the Sawn Lake Well. Shamrockcontends that if a Receiver is appointed, Stout may cease funding operations and oil and gas production will cease.

Further, Shamrocksays that it had also initiated a sale process and does not perceive any risk to Kasten while waiting for the completion of that process. [19] Shamrock argues that by nature, the property involved in this case calls for a continuous operation by Stout and itself that arebetter equipped in developing and operating oil well than a Receiver, probably unfamiliar with the oil business. It notes that the SawnLake Well cannot be moved from its present location and there is no evidence of waste regarding the well.

Shamrock apprehends thatKasten's motivation is "not a good faith pursuit of repayment of debt, but rather an attempt to obtain the Sawn Lake Well." Should a Receiver be Appointed in this Case?

[ 20 ] The Alberta Court of Appeal notes in BG International Limited v Canadian Superior Energy Inc , 2009 ABCA 127 at paras 16-17 that a remedial Order to appoint a Receiver "should not be lightly granted" and the chambers judge should: (

i) carefully explore whether there are other remedies, short of a receivership, that could serve to protect the interests of the applicant; (ii) carefully balance the rights of both the applicant and the respondent; and (iii) consider the effect of granting the receivership order, and if possible use a remedy short of receivership. [ 21 ] The security documentation in the present case authorizes the appointment of a Receiver (GSA, para 8.2).

Thus, even if I accept the argument that the Applicant Kasten has not been able to demonstrate irreparable harm, that itself would not be determinative of whether or not a Receiver should be appointed in this matter. It is not essential for a creditor to establish irreparable harm if a receiver is not appointed: Paragon Capital at para 27. I am also not persuaded by Shamrock's suggestion that it is probable that Stout may cease funding its operations and this development would result in irreparable harm which may be avoided by the Court's refusal to appoint a Receiver.

In my view, such a cessation of funding by Stout would likely amount to a breach under the joint operating agreement and Shamrock could accordingly, seek appropriate remedy. This factor or consideration should not stand in the way of an appointment of a Receiver, if it is otherwise just to do so. [ 22 ] Shamrock objects to the appointment of a Receiver based on the nature of the property and the probability that a court-appointed Receiver may lack familiarity with oil well development and operation.

However, this concern is not insurmountable, given the broad management authority and discretion that a court-appointed Receiver would possess to enable it do everything positively necessary to ensure that the operation of the relevant oil well continues in a productive and efficient manner. [ 23 ] In terms of apprehended or actual waste, there is no concrete evidence before this Court one way or the other. However, it is apparent that Shamrock has not made any substantial payments to Kasten from the alleged revenues flowing from the operation and production in the Sawn Lake Well.

This situation also ties in to one of the factors that this court should consider, i.e. whether the manner in which Shamrock is making payments to Kasten (as a security-holder) forms a reasonable basis for Kasten to expect that it would encounter difficulty with Shamrock (as the debtor).

Kasten contends that it is critical that there is no evidence before this Court to demonstrate the veracity of the claim that the Sawn Lake Well is generating the alleged production; and neither is there any evidence as to where the alleged revenues accruing from the production is being diverted. [ 24 ] In my view, the approach which Shamrock has adopted in paying the debts owed to Kasten seems to be a justifiable basis for Kasten's apprehension that it would likely and ultimately encounter difficulties with Shamrock.

And based on this ground, it would be inaccurate to characterize Kasten's tenacious pursuit of Shamrock for its indebtedness as an activity motivated by bad faith, as Shamrock alleges. [ 25 ] Shamrock states that it had initiated a sale of Sawn Lake Well. At this point however, there is no indication that Shamrock's initiative or endeavour is moving ahead in a positive manner. After the chambers application before me on November 29, 2012, Mr. Nathan Richter (on behalf of Stout) sent a letter dated December 14, 2012 to Kasten (see, attachment to Shamrock's supplemental brief filed Dec. 14, 2012).

The letter indicated that four postdated cheques were sent to Kasten as payments of monthly interests until March, 2013 and pending the anticipated sale of Sawn Lake Well in April, 2013. Mr.

