National Bank of Canada v Twin Butte Energy Ltd, 2017 ABQB 608

Court of Queen’s Bench of Alberta Citation: National Bank of Canada v Twin Butte Energy Ltd, 2017 ABQB 608 Date: 20171011 Docket: 1601 11552 Registry: Calgary Between: National Bank of Canada, in its Capacity as Administrative Agent under that certain Amended and Restated Credit Agreement dated January 15, 2016, as amended Applicant - and - Twin Butte Energy Ltd. Respondent _______________________________________________________ Reasons for the Decision of the Honourable Mr. Justice K.D. Yamauchi _______________________________________________________ I.

Introduction [ 1 ] This matter arises out of an application by FTI Consulting Canada Inc (the “Receiver”), receiver and manager of the assets, property and undertaking of Twin Butte Energy Ltd (“Twin Butte”). The Receiver applies for an interim distribution and holdback of certain funds that resulted from the sale of Twin Butte’s assets. [ 2 ] There are 2 issues on which the parties seek this Court’s ruling, which are: A. Whether Robert Wollmann is entitled to compensation for his alleged constructive dismissal resulting from the Receiver’s appointment; and B.

Whether the taxing authorities are entitled to post-receivership interest. II. Robert Wollmann: Background Facts [ 3 ] Mr. Wollmann entered into an executive employment agreement with Twin Butte effective May 14, 2014 (the “Agreement”). The Agreement contained a number of provisions including the following:

3.1 The Executive shall serve the Corporation in the full-time capacity of President and shall perform the duties on a full-time basis asdetermined from time to time by the Board of Directors and the duties that are customarily done by an executive in the same position in acorporation of similar size and business to the Corporation, to the best of the Executive's ability. [4] On or about March 25, 2015, Mr. Wollmann was appointed Twin Butte’s Chief Executive Officer in addition to hiscontinuing responsibilities as President.

At this time, Twin Butte provided him with a document headed “Position Description,” whichoutlined his key areas of responsibility which included: strategic direction, operating, capital and financial plans; management andorganization; finance and controls; and, delegation. [5] The Agreement also contained the following: 1.1 In this Agreement the following words shall have the following meanings: ... (f) "Constructive Dismissal" means, unless consented to by the Executive, any action which constitutes constructive dismissal of theExecutive including, without limiting the generality of the foregoing: (

i) a material decrease in the title, position, responsibility or powers of the Executive; (ii) a requirement to relocate to another city, province, or country; or (iii) any material reduction in the value of the Executive's benefits, salary, plans and programs; [6] The Agreement also contained provisions concerning Mr. Wollmann’s pay entitlements on his termination, which includedConstructive Dismissal. [7] On September 1, 2016, a group of Twin Butte's lenders led by National Bank of Canada applied for and were granted anorder appointing the Receiver.

On the same date, Twin Butte’s directors resigned en masse. [8] On September 2, 2016, Mr. Wollmann delivered a letter to Twin Butte stating that the Receiver’s appointment, and resultingchanges to the terms of his employment, constituted constructive dismissal under the Agreement. [9] On September 3, 2016, Mr. Wollmann entered into a consulting agreement with the Receiver in which he agreed to provideservices to the Receiver, as needed. [10] On or about September 6, 2016, the Toronto Stock Exchange delisted Twin Butte's shares. III. Robert Wollmann: Discussion [11] Mr.

Wollmann argues that the appointment of the Receiver and the resignation of Twin Butte’s board of directors resulted in amaterial decrease in his position, responsibility and powers. In particular, he argues that because of the Receiver’s appointment he couldno longer undertake the following duties:

a) work with the board to define Twin Butte’s principal objectives;

b) carry out the management of Twin Butte’s business affairs with the goal of achieving its principal objectives as defined by theboard;

c) present short and long-term strategic plans to the board;

d) establish the limits of management's authority and responsibility in conducting Twin Butte’s business;

e) present plans of potential issuances of additional common shares or other securities to the public; and

f) monitor and communicate the appropriateness of Twin Butte’s capital structure to the board. [12] As well, he argues that the appointment of the Receiver, the resignation of Twin Butte’s board of director's, and the delistingof Twin Butte's shares resulted in a material reduction in the value of his compensation.

