Alberta Treasury Branches v Exall Energy Corporation, 2017 ABQB 602

Court of Queen’s Bench of Alberta Citation: Alberta Treasury Branches v Exall Energy Corporation, 2017 ABQB 602 Date: 20171130 Docket: 1501 03391 Registry: Calgary Between: Alberta Treasury Branches Applicant - and - Exall Energy Corporation Respondent _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice D.B. Nixon _______________________________________________________ I. Introduction [ 1 ] A

summary of this decision was delivered orally. I reserved the right to make editorial changes to the final form of the Judgment. I advised the parties that written reasons would be forthcoming. [ 2 ] Exall Energy Corporation (“ Exall Energy ”) is in receivership. Substantially all of the assets of that corporation have been sold. An aggregate of $1,264,493.45 is being held as security for a variety of claims (the “ Holdback ”). [ 3 ] Applications have been made by various parties seeking all or a portion of the Holdback. The arguments of the various

applicants generally fall into one of three categories: (

a) LMP Resource Investments Inc. (“ LMP Resource ”) argues that a portion of the Holdback has been held in trust, and that those funds are payable to it in priority to the other claims; (

b) Murdock Energy Inc. (“ Murdock Energy ”) and Essential Well Service Partnership (“ Essential Partnership ”) have filed liens, and they both argue that a portion of the Holdback is payable to them in priority to the other claims; and (

c) Alberta Treasury Branches (“ ATB ”) is a secured lender, and it argues that the Holdback is payable to it because the security it holds displaces all other claims. [ 4 ] There are also some housekeeping matters which I have been called upon to decide. These housekeeping matters include to whom certain debt obligations should be paid, the approval of an interim distribution to ATB, the approval of the actions of certain professionals, the approval of receipts and disbursements, and the approval of a payment to a lien holder that did not perfect its claim. II. Issues [ 5 ] The issues are restated as follows. A.

The 2008 Trust Declaration [ 6 ] LMP Resource asks the Court for leave to file a lien against Alberta Crown petroleum and natural gas lease 0508090127, which is on lands located at S.E. 1/4 02-75-06-W5M (collectively, the “ LMP Marten Mountain Property ”). LMP Resource sought leave to file that lien because it wanted to protect its entitlement to production pursuant to a Trust Agreement dated September 4, 2008 (the “ 2008 Trust ”). [ 7 ] Rather than deal with the LMP Resource request for a lien, I will address the substantive issue. Was the 2008 Trust valid and subsisting at the relevant time? B.

The CAPL Deemed Trust [ 8 ] LMP Resource asks this Court to direct the Receiver (defined below) to pay it all revenues received from production. LMP Resource makes this request on two bases. First, it seeks this direction on the basis of the 2008 Trust. Second, it seeks this direction on the basis of a deemed trust that arises under clause 507 of the Canadian Association of Petroleum Landmen Operating Procedure 1990 (the “ 1990 Operating Procedure ”). [ 9 ] Subject to my findings concerning the 2008 Trust, the substantive issue that underlies this request by LMP Resource involves a deemed trust question.

Did clause 507 of the 1990 Operating Procedure impress a deemed trust (the “ 507 Trust ”) on the general operating bank account of Exall Energy at the relevant time? C. Production In-Kind [ 10 ] LMP Resource asks this Court to direct the Receiver, in its capacity as the Operator, to permit LMP Resource to take its production in-kind from the Canadian resource properties in which it has an interest. [ 11 ] The substantive issue that underlies this item is whether the underlying request is reasonable in the context of this case.

Specifically, is the request for a judicial direction to the effect that LMP Resource be allowed to take its production in-kind moot because of the underlying circumstances? D. Lien Claimants – Priority [ 12 ] In their capacity as lien claimants, Murdock Energy and Essential Partnership (collectively, the “ Lien Claimants ”) ask this Court to order the Receiver to pay their outstanding accounts from the Holdback. [ 13 ] The substantive issues that underlie this request are twofold. First, was the security which the Lien Claimants held in certain Canadian resource properties improperly discharged?

If so, what are the legal implications? Second, will ATB receive a windfall because of how certain payments received or receivable are handled by the Operator? E. Passive Working Interest Holders – Debt Obligations [ 14 ] In their capacity as passive working interest participants in certain Canadian resource properties, Chair Resources Inc. (“ Chair Resources ”), LMP Resource and Canden Resources Ltd. (“ Canden Resources ”) (collectively, the “ Passive Working Interest Holders ”) ask this Court for direction as to whom they should remit their respective components of the Passive W.I.

Holders Indebtedness (defined below). [ 15 ] The substantive issue here is to whom is the Passive W.I. Holders Indebtedness owed? The options are that this indebtedness is owed to the Receiver, in its capacity as the Operator, or to the Lien Claimants, in their capacity as unpaid creditors. A related issue concerns the request by the Passive Working Interest Holders that the Court dismiss the corresponding claims. That is, should the Murdock Claim (defined below) and the Essential Claim (defined below) be dismissed? F.

ATB – Interim Distribution [ 16 ] Is the Receiver permitted to make an interim distribution to ATB of the entire amount of the Holdback?

G. Receiver and Legal Counsel – Approval Order [ 17 ] Is it appropriate to approve the actions, conduct and activities of the Receiver and its legal counsel as outlined in the Third Receiver Report (defined below), and all other reports filed by the Receiver? H. Receiver Receipts and Disbursements – Approval Order [ 18 ] Is it appropriate to approve the Interim Financial Statements of Receipts and Disbursements of the Receiver for the period March 25, 2015 to May 31, 2016, as set out in the Third Receiver Report? III.

Factual Overview [ 19 ] In the course of its ordinary business, Exall Energy entered into farmout and related agreements in respect of a variety of Canadian resource properties.

Exall Energy acted as the “Operator” on a number of those Canadian resource properties. [ 20 ] Under the relevant farmout agreements, Exall Energy was authorized to assign responsibilities and allocate costs amongst the various participants in respect of the Canadian resource properties. [ 21 ] In 2005, Kingsmere Exploration Ltd. (“ Kingsmere Exploration ”), Chair Resources and Canden Resources entered into a Farmout and Participation Agreement (the “ 2005 Farmout Agreement ”).

Under the 2005 Farmout Agreement, Kingsmere Exploration farmed out 40% of its interest in petroleum and natural gas lease 0504090584 on lands located at the N 1/2 1-75-06-W5M to Chair Resources (30%) and Canden Resources (10%). [ 22 ] The Canadian resource properties that are subject to the 2005 Farmout Agreement are governed by a Joint Operation Agreement, dated April 21, 2011 (the “ 2011 JOA ”). The 2011 JOA incorporated the 1990 Operating Procedure. [ 23 ] On June 14, 2007, Kingsmere Exploration and LMP Resource entered into a farmout and participation agreement (the “ 2007 Farmout Agreement ”).

Under the 2007 Farmout Agreement, LMP Resource earned an interest in a test well. LMP Resource also earned an interest in a number of other Canadian resource properties. [ 24 ] On July 1, 2007, Exall Energy amalgamated with Kingsmere Exploration.

The amalgamated entity continued on, using the name “Exall Energy Corporation”. [ 25 ] On January 27, 2008, Exall Energy conveyed an interest in the 2005 Farmout Agreement to LMP Resource. [ 26 ] All of the leases in respect of the Canadian resource properties that are relevant to this case concerning LMP Resource were ultimately subsumed under the 2005 Farmout Agreement as a result of a series of inclusion agreements.