Richter also confirmed in the letter that no formal bids were received as at the bid deadline date of December 12, 2012. [ 26 ] After carefully considering whether there are other remedies, short of a receivership, that could serve to protect the interests of the Applicant in this matter and also carefully balancing the rights and interests of both Kasten and Shamrock, I have come to the conclusion that a remedial Order to appoint a Receiver and Manager is just, convenient and appropriate in the circumstances of the developments and delays in this matter.

Is Shamrock's Oil and Gas Lease Covered by the GSA? [ 27 ] Kasten submits that while the GSA is not directly enforceable against the oil and gas under (or in) the ground, once the oil and gas comes out of the ground and captured by Shamrock it becomes subject to the GSA in much the same manner as the production facilities that are clearly covered by the GSA.

It agrees that the oil and gas lease contains a profit à prendre , but submits that the right of Shamrock to extract oil and gas as granted by the Crown is transferable. [ 28 ] Shamrock agrees that a Receiver could only be appointed over its personal property, which includes the oil when it is produced and removed from the ground. However, it contends that the authority of the Receiver does not extend to the lease or the sale of Sawn

Lake Well since Kasten has no security over the PNG lease under the GSA and can only receive revenue from the Well. Shamrock takes the position that the oil and gas lease is a profit à prendre , which is an interest in land excluded under Alberta's PPSA , s 4(f). [ 29 ] I note that the Supreme Court of Canada in Saulnier v Royal Bank of Canada, 2008 SCC 58 , [2008] 3 SCR 166 [Saulnier] discussed the term "property" in the context of a commercial fishing licence under the Bankruptcy and Insolvency Act , RSC 1985, c B-3, s 2 [ BIA ] and Nova Scotia's Personal Property Security Act , SNS 1995-96, c 13 [ PPSA ]. The provision of the relevant

section of Nova Scotia's PPSA is identical to that of Alberta's Personal Property Security Act , RSA 2000, c P-7 . [ 30 ] The Supreme Court in Saulnier held that the BIA and PPSA should be interpreted in a way best suited to enable them accomplish their respective commercial purposes. Binnie, J, writing for the Court, observed that: [28] … [A] fishing licence … bears some analogy to a common law profit à prendre which is undeniably a property right.

A profit à prendre enables the holder to enter onto the land of another to extract some part of the natural produce, such as crops or game birds … [29] Fichaud J.A. in the court below noted numerous cases where it was held that "during the term of a license the license holder has a beneficial interest to the earnings from his license" (para. 37) … The earnings flow from the catch which is lawfully reduced to possession at the time of the catch, as is the case with a profit à prendre . [30] Some analytical comfort may be drawn in this connection from the observations of R. Megarry and H. W. R.

Wade on The Law of Real Property (4th ed. 1975), at p. 779: A licence may be coupled with some proprietary interest in other property. Thus the right to enter another man's land to hunt and take away the deer killed, or to enter and cut down a tree and take it away, involves two things, namely, a licence to enter the land and the grant of an interest (a profit à prendre) in the deer or tree.

And at p. 822: A right to "hawk, hunt, fish and fowl" may thus exist as a profit, for this gives the right to take creatures living on the soil which, when killed, are capable of being owned. [31] The analogy of a commercial fishing licence to the profit à prendre has already been noted by the High Court of Australia in Harper v. Minister for Sea Fisheries (1989), 168 C.L.R. 314 [where] Brennan J. [observed]: A fee paid to obtain such a privilege is analogous to the price of a profit à prendre; it is a charge for the acquisition of a right akin to property.

Such a fee may be distinguished from a fee exacted for a licence merely to do some act which is otherwise prohibited (for example, a fee for a licence to sell liquor) where there is no resource to which a right of access is obtained by payment of the fee. [p. 335] … [33] In my view these observations are helpful … there are important points of analogy between the fishing licences issued to the appellant Saulnier and the form of common law property called a profit à prendre … [34] My point is simply that the subject matter of the licence (i.e. the right to participate in a fishery that is exclusive to licence holders) coupled with a proprietary interest in the fish caught pursuant to its terms, bears a reasonable analogy to rights traditionally considered at common law to be proprietary in nature.

