Bank of Montreal v Bumper Development Corporation Ltd, 2016 ABQB 363

Court of Queen ’ s Bench of Alberta Citation: Bank of Montreal v Bumper Development Corporation Ltd, 2016 ABQB 363 Date: 20160629 Docket: 1601 02201 Registry: Calgary Between: Bank of Montreal Plaintiff - and - Bumper Development Corporation Ltd. Bumper Development Corporation Defendants _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice A.D.

Macleod _______________________________________________________ [ 1 ] At issue here is whether Eagle Energy Inc. (“Eagle”) can enforce an operating agreement in the context of a court approved sale of the underlying oil and gas properties in a receivership under s 243 of the Bankruptcy and Insolvency Act , RSC 1985, c B-3. Eagle seeks to enforce the operating agreement through this application. Forent Energy Ltd. (“Forent”), the company that successfully bid on and purchased the oil and gas properties from the Receiver, opposes this application.

[ 2 ] On February 16, 2016, Bank of Montreal applied for a Receivership Order with respect to Bumper Development Corporation Ltd. (“Bumper”).The Order was granted and Alvarez & Marsal Canada Inc. was appointed Receiver/Manager over all of the assets of Bumper pursuant to s 243 of the Bankruptcy and Insolvency Act . The objective of the receivership was to protect and realize upon Bumper’s assets and distribute the proceeds to the stakeholders under the supervision of the Court. [ 3 ] At the time the receivership order was granted, Eagle and Bumper were parties to a Joint Operating Agreement (“JOA”).

The JOA related to approximately twenty eight wells near Twining, Alberta. While the JOA is dated April 9, 2013, the original signing parties were Bumper and Coda Petroleum Inc. (“CODA”). Eagle became party to the JOA by purchasing CODA.

Bumper and Eagle also entered into an agreement for the construction, ownership and operation of the Twining 16-20-31-24 W4M Battery (“Battery”) which, while dated as of January 1, 2015, was actually signed by Bumper on February 3, 2016. [ 4 ] Incidental to this Court’s power to appoint a Receiver, the Order of February 16, 2016 also contains the following clause at paragraph 9: No Exercise of Rights or Remedies All rights and remedies (including, without limitation, set-off rights) against the Debtors, the Receiver, or affecting the Property, are hereby stayed and suspended except with the written consent of the Receiver or leave of this Court... [ 5 ] As is the case with most JOAs in this province, the operatorship was governed by the CAPL operating procedure (2007) issued by the Canadian Association of Petroleum Landmen.

Clause 2.02 of that operating procedure reads in part as follows: 2.02 Replacement of Operator A Immediate Replacement - The Parties acknowledge that the Operator’s ability to fulfill its duties and obligations for the Parties’ benefit is largely dependent on its ongoing financial viability and that the Operator may not seek relief at law, in equity or under the Regulations to prevent its replacement in accordance with this Subclause. The Operator will be replaced immediately after service of notice from Non-Operator to the other Parties to such effect if:

a) the Operator becomes bankrupt or insolvent, commits or suffers any act of bankruptcy or insolvency, is placed in receivership or seeks debtor relief protection under applicable legislation (including the Bankruptcy and Insolvency Act (Canada) and the Companies’ Creditors Arrangement Act (Canada)), and it will be deemed to be insolvent for this purpose if it is unable to pay its debts as they fall due in the usual course of business or if it does not have sufficient assets to satisfy its cumulative liabilities in full; ...

Any such notice from a Non- Operator must be a bona fide notice that specifies the basis for replacement under this Subclause and includes verifiable evidence substantiating that basis in reasonable detail.