Pursuant to the 2005 Farmout Agreement, Exall Energy was to operate the Canadian resource properties in which LMP Resource had a direct interest in accordance with the terms of the 1990 Operating Procedure (the “ Other LMP Lands ”). The terms of the 1990 Operating Procedure included the requirement that Exall Energy remit to LMP Resource its share of net funds from the sale of any production not taken in-kind from the Other LMP Lands. [ 27 ] On September 4, 2008, Exall Energy and LMP Resource entered into a Declaration of Trust and Memorandum of Agreement.

The Declaration is the document which underlies the 2008 Trust. [ 28 ] Exall Energy borrowed money from ATB for its oil and gas operations. The corporation was not able to service its indebtedness to ATB. [ 29 ] ATB applied for a receivership order (the “ Receivership Order ”) over the property of Exall Energy (the “ Exall Property ”).

On March 25, 2015, MNP Ltd. was appointed the receiver and manager of the Exall Property (the “ Receiver ”). [ 30 ] The Receivership Order defined the Exall Property to be all of Exall Energy’s “…current and future assets, undertakings, and properties of every nature and kind whatsoever, and wherever situate including all proceeds thereof.” [ 31 ] Sanjel Canada Ltd. (“ Sanjel ”) registered a builder’s lien in the amount of $6,189. That builder’s lien was filed with the Land Titles Office on April 1, 2015.

Sanjel did not file a Statement of Claim or a Certificate of lis pendens in respect of that lien. [ 32 ] Sorus Consulting

(1995) Ltd. (“ Sorus Consulting ”) registered builders’ liens in the amounts of $3,150, $81,432 and $4,593. Those builders’ liens were filed with the Land Titles Office on April 16, 2015. Sorus Consulting did not file a Statement of Claim or a Certificate of lis pendens in respect of its liens. [ 33 ] Since the Receivership Order was granted, the Receiver has issued joint interest billings (“ JIBs ”) to LMP Resource for the production months. LMP Resource has not paid any amounts to the Receiver on account of the JIBs since March 25, 2015. [ 34 ] The Receiver has issued the following reports, all of which have been filed with the Court: (

a) The first report of the Receiver, dated October 23, 2015 (the “ First Receiver Report ”); (

b) The second report of the Receiver, dated February 29, 2016 (the “ Second Receiver Report ”);

(

c) The third report of the Receiver, dated June 6, 2016 (the “ Third Receiver Report ”); and (

d) The supplement to the Third Receiver Report, dated June 30, 2016 (the “ Supplement Third Receiver Report ”). [ 35 ] The Receivership Order authorized the Receiver to sell the Exall Property, or any parts thereof, and apply for a vesting order necessary to convey the Exall Property, or any parts thereof, free and clear of any liens or encumbrances. The Receiver marketed a subset of the Exall Property for approximately eight months. [ 36 ] An offer was received from Aeneid Exploration Inc. (“ Aeneid Exploration ”) for the subset of the Exall Property.

The Receiver took steps to close the sale to Aeneid Exploration. [ 37 ] The purchase and sale agreement that effected the disposition of the subset of the Exall Property to Aeneid Exploration (the “ PSA ”) defined the assets sold to be “... all of Exall’s right, title, estate and interest in the Petroleum and National Gas Rights, Tangibles and Miscellaneous Interests as defined herein.” On March 9, 2016, this Court granted an Approval and Vesting Order and an Interim Distribution Order (collectively, the “ March 2016 Order ”). [ 38 ] The March 2016 Order defined the subset of Exall Property that was sold to Aeneid Exploration (the “ Purchased Assets ”).

The PSA stipulated that the Purchased Assets did not include deposits, cash call advances or operating fund payments. [ 39 ] The March 2016 Order allowed the Receiver to distribute the proceeds from the sale of the Purchased Assets and from the other funds available in the Exall Energy bank accounts to pay the claim of Service Canada and to remit the remainder of the funds to ATB, except for the Holdback and other miscellaneous amounts. As stated above, amount of the Holdback is $1,264,493.45. [ 40 ] LMP Resource has claimed $314,799.05 (the “ LMP Claim ”).

An amount equal to the LMP Claim is included in the Holdback, pending resolution of this dispute. [ 41 ] Four corporations have filed liens (collectively, the “ Liens ”). The Liens aggregate to $949,694.40 (the “ Lien Amount ”). An amount equal to the Lien Amount is included in the Holdback, pending resolution of this dispute. The breakdown of the Lien Amount is as follows: Lien Holder Amount Sorus Consulting

(1995) Ltd. $ 3,150.00 Sorus Consulting

(1995) Ltd. 4,593.75 Sorus Consulting

(1995) Ltd. 81,432.75 89,176.50 Essential Well Service Partnership 454,141.62 Essential Well Service Partnership 245,941.39 700,083.01 Murdock Energy Inc. 122,682.00 Murdock Energy Inc. 31,563.27 154,245.27 Sanjel Canada Ltd. 6,189.62 Total $ 949,694.40 IV. Analysis [ 42 ] ATB has a security interest against the Exall Property. ATB asserts its security interest is valid and enforceable. [ 43 ] None of the parties to this Application have disputed the validity or enforceability of the ATB security.

Subject to the arguments that were made at this hearing, the Receiver is not aware of any claims that would rank ahead of the security held by ATB. A. The 2008 Trust Declaration [ 44 ] Trust arguments warrant careful consideration. The presence of a trust can displace various entitlements and priorities. Accordingly, it is important for a court to give a trust argument appropriate attention. [ 45 ] The substantive issue that underlies the trust Declaration argument is whether the 2008 Trust was valid and subsisting at the relevant time. 1. Incremental Facts [ 46 ] A

schedule to the Declaration that documents the 2008 Trust stipulates that Exall Energy held an interest in the LMP Marten Mountain Property in trust for LMP Resource. The 2008 Trust held that interest in the LMP Marten Mountain Property from its creation on September 4, 2008. That

schedule to the Declaration makes no reference to any other property, including any component of the Other LMP Lands. [ 47 ] The oil and gas lease which underlies the LMP Marten Mountain Property expired on September 4, 2013.

2. The Law [48] The determination of whether a trust exists is based on the ordinary principles that underlie the law of trusts. The prerequisitesfor a valid trust involve three certainties: first, the certainty of intent; second, the certainty of subject matter; and, third, the certainty ofobjects. 3. Application of the Law [49] LMP Resource argues that the 2008 Trust is valid and subsisting. I disagree. [50] I find that the LMP Resource arguments in respect of the 2008 Trust are without merit. That trust was extinguished byoperation of law on September 4, 2013.

That is the expiry date of the oil and gas lease which underlies the LMP Marten MountainProperty. [51] The reason for my finding is that there is no evidence that any property (other than the LMP Marten Mountain Property) wasacquired by the 2008 Trust between its creation on September 4, 2008 and the expiry of the lease underlying the LMP Marten MountainProperty on September 4, 2013. While there is evidence that LMP Resource acquired other Canadian resource properties over that fiveyear period, that body corporate is a separate and distinct person from the 2008 Trust. B.

The CAPL Deemed Trust [52] As noted above, I found the arguments concerning the 2008 Trust to be without merit because that trust was extinguished byoperation of law on September 4, 2013. Accordingly, I will not give that argument further attention, notwithstanding that LMP Resourcerepeated the argument in its pursuit of production revenues owed for periods before the Receivership Order was issued. [53] Focusing on the deemed trust argument, that assertion also warrants careful consideration.

The implications of a deemed trustare just as significant as a substantive trust (such as the 2008 Trust), provided the necessary prerequisites exist. [54] The substantive issue that underlies the deemed trust argument is whether the funds in the general operating bank account ofExall Energy on March 25, 2015 were impressed with the 507 Trust or whether the relevant funds had been released from trust. 1. Incremental Facts [55] Exall Energy operates various Canadian resource properties under the terms of the 1990 Operating Procedure.