It is thus reasonably within the contemplation of the definition of "property" [which in] this connection the property in question is the fish harvest.

(emphasis added) [31] In my view, the oil and gas lease in this case which grants a right (or licence) to Shamrock to access, drill for and extract theresource or substance from the ground is analogical and identical to a commercial fishing licence which grants the right to harvesting offish resource as discussed in Saulnier. This is in the sense that during the term of the oil and gas lease/licence, Shamrock, the leaseholder has a beneficial interest to the earnings from its oil and gas lease: Saulnier at para 29.

The right to exclusively extract oil and gasby Shamrock, the lease holder coupled with a proprietary interest in the extracted resource pursuant to the terms of the lease/licence,"bears a reasonable analogy to rights traditionally considered at common law to be proprietary in nature": Saulnier at para 34. [32] In the result, I conclude that Shamrock's oil and gas lease is a proprietary interest within the purposive contemplation of Alberta'sPersonal Property Security Act: Saulnier at para 34; Stout & Company LLP v Chez Outdoors Ltd, 2009 ABQB 444 at para 39, 9 AltaLR (5th) 366 [Chez Outdoors].

Shamrock's oil and gas lease is covered by the GSA and Alberta's Personal Property Security Act in thecategory of "intangibles": Chez Outdoors at para 15. That right is transferable and falls within the power and authority of acourt-appointed Receiver, subject to the terms of the oil and gas lease as agreed with the Crown.

Scope of the Court-Appointed Receiver's Authority [33] This Court has the authority to make an Order either "unconditionally or on any terms and conditions" it thinks just, including arestriction of the powers of a Receiver and Manager if necessary in the circumstances of the case before it: Judicature Act, s 13(2). [34] Kasten seeks a court-appointed Receiver who is a court officer owing a fiduciary duty to all parties, including the debtor: Philip'sManufacturing Ltd v Coopers & Lybrand Ltd, (BC CA), 92 DLR (4th) 161 at para 17, [1992] 5 WWR 549 (WL).

Itargues that the court-appointed Receiver would take instructions from the Court and not from Kasten. The Receiver would be bound toact in the best interests of all parties. In a volte-face, Kasten seeks in its supplemental brief that this Court should appoint it as a Receiver.There was no reason specifically advanced by Kasten for its new position. [35] Shamrock submits that a Consent Receivership Order should be granted and the Receiver should not be conferred with a powerof sale.

It wants the Order held in abeyance until April 1, 2013 or when Shamrock/Stout fails to make a payment of interest as scheduled,whichever occurs first, in order to allow for the sale of Sawn Lake Well. [36] The Respondent notes that Kasten now seeks to be appointed as the Receiver and Manager instead of the earlier proposedindependent body corporate, MNP Ltd. which had given its consent to act as Receiver and Manager of Shamrock, the debtor. [37] In the absence of any clear objection to the appointment of MNP Ltd., an independent and neutral entity in this matter, an Orderwill issue to name MNP Ltd. as the court-appointed Receiver and Manager of all the current and future assets, undertakings andproperties of Shamrock Oil and Gas Ltd. until Kasten and other creditors (secured and unsecured) are paid in full.

The Receiver andManager will have no power of sale, except as approved by an Order of this Court. However its authority is suspended until April 1,2013 in order to accommodate any potential sale of Sawn Lake Well by Shamrock. To be clear, if Sawn Lake Well is not sold on orbefore April 1, 2013, the power and authority of the Receiver and Manager is to become effective immediately on that day. [38] If parties are unable to agree on costs, they should arrange to speak to me within 30 days of the issue of this decision. Heard on the 29th day of November, 2012.

Dated at the City of Edmonton, Alberta this 24th day of January, 2013.

Donald Lee J.C.Q.B.A. Appearances: Terrence M. Warner Miller Thomson LLP for the Applicant Brian W. Summers Fraser Milner Casgrain LLP for the Respondent