Subject to the restrictions in Subclause 2.06B on the appointment of a successor Operator, the Party with the largest Working Interest will then act as Interim Operator on the same basis as in Subclause 2.06D, unless the Parties have otherwise appointed a successor Operator under Clause 2.06. [ 6 ] Similarly, clauses 3.03 and 3.04 of the Operating Agreement governing the Battery state: 3.03 Operator shall immediately cease to be Operator in the circumstance described in Subclauses (

a) and (

b) below and in all circumstances described on this Clause a replacement. Operator appointed pursuant to Clause 304 if: (

a) Operator becomes bankrupt or insolvent, commits or suffers any act of bankruptcy or insolvency, is placed in receivership or a receiver/manager or person filling that role is appointed with respect to its property... 3.04 (

a) Upon Operator resigning or otherwise ceasing to be Operator and until a replacement Operator being appointed, the Owner with the largest Facility Participation... shall automatically become the Interim Operator [ 7 ] Eagle also asserts a right to operatorship to both the wells and the Battery under other provisions dealing with the disposition of Bumper’s interest.

In those circumstances, Eagle has the right to elect to become Operator rather than consenting to the assignee or the purchaser becoming Operator. [ 8 ] Pursuant to those provisions Eagle, upon learning of the Receivership Order, notified the Receiver of its intention to assume operatorship of both the wells and the Battery. Those letters are dated February 26, 2016 and are Exhibits C and D to the Affidavit of Richard W.

Clark, President and CEO of Eagle. [ 9 ] On February 29, 2016, the Receiver responded that under paragraph 9 of the Order, the notices were stayed and Bumper remained the Operator of both the wells and the Battery. [ 10 ] Meanwhile, Bumper’s interest in the properties was put up for sale and bids were received from both Eagle and Forent. On March 22, 2016, Eagle sent a letter to the Receiver.

The letter provided notice of two things: one, that pursuant to clause 24.01 of the CAPL Operating Procedure, no disposition could be made of Bumper’s working interest in the JOA assets without notice to Eagle of its intention to do so; and two, that Eagle was entitled to 20 days within which to determine whether the disposition of Bumper’s interest in the JOA assets would be likely to have a material adverse effect on Eagle. A copy of that letter is attached as Exhibit “F” of the Affidavit of Richard W. Clark. The Receiver did not respond. [ 11 ] Mr. Clark, in his Affidavit, goes on to state that he and Mr.

Cortese of Eagle attended a meeting with the Receiver’s representative on April 14, 2016. He deposes at paragraph 14 of the Affidavit that he informed the Receiver that the JOA provided that

Eagle becomes Operator upon the disposition of Bumper’s interest. Apparently, the Receiver’s representative agreed that the Receiver would not entertain any offer purporting to convey operatorship of Bumper’s assets to any persons except for Eagle.

He states at paragraph 16 that: The Receiver’s Representative also agreed that, should Eagle not be the successful bidder, the purchase and sale agreement with the successful bidder would provide, as a condition of closing, that the operating licence pertaining to the Bumper Assets would be electronically transferred, at closing, directly from Bumper to Eagle; that the Receiver would arrange for this in advance with the Alberta Energy Regulator; and that the Receiver would notify Eagle of any changes of these provisions. [ 12 ] Following the meeting, Mr.

Clark wrote an email to the Receiver which is Exhibit “G” to his Affidavit. It was sent on April 14, 2016 and reads as follows: Orest, thank you for taking the time to visit with Frank and I this morning. You have advised us that all offers are due at close of business tomorrow and that a final decision will be made the lender Monday. In addition, I confirm our conversation regarding the following terms: 1. You have confirmed that you will be presenting the bank with ONLY a non-operated offer from Forent.

Furthermore, you have confirmed that you will not present the bank with an offer from Forent or any other potential bidder (other than Eagle) which purports to convey operatorship or is based on any party other than Eagle operating the conveyed assets. In consideration of these undertakings, Eagle will amend its offer (which has expired) and resubmit it to you tomorrow, with as many of the conditions removed as possible. Eagle’s offer will also contemplate an extremely short closing period, subject to the transaction paperwork being in the state of readiness as represented by you today. 2.