The 1990Operating Procedure authorizes Exall Energy to commingle funds related to the operation of the various Canadian resource propertieswith other funds of that corporation. [56] Exall Energy did not maintain a separate bank account for production revenues that were attributable to its various jointventure participants. It deposited all revenues into its general operating bank account, thereby commingling production revenuesattributable to its co-venturers with its own funds. [57] Exall Energy failed to pay LMP Resource for the production months July 2014 to January 2015, inclusive.

The productionamounts owed to LMP Resource by Exall Energy for those months arise from the sale of production from the Other LMP Lands, inwhich LMP Resource holds an interest.

The total net amount that Exall Energy owed LMP Resource for production months July 2014through January 2015 was $314,747.36 (the “LMP Pre-Receivership Net Production Claim”). [58] The balance in the general operating bank account of Exall Energy at the end of business on March 24, 2015 was a negative$49,331.97. [59] The balance in the general operating bank account of Exall Energy at the end of business on March 25, 2015 (being the datethat the Receivership Order issued) was a positive $493,772.83. 2. The Law [60] The terms of the 1990 Operating Procedure form part of the contractual framework in this case.

Clause 507 of the 1990Operating Procedure reads as follows: 507 COMMINGLING OF FUNDS - The Operator may commingle with its own funds the moneys which it receives from or for theaccount of the Joint-Operators pursuant to this Operating Procedure.

Notwithstanding that moneys of a Joint​ Operator have beencommingled with the Operator’s funds, the moneys of a Joint-Operator advanced or paid to the Operator, whether for the conduct ofoperations hereunder or as proceeds from the sale of production under this Operating Procedure, shall be deemed to be trust moneys, andshall be applied only to their intended use and shall in no way be deemed to be funds belonging to the Operator, other than in its capacityas the Joint-Operators’ trustee. [61] The jurisprudence associated with commingled trust funds is also relevant in this case.

A brief overview of the principlesemanating from that jurisprudence is as follows. [62] An agreement to commingle funds is a factor that must be considered in determining the legal relationship between parties.The agreement of the parties to commingle trust funds with other funds is not fatal to the trust concept. When the commingling clause isviewed in the context of the entire 1990 Operating Procedure, it does not negate the trust relationship: Bank of Nova Scotia v Sociétégeneral (Canada), (AB CA), [1988] 4 WWR 232 (ABCA) at para 10.

[ 63 ] When a fiduciary obligation is found to exist, the beneficial owner has a right to follow the trust funds: Bank of Nova Scotia at para 21 . [ 64 ] Proprietary rights created by a deemed trust are extinguished if the trust property comes into the hands of a third-party who is a “ bona fide purchaser for value without notice”.

The effect of this bona fide third-party rule is that the risk of a breach of trust by a trustee usually falls on the beneficiaries: Brookfield Bridge Lending Fund Inc v Vanquish Oil & Gas Corp , 2009 ABCA 99 at para 9 . [ 65 ] The express right to commingle funds does not give the trustee the right to breach the trust. The 1990 Operating Procedure stipulates that the trust funds can only be applied to their intended use: Brookfield Bridge at para 11. [ 66 ] Provided there is a positive balance in the commingled bank account, the analysis is easy.

The trust is impressed on that bank account, and the net balance is protected from the claims of any secured creditor: Brookfield Bridge at para 12. [ 67 ] However, once the trust funds are disbursed to a bona fide third-party for value without notice, the funds are released from the trust. In such circumstances, beneficiaries can no longer follow the funds. If trust funds are commingled with non-trust funds, the trustee is generally presumed to have honest intentions and to have spent the non-trust funds first. Therefore, any remaining balance will be presumed to be trust funds.

The claim of the beneficiaries is prima facie limited to the lowest intermediate balance in the account: Brookfield Bridge at para 13. 3. Application of the Law [ 68 ] LMP Resource argues that the Receiver holds the amount of the LMP Pre-Receivership Net Production Claim in trust for it. I disagree. [ 69 ] I find that the LMP Resource argument in respect of the 507 Trust is without merit. The funds which that corporation was targeting had been released from that deemed trust. [ 70 ] The reason for my finding is embedded in the facts that are relevant to the 507 Trust arguments.

While the commingling of funds does not displace the deemed trust, the fact that the general operating bank account of Exall Energy was negative at the end of business the day before the Receivership Order was issued is fatal to the 507 Trust argument. That is, the general operating bank account of Exall Energy had a negative balance of $49,331.97 on March 24, 2015. [ 71 ] Since there has been no evidence to the contrary, I infer that the trust funds in the general operating bank account of Exall Energy were disbursed on or before March 24, 2015 to bona fide third-parties for value without notice.

That being the case, the funds which LMP Resource was targeting in the general operating bank account of Exall Energy had been released from trust. [ 72 ] The only reason the balance in the general bank operating account of Exall Energy was positive on March 25, 2015 was because of a deposit of $504,574.81 from Enerchem. I was provided with no evidence concerning the nature of the Enerchem deposit. Absent any evidence to the contrary, I find that the Enerchem deposit was not traceable to any production that was attributable to LMP Resource.

As a result, LMP Resource can no longer trace the funds that were in the general operating bank account of Exall Energy: Brookfield Bridge at para 13. [ 73 ] Given the above analysis, I find that LMP Resource is not the beneficial owner of an amount in respect of the LMP Pre- Receivership Net Production Claim. That is, LMP Resource has no entitlement to the funds in the Holdback under the 507 Trust. C.

Production In-Kind [ 74 ] LMP Resource requests that I direct the Operator to permit this passive working interest holder to take its production in-kind from the Canadian resource properties in which it has an interest. The narrow issue that I need to address is whether the question is moot because of the underlying circumstances. 1. Incremental Facts [ 75 ] LMP Resource is taking 82% of its production entitlement in-kind from the Other LMP Lands.

It elected to do this before the Receivership Order was issued. [ 76 ] The 1990 Operating Procedure stipulates that when LMP Resource takes production in-kind, it is required to reimburse the Operator for its share of production costs. [ 77 ] The Receiver is currently the Operator. The Receiver continues to sell 18% of the production that is attributable to LMP Resource. The Receiver uses the funds from the sale of that 18% tranche to cover the production costs attributable to LMP Resource.

Any amount remaining after those production costs have been paid to the various service providers would be payable to LMP Resource. [ 78 ] As of October 19, 2015, LMP Resource owed Exall Energy $43,504.28 for production costs. This amount owing by LMP Resource to Exall Energy relates to the production costs for which LMP Resource is responsible. That amount is net of what Exall Energy owed LMP Resource for the sale of its 18% production tranche. 2. The Law [ 79 ] The terms of the 1990 Operating Procedure are part of the contractual framework that applies in this case.

Clause 601 of the 1990 Operating Procedure reads as follows:

601 EACH PARTY TO OWN AND TAKE ITS SHARE - Each party shall own its proportionate share of the petroleum substances produced from wells operated for the joint account. The Operator shall measure and deliver into the possession of each party, as and when produced at the first point of measurement, the proportionate share of petroleum substances owned by that party, exclusive of production which has been unavoidably lost and production which may be used by the Operator in producing operations respecting the joint lands.