He argues that the Share Award Incentive Planwhich represented more than half of his total compensation could no longer be implemented following these events. [13] Thus, he argues that the appointment of the Receiver and resulting changes to the terms of his employment constituted aconstructive dismissal under the Agreement. [14] The parties spent a great deal of time presenting this Court with arguments concerning whether they had met the 2-part test todetermine whether Mr.

Wollmann had been constructively dismissed, based on the Supreme Court of Canada’s decision in Potter v NewBrunswick Legal Aid Services Commission, 2015 SCC 10, [2015] 1 SCR 500 [Potter].

With respect, this puts the cart before the horse.It is this Court’s view that we should first look to see the effect of receivership on the powers of the corporation and its directors andofficers. [15] The law is clear that receivership divests the corporation, its board of directors, and its officers of their power to deal with theproperty comprised in the appointment: Nova Metal Products Inc v Comiskey (Trustee of) (1990), (ON CA), 1 OR(3d) 289 at 298, 314 (CA); Alberta Treasury Branches v Hat Development Ltd (1988), (AB KB), 64 Alta LR (2d)

17, 71 CBR (NS) 264 (QB) at 268. In many cases, courts have articulated this principle when the corporation’s directors attempt tooverride the receiver’s powers or undertake certain duties that fall into the receiver’s hands. Does this mean that the directors are dismissed?

In a leading Canadian treatise, Frank Bennett, Bennett on Receiverships, 3rd ed (Toronto: Carswell, 2011) [Bennett], theauthor says the following: The appointment of a receiver and manager, whether court or private, does not dissolve a debtor corporation but merely suspends it anddeprives the debtor of all its power to enter into contracts or dispose of the property. The powers of the officers and directors of thedebtor corporation are only suspended with respect to the assets, even though management and control of the assets are transferred to thereceiver.

The directors are not relieved of their statutory duties albeit they may be difficult to perform. Bennett at 84. [16] Later, the author says, “[t]he powers of the directors and officers of the debtor corporation are suspended during the currencyof the order with respect to the management of the assets under the receiver’s care”: Bennett at 214-15 [emphasis added]. [17] What that tells us is that the directors and officers are not dismissed, constructively or otherwise. Nor do their roles change.Their roles in the corporation are merely suspended during the pendency of the receivership.

When the receivership concludes, theyassume their pre-existing roles, although the nature of the corporation may result in a change of those roles. [18] It is arguable that the Agreement is a contract of employment, rather than an agreement that deals with a corporate officer. Ifthat is the case, which this Court is not so ruling, there is case law which suggests that the court appointment of a receiver operates as adismissal of employees. See e.g. Toronto Dominion Bank v Leonard Industries Ltd, (SK KB), [1984] 1 WWR 120(Sask QB); Central Trust Co v Major Properties Inc (1987), (BC SC), 70 CBR 288 (BCSC).

It is this Court’s view that a more principled approach is contained in Big Sky Living Inc (Re) (2002), 2002 ABQB 659 , 37 CBR (4th) 42 at para 39(Alta QB), in which Slatter J, as he then was, said the following: Paragraph 11 starts out by providing that all employment is "hereby" terminated. I am prepared to assume that the Interim Receiver mayunilaterally terminate the employment of the employees. If the Interim Receiver did so, or if that is the legal effect of a receivership, itmight well be appropriate on notice to seek a declaration of the Court to confirm that fact.

However, that is a far different thing fromasking the Court, by court order, to terminate employees, or to declare that result, if only because there is no evidence on the recordwhatsoever to justify such action. A further problem arises in that an employee might be terminated by this Order, but not find out aboutthe termination until sometime later when he or she is actually served with the Order. Accordingly, the provision for termination shouldnot be included.

The Interim Receiver may terminate employees if it wishes, and may apply for further relief on notice to affectedemployees. [19] This Court acknowledges that Slatter J was dealing with an order appointing an interim receiver under the Bankruptcy andInsolvency Act, but it is this Court’s view that the same concerns that he raised apply to a court order appointing a receiver and manager.