In the event that Eagle is not the successful buyer, Eagle requires that the following terms be handled as set out below, In order for Eagle to not challenge the sale process in court:

a) The PSA with the Buyer must contain a condition of closing provision that the electronic filing of transfer of the operating license pertaining to the properties and the facilities will be made at closing, directly from Bumper to Eagle and not via the purchaser and then to Eagle. This will be a condition of closing and will be a process established by you with the AER in advance of closing. You will agree to promptly advise us if this provision changes in any way. Eagle has advised that the AER has approved this approach and can modify its license transfer process to accommodate this structure.

b) You and Eagle will prepare a plan which provides that at or prior to closing, all land and other customary records (both physical and electronic) needed for Eagle to operate the assets, be delivered into Eagle’s possession. Frank Cortese will be Eagle’s lead on this matter.

c) Although it was not discussed on either of our calls today, we understand, that there are some joint partner wells which Eagle would end up operating in which Eagle will have no working interest. Further provisions may need to be made in this regard, depending on with whom the license reside for the purpose of LMR calculations . Kindly advise if I have missed anything material to our discussion or if any of the above is contrary to your understanding. Many thanks.

RC [ 13 ] The Receiver indicated in his second report that he did not agree to refrain from transferring the licenses but did agree that operatorship was not part of the sale. But in any event, the Receiver did not respond to Mr. Clark’s email. [ 14 ] Forent was the successful bidder and the Receiver applied for approval of the sale of Bumper’s interest to Forent and for a Vesting Order. The matter came before me on May 11, 2016 at which time Eagle filed an application for this Court to recognize Eagle’s right to become Operator of the assets after the sale.

Eagle had not been shown a copy of the proposed sale agreement and did not know whether its rights were being undermined by the proposed sale. It did not want a Vesting Order to go if its rights to be Operator were affected. [ 15 ] My decision was to approve the sale upon the recommendation of the Receiver and the secured creditor, The Bank of Montreal. The sale was to be without prejudice to Eagle’s right to argue the issue of operatorship at a later date. Accordingly, the Vesting Order contained the following paragraphs: Operating Interest and Associated Licenses 16.

This Order shall be without prejudice to the rights of Eagle Energy Inc. (‘Eagle”) to assert its position related to the Eagle Application as at the time of the granting of this Order. 17. To that extent that Eagle may claim an entitlement to become the operator of any of the Assets in relation to which it presently holds a working interest (the “Eagle Related Assets”), and/or to hold the associated licenses related thereto, such claim shall be adjudicated before Justice Macleod on or before May 24, 2016 or such other date as counsel to Forent and Eagle may argue (the “Eagle Application”).

AER will be provided with notice if the application date changes. The Receiver takes and will take no position with respect to the Eagle Application. Neither the Purchaser nor Eagle shall seek any damages against the Debtor or the Receiver in relation to the Eagle Application. [ 16 ] As per my Order, the matter came back in front of me on May 24, 2016, and the issue of operatorship was argued by Eagle and Forent. The Receiver took no position.

The Alberta Energy Regulator also did not take a position, as it was common ground that this Court would not be interfering with the discretionary authority of the Alberta Energy Regulator. [ 17 ] It is quite clear from the contractual documents at issue that as between Eagle and Bumper, Eagle was entitled to be Operator of the wells and the Battery upon Bumper becoming insolvent or being placed in receivership (see Tri- Star Resources Ltd v JC

International Petroleum Ltd (1986), (AB KB), [1987] 2 WWR 141 (ABQB), 48 Alta LR (2d) 355).

The existence ofsuch an arrangement reflects the understanding that Operators conduct operations on behalf of all parties and in so doing, frequently dealwith money belonging to the non-operating parties. [18] Had Eagle pursued its right to be Operator at the time of the granting of the Receivership Order or soon thereafter, I can thinkof no reason why this Court would not have acceded to Eagle’s request to lift the stay and grant a declaration with respect to both thewells and the Battery. [19] The stay was granted incidental to the appointment of the Receiver to permit for orderly realization and distribution.