Each party shall, at its own expense, have the right to take in kind and separately dispose its proportionate share of such production.... 3. Application of the Law [ 80 ] The application by LMP Resource for a court order to permit it to take its production in-kind is moot. I will not grant the court order requested. [ 81 ] My reasons for not issuing a court order regarding LMP Resource’s entitlement to take production in-kind are twofold. [ 82 ] First, LMP Resource already has the right to take its production in-kind under clause 601 of the 1990 Operating Procedure.

LMP Resource can make its own elections, in accordance with its contractual rights. Further, I find that the argument which LMP Resource advanced to the effect that it has a prima facie right to such a court order is without merit. [ 83 ] Second, LMP Resource has already implemented steps to take 82% of its production in-kind from the Other LMP Lands.

The sales revenue from the remaining 18% of production that is attributable to LMP Resource is used by the Operator to offset the production costs that are attributable to this particular passive working interest owner. [ 84 ] The fact that LMP Resource owed Exall Energy $43,504.28 as at October 19, 2015 for production costs attributable to the 82% share of hydrocarbons taken from the Other LMP Land evidences that the Operator needs the revenues from that 18% production tranche to pay for the costs of operations.

Implicit in the fact that LMP Resource owed Exall Energy $43,504.28 is the realization that the proceeds from the sale of that 18% tranche is not sufficient to fund the production costs which are attributable to LMP Resource. That is another reason that I would not consider granting such a court order. D. Lien Claimants – Priority [ 85 ] Murdock Energy and Essential Partnership both seek payment of their respective accounts for the work and materials supplied to Exall Energy. Exall Energy contracted for those supplies in its capacity as an Operator.

Both Murdock Energy and Essential Partnership assert that they have priority over the Holdback funds because of their status as Lien Claimants. [ 86 ] The substantive issues that I need to address are twofold. First, was the security which the Lien Claimants held in certain lands improperly discharged? If so, what are the legal implications? Second, will ATB receive a windfall because of how certain payments received or receivable are handled by the Operator? [ 87 ] Sanjel has not complied with the requirements set out in the Builders’ Lien Act , RSA 2000, c. B-7.

Therefore, it does not have a valid and subsisting builders’ lien. Further, Sanjel has not been a participant in this application. That being the case, I will not consider the position of Sanjel. [ 88 ] Sorus Consulting has not complied with the requirements set out in the Builders’ Lien Act . Therefore, it does not have valid and subsisting builders’ liens. Further, Sorus Consulting has been an indirect participant in this application as a result of an apparent accommodation by ATB.

That being the case, I will consider the position of Sorus Consulting below when I address the interim distribution of funds to ATB. 1. Incremental Facts [ 89 ] Murdock Energy provided work and materials to Exall Energy. Murdock Energy invoiced Exall Energy for those supplies. An amount of $154,245.27 remains owed to Murdock Energy. [ 90 ] The $154,245.27 that is owed to Murdock Energy is an aggregate of amounts that are owed by Exall Energy and the Passive Working Interest Holders.

The details of that amount owed can be broken down as follows: Chain Resources $ 26,155.29 Canden Resources 8,058.61 LMP Resource 4,005.06 Sub-Total: Amount Owed by Passive Working Interest Holders 38,218.96 Exall Energy 102,806.81 Interest 13,219.50 $ 154,245.27 [ 91 ] On December 23, 2014, Murdock Energy registered a Statement of Lien against an interest in certain Crown Minerals in the amount of $122,682 (the “ First Murdock Lien ”).

The last date that Murdock Energy supplied work and materials for oil and gas well service work in respect of the land underlying the First Murdock Lien was December 5, 2014. [ 92 ] On April 13, 2015, Murdock Energy registered a Statement of Lien against an interest in certain Crown Minerals in the amount of $31,563.27 (the “ Second Murdock Lien ”). The last date that Murdock Energy supplied work and materials for the oil and gas service work in respect of the land underlying the Second Murdock Lien was January 27, 2015.

[ 93 ] The First Murdock Lien amount and the Second Murdock Lien amount aggregate to $154,245.27 (the “ Aggregate Murdock Lien ”). [ 94 ] On June 16, 2015, Murdock Energy filed a Statement of Claim (the “ Murdock Claim ”), along with a Certificate of lis pendens (the “ Murdock CLP ”). The Murdock CLP was registered against the relevant lands on June 16, 2015. [ 95 ] As of June 29, 2016, neither the Aggregate Murdock Lien nor the Murdock CLP was registered against the relevant lands. [ 96 ] Essential Partnership provided work and materials to Exall Energy.

Essential Partnership invoiced Exall Energy for those supplies. An amount of $700,083.01 remains owed to Essential Partnership. [ 97 ] The $700,083.01 that is owed to Essential Partnership is an aggregate of amounts that are owed by Exall Energy and the Passive Working Interest Holders. [ 98 ] On February 13, 2015, Essential Partnership registered a Statement of Lien against an interest in certain Crown Minerals in the amount of $454,141.62 (the “ First Essential Partnership Lien ”).

The last date that Essential Partnership supplied work and materials for the oil and gas well service work in respect of the land underlying the First Essential Partnership Lien was January 30, 2015. [ 99 ] On February 13, 2015, Essential Partnership registered a Statement of Lien against an interest in certain Crown Minerals in the amount of $245,941.39 (the “ Second Essential Partnership Lien ”).

The last date that Essential Partnership supplied work and materials for the oil and gas well service work in respect of the land underlying the Second Essential Partnership Lien was January 30, 2015. [ 100 ] The First Essential Partnership Lien amount and Second Essential Partnership Lien amount aggregate to $700,083.01 (the “ Aggregate Essential Partnership Lien ”). [ 101 ] On April 21, 2015, Essential Partnership filed a Statement of Claim (the “ Essential Claim ”), along with a Certificate of lis pendens (the “ Essential Partnership CLP ”).

The Essential Partnership CLP was registered against the relevant lands on April 27, 2015. [ 102 ] As of June 29, 2016, neither the Aggregate Essential Partnership Lien nor the Essential Partnership CLP was registered against the relevant lands. [ 103 ] Of the $154,245.27 owed to Murdock Energy, the Passive Working Interest Holders were invoiced their proportionate share by the Operator through the JIB mechanism. The amount billed to the Passive Working Interest Holders by the Operator in respect of Murdock Energy is an aggregate of $38,218.96.

Invoicing through the JIB mechanism is standard practice in the oil and gas industry. That $38,218.96 amount has not been paid to the Operator by the Passive Working Interest Holders. [ 104 ] The remaining amount that is owed to Murdock Energy is $116,026.31. That amount consists of $102,806.81, all of which is owed by Exall Energy, plus interest of $13,219.50.

Some of that interest is attributable to the Passive Working Interest Holders, but the Operator has never billed it out to them. [ 105 ] Of the $700,083.01 owed to Essential Partnership, the Passive Working Interest Holders were invoiced their proportionate share by the Operator through the JIB mechanism. The Passive Working Interest Holders remitted their respective portions of the amounts due to the Operator for the services of Essential Partnership.

However, there is no evidence concerning the dates that such amounts were paid to the Operator. [ 106 ] The borrower/lender relationship between Exall Energy and ATB, and the related security, dates back to August 30, 2010.

ATB extended credit facilities and related services to Exall Energy pursuant to a Sixth Amended and Restated Commitment Letter that was dated May 30th, 2014. [ 107 ] Exall Energy granted security to ATB in respect of its obligations under the loan agreement, the MasterCard facility and the ISDA (referring to a master agreement published by the “International Swaps and Derivatives Association”). The nature of that security included: (

a) a general security agreement charging all of the present and after-acquired personal real property of Exall Energy; and (

b) a fixed and floating charge debenture that was issued by the corporation in favour of ATB, dated November 6, 2013, in the amount of $100 million (collectively, the “ ATB Security ”). [ 108 ] ATB and Exall Energy entered into a Forbearance Agreement, dated October 29, 2014.

In that Forbearance Agreement, Exall Energy acknowledged that $34,737,262.19 was then owed under the Loan Agreement. [ 109 ] The proceeds realized by the Receiver from the sale of the Purchased Assets were less than the debt that Exall Energy owed ATB. [ 110 ] The sale proceeds realized on the disposition of the Purchased Assets represented the interest that Exall Energy held in those assets. 2.

The Law [ 111 ] Under the statutory framework, a lien has priority over all judgments, executions, assignments, attachments, garnishments and receiving orders recovered, issued or made after the lien arises: section 11(1) of the Builders’ Lien Act . However, a registered mortgage or a mortgage registered by way of a caveat has priority over a lien to the extent that the mortgage money was secured or advanced in good faith prior to the registration of the statement of lien: section 11(4) of the Builders’ Lien Act . [ 112 ] The terms of the March 2016 Order form part of the legal framework in this case.

Clauses 10, 11 and 15 of the March 2016

Order read as follows: 10. The Minister of Energy for Alberta, acting pursuant to the Mines and Minerals Act (Alberta), shall cancel and discharge all Claims registered against the interests of the Debtor in respect of the Purchased Assets and, without limiting the generality hereof, the Minister of Energy shall cancel and discharge all security notices and all assignments under

section 426 (formerly

section 177) of the Bank Act (Canada). 11. The Minister of Energy for Alberta, acting pursuant to the Mines and Minerals Act (Alberta), shall cancel and discharge all Claims in the nature of builders’ liens against the interest of the Debtor in and to the Purchased Assets located in the Province of Alberta. 15.

For the purposes of determining the nature and priority of Claims, the net proceeds from the sale of the Purchased Assets (to be held in an interest bearing trust account by the Receiver) shall stand in the place and stead of the Purchased Assets, and from and after the delivery of the Receiver’s Certificate all Claims and encumbrances shall attach to the net proceeds from the sale of the Purchased Assets with the same priority as they had with respect to the Purchased Assets immediately prior to the sale, as if the Purchased Assets had not been sold and remained in the possession or control of the person having that possession or control immediately prior to sale. [ 113 ] The terms of the 1990 Operating Procedure are part of the contractual framework in this case.

Clause 1501 of the 1990 Operating Procedure provides as follows: The rights, duties, obligations and liabilities of the parties hereunder shall be separate and not joint or collective, nor joint and several...Nothing contained herein shall be construed as creating a partnership, joint venture or association of any kind or as imposing upon any party, any partnership duty, obligation or liability to any other party. [ 114 ] The effect of clause 1501 on the division of property between working interest holders was considered in Direct Energy Marketing Ltd v Kalta Energy Corp , 2003 ABQB 1068 .

In that case, Kalta Energy was the Operator, and it had purchased seven separators. [ 115 ] Kalta Energy went into receivership. Its principal secured creditor was Direct Energy, and that secured creditor claimed priority over the separators. [ 116 ] The Court ruled that the effect of clause 1501 was that as the Operator “purchased the separators for the joint account, each of the working interest partners would have obtained a proportionate interest in the separators as a tenant in common”: Direct Energy at para 33.

The Court also ruled that the receiver was “not entitled to more of an interest in the separators than what Kalta [the Operator] owns, its security interest can only attach to Kalta’s proportionate interest in the separators upon delivery”: Direct Energy at para 44. [ 117 ] This approach was confirmed by the Court of Appeal in Bank of Nova Scotia , which held that clause 1501 in the 1981 edition of the CAPL Operating Procedure defined the duties, obligations and liabilities of the parties to be several: Bank of Nova Scotia at para 12 .

The Court of Appeal in that case went on to state that clause 1501 of the 1981 Operating Procedure “ defines the relationship of all participants in the venture inter se ”: Bank of Nova Scotia at para 12 . [ 118 ] As a historical note, clause 1501 of the 1981 CAPL Operating Procedure stated that the rights and liabilities of the parties shall be “several and not joint or collective”.

In contrast, the 1990 Operating Procedure states that these rights shall be “separate and not joint or collective.” [ 119 ] In exploring the matter further, I note that The Dictionary of Canadian Law , 4th ed (Toronto: Carswell, 2011) defines “several” as “[i]ndividual, separate; the opposite of ‘joint’.” I am confident that the Court of Appeal in Bank of Nova Scotia would have given the term “separate” in the 1990 Operating Procedure the same

interpretation that it gave the term “several” in the 1981 version. Indeed, the term “separate” is supportive of the liabilities not being joint or collective. 3. Application of the Law [ 120 ] As a first step, an overview of the context is warranted. The underlying story puts matters in perspective. [ 121 ] The Lien Claimants were engaged by Exall Energy in its capacity as the Operator of various Canadian resource properties. The Lien Claimants provided work and materials to Exall Energy. [ 122 ] The Lien Claimants did the work requested.

Both Exall Energy and the Passive Working Interest Holders benefited from that work. [ 123 ] The Lien Claimants did not get paid. To protect themselves, the Lien Claimants registered their respective liens against the relevant Canadian resource properties. [ 124 ] The Aggregate Murdock Lien and the Aggregate Essential Partnership Lien (collectively, the “ M-E Liens ”) were filed within a narrow range of time. The First Murdock Lien was filed approximately three months before the date of the Receivership Order. The Second Murdock Lien was filed approximately three weeks after the Receivership Order was issued.

The First Essential Partnership Lien and the Second Essential Partnership Lien were filed less than six weeks before the issuance of the Receivership Order. [ 125 ] The last work related to the M-E Liens was supplied by the Lien Claimants approximately three months before the date of the Receivership Order.

The individual Lien Claimants made independent supplies to the Operator, and the each of them invoiced the Operator separately. [ 126 ] The Passive Working Interest Holders have paid, or have an obligation to pay, the Operator for their respective portion of the amounts that were, or are, owed to the Lien Claimants. This obligation has been reflected in the JIBs that have been issued by the Operator to the Passive Working Interest Holders.

[127] The Operator is, or will be, the interim beneficiary of those funds that flow from the Passive Working Interest Holders into thegeneral operating bank account. [128] ATB has benefitted from the discharge of the Liens. In particular, ATB has benefitted from the discharge of the M-E Liens fortwo reasons. [129] First, ATB has benefited from the discharge of the M-E Liens in respect of the interest that Exall Energy held in the PurchasedAssets.

I find that is a benefit to which ATB was entitled. [130] Second, ATB has benefited from the discharge of the M-E Liens in respect of the interest that the Passive Working InterestHolders held in those same Canadian resource properties as tenants-in-common. The reason ATB benefited from this latter discharge isbecause it simplified matters for purposes of the conveyance, even though it was not entitled to discharge the security interest that theLien Claimants held against the Passive Working Interest Holders.

I find that is a benefit to which ATB was not entitled. [131] With the benefit of that overview, I turn to the application of the law. [132] The first recital in the March 2016 Order defines the term “Debtor” to be Exall Energy. That first recital also defines the phrase“Purchased Assets” to be the assets as described in the PSA between the Receiver and Aeneid Exploration. [133] The Purchased Assets are a subset of the former assets of Exall Energy.

Substantially all of the Purchase Assets consisted ofinterests in various Canadian resource properties and related assets, including tangible equipment and miscellaneous interests which areneeded for oil and gas operations. [134] Clause 15 of the March 2016 Order stipulates that the priority position of the Lien Claimants will be determined as if ExallEnergy had not sold the Purchased Assets. [135] The Passive Working Interest Holders were tenants-in-common with Exall Energy at the relevant time in relation to all rights,duties, obligations and liabilities arising in relation to the Canadian resources properties (sometimes described as petroleum and naturalgas rights): Direct Energy at para 33; and Bank of Nova Scotia at para 12.