Eagle’sright to operate, however, arises under a contract which pre-dates the receivership. Also, there is no reason to interfere with thecontractual rights of Eagle which are not subject to the security of Bumper’s creditors. [20] This is not a situation such as the one facing this Court in Norcen Energy Resources Ltd v Oakwood Petroleums Ltd (1988), (AB KB), 92 AR 81 (ABQB), 63 Alta LR (2d) 361 . In that case s 11 of the Companies Creditor’s Arrangement Act,RSC 1970, c C-25 (CCAA) was at issue.

Section 11gives very broad powers to the Court in situations where arrangements involvingcompromise can be utilized to rescue insolvent companies. The CCAA has proved to be an extraordinarily flexible Act. The Act has beenused effectively to give debtors respite from creditors in order to allow the stakeholders to negotiate a proposal for continuing thebusiness, rather than allowing the business to fall into bankruptcy. Here, the issue is not Bumper’s survival but the realization on itsassets. [21] Forent argues that Eagle sat upon its right and did not bring an application in a timely manner to lift the stay.

Having sat on itsrights until the eve of an application for approval and a Vesting Order, this Court should not allow the stay to be lifted. [22] In my view, however, Eagle acted reasonably. When faced with the Receiver’s position with respect to the stay, Eagle metwith the Receiver’s representatives and negotiated a deal. Based on this deal, Eagle believed it would be the Operator even if it were notthe successful bidder for the underlying assets.

Clearly, Forent did not have any reasonable expectation that it was purchasingoperatorship. [23] In my view it would be unfair to deprive Eagle of its clear contractual right to be Operator of both the wells and battery. To doso would be tantamount to appropriating Eagle’s right for the benefit of Bumper’s creditors. [24] Forent also argued that Eagle was invoking the equitable jurisdiction of this Court in seeking either specific performance or adeclaration. Forent argues that Eagle does not come to this Court with clean hands.

Forent alleges that Eagle obtained its original interestin the Twining area by misappropriating Forent’s confidential information. Eagle then used Forent’s confidential information for theimproper purpose of acquiring CODA. [25] While the argument was interesting and skillfully made, I cannot give effect to it. First of all, while I allowed the sale I did sowithout prejudice to Eagle’s right to make the argument as the situation was on May 11, 2016.

Moreover, the issue was between Bumperand Eagle rather than Forent and Eagle. [26] Furthermore, Forent has issued a Statement of Claim against Eagle for breach of confidence, breach of fiduciary duty andalleging that Eagle holds its entire interest in the area in trust for Forent. Eagle has denied the allegations and filed a Statement ofDefence. The timing of the Statement of Claim is also interesting in that it was issued on May 10, 2016.

Forent argues that there issufficient evidence contained in the affidavits filed supporting its allegations for me to find in favor of Forent and that I should do sobecause it is the right thing to do. With respect, that is turning due process on its head. Eagle is entitled to full answer and defence. Ithink it would be inappropriate for me to pre-judge the outcome of this litigation by denying Eagle its claim to operatorship, the effect ofwhich would be to grant operatorship to Forent. Moreover, there is no prejudice to Forent.

Should Forent be successful in its litigation itwill be entitled to the relief it seeks i.e. to all of Eagle’s interest in both the wells and battery. [27] Accordingly, the stay is lifted “nunc pro tunc” and Eagle’s application is granted. There will be a declaration that Eagle isentitled to operate both the wells and Battery in question. It is also directed that the Receiver and others, including Forent, transmit toEagle all accounts, licences etc. which are reasonably necessary for Eagle to succeed Bumper as Operator under both of the agreements. [28] Eagle is entitled to costs of the application.

Heard on the 24th day of May, 2016. Dated at the City of Calgary, Alberta this 29th day of June, 2016.

A.D. Macleod J.C.Q.B.A. Appearances: C. J. Popowich and J. R. Devlin for Eagle Energy Inc. Peter Linder, QC for Forent Energy Ltd.