The basis for this finding is clause 1501 of the 1990 OperatingProcedure. That Operating Procedure states specifically that the rights of the parties are separate. [136] I acknowledge that ATB was owed $34,737,262.19 as at October 29, 2014, and that it had perfected its security prior to theDecember 23, 2014 date. Indeed, the Lien Claimants acknowledged the priority of ATB. However, I find that the ATB Security onlyattached to the interest in the assets that were held by Exall Energy.

That is, the ATB Security only attached to the interest in the assetsheld by the “Debtor”, and that defined term referred solely to Exall Energy. [137] I also find that the March 2016 Order did not specify that the M-E Liens could be removed in respect of the interests that thePassive Working Interest Holders held in the underlying Canadian resources properties.

I make this finding because there is a distinctionbetween the interest that was owed by Exall Energy in the Purchased Assets (for discussion purposes, the “Exall 66% Interest”) and thecorresponding interest that was owned by the Passive Working Interest Holders in the same Canadian resource properties (for discussionpurposes, the “Passive 34% Interest”). [138] It was the Exall 66% Interest that was sold to Aeneid Exploration.

As such, ATB argues that the entire amount of the Holdbackconsists of proceeds from the sale of the Exall 66% Interest. [139] ATB further argues that the Lien Claimants are effectively making claims against the Exall 66% Interest at the time of sale.One or more of the other participants in this action also have asserted that there is no connection between the Holdback amount, on onehand, and any claims that the Lien Claimants have in the Passive 34% Interest that is held by the Passive Working Interest Holders, onthe other hand. [140] One or more of the other participants in these proceedings further asserts that the M-E Liens have ceased to exist, and are goneforever: Krause v Group Builders Inc (1990), (AB KB), 106 AR 29 at para 8.

Those other participants go on to arguethat the Lien Claimants are now unsecured debtors. [141] Viewed narrowly, the thrust of the ATB argument has merit. However, when looked at in context, I find that the security theLien Claimants held in the relevant Canadian resource properties has morphed into the Holdback. I make this finding for four reasons. [142] First, the Lien Claimants had security in the form of the M-E Liens. While the security inherent in the M-E Liens was displacedby the ATB Security in respect of the Exall 66% Interest, nothing displaced that same security in respect of the Passive 34% Interest.

Assuch, the Lien Claimants held valid security in the Passive 34% Interest immediately prior to that security being inadvertently removedbecause of a misunderstanding of the scope of the authority embedded in the March 2016 Order. [143] Given these facts, I find that it was not appropriate to discharge the entire security that the Lien Claimants held in the relevantCanadian resource properties (i.e., the Passive 34% Interest) without providing an alternative security for the Lien Claimants against thePassive Working Interest Holders.

Based on the production that has been realized by the Passive Working Interest Holders since the datethe Receivership Order was granted, I infer that the security represented by the M-E Liens in the Passive 34% Interest had valueimmediately prior to it being discharged. [144] But for the wording in clause 15 of the March 2016 Order and the Receiver’s interim statement of receipts and disbursements,my analysis would stop here, and I may have found that the Lien Claimants had no entitlement to the Holdback.

However, the wordingwithin that clause 15 and the overall cash flows require me to move to the next stage in the analysis. [145] Second, the clause 15 of the March 2016 Order stipulates that “[f]or the purposes of determining the nature and priority ofClaims, ...all Claims and encumbrances shall attach ... as if the Purchased Assets had not been sold and remained in the possession or

control of the person having that possession or control immediately prior to sale ” (emphasis added). [ 146 ] The words “immediately prior to sale” are of critical importance. I interpret those words to mean that I am to determine the Lien Claimants’ position by reference to the status of matters immediately prior the sale of the Purchased Assets. That wording brings a temporal aspect into the

interpretation task. [ 147 ] Given the wording in clause 15 of the March 2016 Order and the temporal aspect of that clause, I am obligated to determine the Lien Claimants’ security status as if the Purchased Assets had not been sold. Immediately prior to the sale of the Purchased Assets, the M-E Liens were in place and were valid security against the Passive 34% Interest. [ 148 ] Third, and notwithstanding specific arguments to the contrary, the Lien Claimants are not making a claim against the proceeds of sale that the Receiver realized on the sale of the Purchased Assets.

Further, I find that there is a connection between the Holdback amount and claims that the Lien Claimants have in the Passive 34% Interest that is held by the Passive Working Interest Holders. This finding is supported by the cash flow that is presented in the Interim Statement of Receipts and Disbursements for the Period of March 25, 2015 to May 31, 2016, as disclosed in the Third Receiver Report. [ 149 ] As outlined in Appendix A to this Decision, Exall Energy received $7,858,180 from the sale of certain of its assets during the period March 25, 2015 to May 31, 2016.

The majority of those receipts were from the sale of the Purchased Assets. During that same March 25, 2015 to May 31, 2016 period, Exall Energy (via the Receiver’s actions) distributed $7,933,369.74 to ATB. ATB received those funds in its capacity as the secured creditor. [ 150 ] Given these facts, it is evident that the Receiver distributed an amount to ATB which is in excess of the proceeds from the sale of the Purchased Assets. As a consequence, it is clear that the funds in the Holdback account are not solely sourced from the proceeds realized on the sale of the Purchased Assets.

That being the case, it cannot be said that the Lien Claimants are making claims solely against the proceeds realized on the sale of the Purchased Assets. To the contrary, the Lien Claimants are making claims against the Holdback because the funds in that account consist of either or both a commingling or a substitution of cash to which they had an entitlement. [ 151 ] Given that the Receiver has distributed more cash to ATB then it received from the sale of the Purchased Assets, inferences can be drawn.

That being the case, I infer that the source of the funds in the Holdback includes amounts that the Passive Working Interest Holders paid to the Operator in respect of the Aggregate Essential Partnership Lien.

The very reason the Lien Claimants filed the M-E Liens was to increase the likelihood that they could get paid by the parties that hold a working interest in the subject Canadian resource properties, and that includes the payments by the Passive Working Interest Holders to the Operator in respect of the Passive 34% Interest. [ 152 ] To support this inference, I need look no further than the fact that the Passive Working Interest Holders paid their respective portions of the Essential Claim to the Operator.

Notwithstanding that there is no evidence concerning when the Passive Working Interest Holders paid their portions of what underlies the Essential Claim to the Operator, given the last day that Essential Partnership supplied work and materials for the relevant oil and gas service work in respect of the subject Canadian resource properties (being January 30, 2015), given the timing of the registrations of the First Essential Partnership Lien and the Second Essential Partnership Lien (being February 13, 2015), and given the cash settlement dates for payables in the oil and gas industry (typically being no earlier than the 25 th day of the month following the issuances of the relevant JIBs), I infer that the Holdback account either includes some portion of the payments that the Passive Working Interest Holders made to the Operator in respect of the Essential Claim or includes substituted funds. [ 153 ] It is important to recognize that those particular payments by the Passive Working Interest Holders in respect of the Essential Claim were never intended to benefit either Exall Energy or ATB.

Further, neither Exall Energy nor ATB were entitled to those amounts. The intent under the 1990 Operating Procedure is that those amounts would simply flow-through to Essential Partnership. [ 154 ] Notwithstanding the intent, I find that the payments for that Passive 34% Interest have not flowed-through to Essential Partnership. Since the Operator received those payments from the Passive Working Interest Holders, those funds simply became commingled in the general operating bank account of Exall Energy.

That being the case, I infer that ATB has taken the economic benefit, directly or indirectly, of those funds in respect of that Passive 34% Interest which were destined for Essential Partnership. [ 155 ] Fourth, a determination that the Lien Claimants have an interest in the Holdback avoids an economic windfall to ATB.

While I take no issue with the ATB Security or its ability to displace unsecured creditors in the normal course, that security should not be allowed to capture amounts payable by the Passive Working Interest Holders that were designated to flow-through to Murdock Energy and Essential Partnership. [ 156 ] From a policy perspective, ATB has no right to those payments.

As a practical matter, any payments by the Passive Working Interest Holders that are in respect of work done by the Lien Claimants would only be captured by ATB if those funds had the misfortune to be commingled within the joint operating bank account of Exall Energy at the time that ATB enforced its security in circumstances where the Lien Claimant had not perfected their security. That is not the case with Murdock Energy or Essential Partnership. To the contrary, those two entities are protected by the M-E Liens, and the other steps they took to perfect their security.

That security should be honoured in respect of the notional Passive 34% Interest. [ 157 ] Given the above findings and inferences, the Lien Claimants are entitled to some portion of the Holdback. I do not state the amount of that entitlement because it is subject to a calculation. I emphasize the need for a calculation because the use of the “Passive 34% Interest” was for discussion purposes only.

The ownership interests that the Passive Working Interest Holders have in the relevant Canadian resource properties varies. [ 158 ] I also emphasize that the liability of each of the Passive Working Interest Holders is separate (and not joint and several). That being the case, the M-E Liens are only operative against the respective Passive Working Interest Holders to the extent of their proportionate liabilities. To emphasize the point, none of the Passive Working Interest Holders are liable for any portion of the Murdock

Claim or Essential Claim that is attributable to Exall Energy acting in its own capacity: Direct Energy at para 44. [ 159 ] In

summary, if I did not recognize the entitlement of the Lien Claimants against the Holdback, ATB would be receiving a windfall in the amount of the JIB payments (or amounts due under the JIB mechanism) that the Passive Working Interest Holders have made (or will make) for the work done by the Lien Claimants, but which payments have not flowed back to Murdock Energy and Essential Partnership, as the case may be. [ 160 ] If the parties require assistance to deal with this calculation, they have leave to bring this matter back before me. E.

Passive Working Interest Holders – Debt Obligations [ 161 ] The Passive Working Interest Holders owe amounts to Exall Energy in its capacity as the Operator. The amounts owed are in respect of the work and materials that Murdock Energy provided to Exall Energy, and to which the Aggregate Murdock Lien applied before it was discharged. [ 162 ] The substantive issues that I need to address are twofold. First, to whom is the Passive W.I. Holders Indebtedness owed? Second, should the Murdock Claim and the Essential Claim be dismissed summarily? 1.

Incremental Facts [ 163 ] The Passive Working Interest Holders owe the following amounts in respect of their joint interest billings: Chair Resources, $26,155.29; Canden Resources, $8,058.61; and LMP Resource, $4,005.06 (the aggregate being $38,218.96, which is defined herein as the “ Passive W.I. Holders Indebtedness ”.) [ 164 ] The M-E Liens no longer exist. 2. The Law [ 165 ] The Passive Working Interest Holders owe the Passive W.I. Holders Indebtedness in the initial context to the Operator.

That obligation to the Operator arises under the 1990 Operating Procedure: Direct Energy at para 44. [ 166 ] A lien that has ceased to exist is gone forever: Krause , at para 8 : see also Wil-ton Construction Ltd v Amerada Minerals Corporation of Canada Ltd , 1989 ABCA 213 . [ 167 ] An applicant is entitled to

summary dismissal if there is no merit to a claim or part of it: Alberta Rules of Court, Alta Reg 124/2010, s 7.3; and Wood Buffalo Housing & Development Corporation v Alves Construction Ltd , 2016 ABQB 249 at para 33 . To have merit, there must be a genuine issue involving a potentially decisive material fact that cannot be summarily found against the non- moving party on the record. This determination pivots on whether the circumstances require viva voce evidence to properly resolve the case: 776826 Alberta Ltd v Ostrowercha , 2015 ABCA 49 at paras 10 and 11 . 3.

Application of the Law [ 168 ] The Holdback represents security for the Lien Claimants in respect of the M-E Liens that were discharged in order to provide clear title to the Purchased Assets acquired by Aeneid Exploration. The PSA under which Aeneid Exploration acquired the Purchased Assets was certified closed on April 27, 2016. Shortly thereafter, all encumbrances registered against the assets were discharged by the Minister of Energy (including the M-E Liens). [ 169 ] For reasons outlined above, I have held that the Lien Claimants are entitled to some portion of the Holdback.

That decision implicitly allows the normal processes within the 1990 Operating Procedure to apply. [ 170 ] Given these circumstances, I find that the Passive Working Interest Holders owe their respective components of the Passive W.I. Holders Indebtedness to the Receiver (in its capacity as the Operator). The Receiver will deal with the resulting priorities, as appropriate. To do otherwise upsets the legal framework that applies in the normal operation of the general operating bank account of the Operator, as provided for in the 1990 Operating Procedure. Further, my findings above under “D.

Lien Claimants – Priority” ensures that the economic burden of the Passive W.I. Holders Indebtedness will flow to the benefit of the Lien Claimants. If it were otherwise, ATB would receive a windfall at the expense of the Lien Claimants.

That would not be appropriate for policy reasons, and is not consistent with the legal relationships that are established under the 1990 Operating Procedure ( i.e. , obligations are separate: clause 1501). [ 171 ] Concerning the question as to whether the Murdock Claim and the Essential Claim should be dismissed summarily, I considered this issue on a stand-alone basis because the M-E Liens have been discharged.

Since the M-E Liens have been discharged, the Murdock Claim and the Essential Claim are simply debt claims against the Passive Working Interest Holders. [ 172 ] Given my decision concerning the ability of the Lien Holders to access the Holdback, the Murdock Claim and the Essential Claim are dismissed. For clarity, these dismissals relate to Court Actions 1503-08745 and 1501-04433, respectively. [ 173 ] These dismissals are appropriate in these circumstances for two reasons. First, the only evidence consists of records.

An affidavit is sufficient to provide the authenticity of the records in which the evidence is contained: Alberta Rules of Court , s 7.2. Second, given the nature of this case, I find that no viva voce evidence is necessary. As a consequence, it is appropriate to dismiss both actions. F. ATB – Interim Distribution

[ 174 ] The substantive question concerning an interim distribution is whether it is appropriate for the Receiver to make a distribution of the entire amount of the Holdback to ATB. [ 175 ] ATB is seeking an interim distribution as a contribution toward its secured claim. Subject to dealing with the entitlements of the Lien Claimants, an interim distribution may be made to ATB. Given the findings above, a calculation needs to be made by the parties. [ 176 ] The Receiver has also requested that I authorize a distribution of $89,176.50 to Sorus Consulting.

ATB has not opposed this request, notwithstanding that it is aware that Sorus Consulting did not perfect is security. [ 177 ] I authorize this distribution to Sorus Consulting, provided that payment is made out of the residual funds that are otherwise payable to ATB. In effect, ATB is funding the distribution to Sorus Consulting. [ 178 ] If ATB needs to deal with some particulars as a result of this decision, it has leave to bring this matter back before me to deal with operational matters.

As stated above, I grant this leave because I have not calculated what amounts will be flowing to the various parties as a result of the above findings. As stated above, the Lien Claimants are entitled to draw against Holdback, but only in respect of the liability that the Passive Working Interest Holders have to those two service providers. Using the conceptual reference that I discussed above, the Lien Claimants are entitled to draw against the Holdback for the amounts reflected in the Passive 34% Interest, but no more.

Since the parties have separate interests in the target Canadian resource property, the Passive Working Interest Holders cannot be held liable to the Lien Claimants for the portion of Murdock Claim or the Essential Claim for which Exall Energy was liable. G.

Receiver and Legal Counsel – Approval Order [ 179 ] The substantive question concerning the actions, conduct and activities of the Receiver and its legal counsel is whether it is appropriate for this Court to approve those events, all of which are outlined in the Third Receiver Report and all other reports filed by the Receiver. [ 180 ] Based on my review of matters in the various reports issued by the Receiver (including the Third Receiver Report and the Supplement Third Receiver Report) and taking into account my above findings in

Section “D. Lien Claimants – Priority”, I approve the actions, conduct and activities of the Receiver and its legal counsel. I grant this approval notwithstanding my findings that the security held by the Lien Claimants in respect of the Passive 34% Interest (this percentage being used for discussion purposes only) was released in error. The reason for granting this approval is because there are sufficient funds in the Holdback to address the outstanding claims associated with the M-E Liens. H.

Receiver Receipts and Disbursements – Approval Order [ 181 ] The substantive question concerning the Interim Financial Statements is whether it is appropriate for this Court to approve of the Receipts and Disbursements of the Receiver for the period March 25, 2015 to May 31, 2016 as set out in the Third Receiver Report. [ 182 ] Based on my review of the related documentation, I ratify and approve the Interim Statement of Receipts and Disbursements of the Receiver for the period March 25, 2015 to May 31, 2016, as set out in the Third Receiver Report. V. Conclusions – A

Summary A. The 2008 Trust Declaration [ 183 ] The 2008 Trust was not a valid and subsisting trust at the relevant time. As a result, when considered from the perspective of the 2008 Trust argument, the indebtedness owed by Exall Energy to LMP Resource does not rank in priority to the ATB Security. B. The CAPL Deemed Trust [ 184 ] Clause 507 of the 1990 Operating Procedure has not impressed a deemed trust on the general operating bank account of Exall Energy at the relevant time.

As a result, when considered from the perspective of the 507 Trust argument, the indebtedness owed by Exall Energy to LMP Resource does not rank in priority to the ATB Security. C. Production In-Kind [ 185 ] The request for a direction from the Court that LMP Resource be allowed to take its production in-kind is moot in these circumstances. The entitlement of LMP Resource to take its production in-kind is governed by contractual terms, and the corporation has exercised those rights. Further, LMP has no prima facie right to such an Order from the Court. D.

Lien Claimants – Priority [ 186 ] The security which the Lien Claimants held in the Canadian resource properties owned by Exall Energy was discharged appropriately. The Lien Claimants do not have priority over the ATB security in respect of the interest that Exall Energy had in those Canadian resource properties. [ 187 ] In contrast, the security which the Lien Claimants held in the Canadian resource properties that were owned by the Passive Working Interest Holders was not discharged appropriately. Given the wording in the March 2016 Order, the Lien Claimants are entitled

to enforce their security against the Holdback to the extent that the Passive Working Interest Holders would be liable in the ordinary course for the work and material provided. [ 188 ] Given the separate interests held by the Passive Working Interest Holders and the fact that their liability is not joint and collective with Exall Energy, the notional amount payable to the Lien Claimants from the Holdback would be in the range of $276,247.18 [$38,218.96 + (700,083.01 x 34%)].

This finding is bolstered by the fact that ATB would otherwise receive a windfall in respect of amounts that are paid or payable by the Passive Working Interest Holders to the Operator for the work done by the Lien Claimants. E. Passive Working Interest Holders – Debt Obligations [ 189 ] The Passive Working Interest Holders owe their respective components of the Passive W.I. Holders Indebtedness to the Receiver. This conclusion is grounded in the fact that the M-E Liens have been discharged. As such, the Murdock Claim and Essential Claim are simply debt claims. That being the case, the Passive W.I.

Holders Indebtedness should flow to the Operator, as those payments would in the ordinary course. Further the Murdock Claim and the Essential Claim are both dismissed. F. ATB – Interim Distribution [ 190 ] Subject to dealing with the entitlements of the Lien Claimants, an interim distribution may be made to ATB. A distribution of $89,176.50 also may be made to Sorus Consulting, provided that payment is made out of the residual funds that are otherwise payable to ATB. G.

Receiver and Legal Counsel – Approval Order [ 191 ] Notwithstanding my findings that the security held by the Lien Claimants in the Passive 34% Interest was released in error, I approve the actions, conduct and activities of the Receiver and its legal counsel. The reason I grant this approval is because there are sufficient funds in the Holdback account to address the outstanding claims. H.

Receiver Receipts and Disbursements – Approval Order [ 192 ] I ratify and approve the Interim Statement of Receipts and Disbursements of the Receiver for the period March 25, 2015 to May 31, 2016, as set out in the Third Receiver Report. I. Costs [ 193 ] If the parties cannot agree on costs, they may be spoken to at a future date. Heard on the 27 th day of July, 2016. Oral decision given on September 8, 2017. Written decision at the City of Calgary, Alberta this 30 th day of November, 2017. D.B. Nixon J.C.Q.B.A. Appearances: Ryan Zahara and James Reid, Blake, Cassels & Graydon LLP for MNP Ltd.

Derek Pontin, Dentons Canada LLP for Alberta Treasury Branches.

Thomas Gelbman and Emily Paplawski, Osler, Hoskin, & Harcourt LLP for Canden Resources Ltd., Chain Resources Inc. and LMP Resource Investments Ltd. Richard Billington, QC, Billington Barristers for LMP Resource Investment Ltd. Bradley Smith, Verhaeghe Law Office for Murdock Energy Inc. Calvin Robb, Robb & Evenson for Essential Well Service Partnership.

Appendix “A” Exall Energy Corporation – In Receivership Interim Statement of Receipts and Disbursements For the Period March 25, 2015 to May 31, 2016 Receipts March 25/15 to May 31/16 Net Receipts from Operations $ 2,080,996.88 Cash in Bank 496,519.17 Sale of Assets 7,858,180.00 Interest Income 13,160.34 Accounts Receivable 512,473.30 Miscellaneous Refunds 1,927.79 GST Collected (Net) 59,584.30 Total Receipts 11,022,841.78 Disbursements Clean Up Costs Associated with Vacating Premises 2,681.84 Storage 625.80 Commission 177,486.00 Appraisal Fees 500.00 GST Remitted 102,534.04 Consulting Services 344,329.00 Legal Fees and Disbursements 101,244.90 Receiver’s Fees 404,280.42 Payment to Secured Creditor 7,933,369.74 Wage Earner Protection Program Act 5,865.77 Miscellaneous 139.00 Total Disbursements 9,073,056.51 Excess of Receipts over Disbursements $ 1,949,785.27

Appendix “A” Exall Energy Corporation – In Receivership Interim Statement of Receipts and Disbursements For the Period March 25, 2015 to May 31, 2016 As at May 31/16 Represented by: General Bank Account $ 3,962.10 Funds Held in Interest Bearing Account (See the Note below) 1,945,823.17 $ 1,949,785.27 Note: Held pending further Order of the Court $ 1,264,493.45 Held pending Final Statement of Adjustments 153,579.88 Unencumbered 531,711.94 $ 1,949,785.27