Pitt J dealt with this head-on in Peoples Trust Co v Paragon Health Care Inc (2007), (ON SC), 38 CBR (5th) 123 atpara 18 (Ont Sup Ct J), where he said the following: It is my view that the issue remains unresolved, and that the better view is that the dismissal is not automatic, but is at the discretion ofthe Receiver. A receiver may often find it to be in the interest of all parties to retain the services of some or all employees to continue theoperation of the business. [20] In the case at bar, the Receiver took no steps to dismiss Mr. Wollmann. In fact, Mr.

Wollmann assumed that his role hadchanged by virtue of the receivership and resigned citing “constructive dismissal” as the basis on which he resigned. With respect, thecourt’s appointment of a receiver merely suspended his role. It did not “dismiss” him. [21] The foregoing is sufficient to deal with Mr. Wollmann’s claim for compensation, which this Court denies. As a result, thisCourt rejects Mr. Wollmann’s notice of dispute, and confirms that he has no claim as against the monies in the Receiver’s hands. [22] The parties spent time arguing Potter, so this Court will deal briefly with it.

Potter provided a framework for this Court’sanalysis by saying the following: The burden rests on the employee to establish that he or she has been constructively dismissed. If the employee is successful, he or she isthen entitled to damages in lieu of reasonable notice of termination. ... [T]he purpose of the inquiry is to determine whether theemployer's act evinced an intention no longer to be bound by the contract.

Given that employment contracts are dynamic in comparison with commercial contracts, courts have properly taken a flexible approachin determining whether the employer's conduct evinced an intention no longer to be bound by the contract. There are two branches of thetest that have emerged. Most often, the court must first identify an express or implied contract term that has been breached, and thendetermine whether that breach was sufficiently serious to constitute constructive dismissal. ...

Typically, the breach in question involveschanges to the employee's compensation, work assignments or place of work that are both unilateral and substantial ... In the words ofMcCardie J., in Rubel Bronze, at p. 323, "[t]he question is ever one of degree". However, an employer's conduct will also constitute constructive dismissal if it more generally shows that the employer intended not tobe bound by the contract. ...

The first branch of the test for constructive dismissal, the one that requires a review of specific terms of the contract, has two steps: first,the employer's unilateral change must be found to constitute a breach of the employment contract and, second, if it does constitute such abreach, it must be found to substantially alter an essential term of the contract (see Sproat, at p. 5-5). Often, the first step of the test willrequire little analysis, as the breach will be obvious. Where the breach is less obvious, however, as is often the case with suspensions, amore careful analysis may be required.

... At the first step of the analysis, the court must determine objectively whether a breach has occurred. To do so, it must ascertain whether the employer has unilaterally changed the contract . If an express or an implied term gives the employer the authority to make the change, or if the employee consents to or acquiesces in it, the change is not a unilateral act and therefore will not constitute a breach. If so, it does not amount to constructive dismissal. Moreover, to qualify as a breach, the change must be detrimental to the employee.

Once it has been objectively established that a breach has occurred, the court must turn to the second step of the analysis and ask whether, "at the time the [breach occurred], a reasonable person in the same situation as the employee would have felt that the essential terms of the employment contract were being substantially changed" ( Farber , at para. 26). A breach that is minor in that it could not be perceived as having substantially changed an essential term of the contract does not amount to constructive dismissal.

The kinds of changes that meet these criteria will depend on the facts of the case being considered, so "one cannot generalize": Sproat , at p. 5-6.5. In each case, determining whether an employee has been constructively dismissed is a "highly fact-driven exercise" in which the court must determine whether the changes are reasonable and whether they are within the scope of the employee's job description or employment contract: ...

Although the test for constructive dismissal does not vary depending on the nature of the alleged breach, how it is applied will nevertheless reflect the distinct factual circumstances of each claim. Potter at paras 31-40 [emphasis added]. [ 23 ] The reason this Court emphasized certain portions is to show that it is actions of the employer that courts will examine. In the case at bar, the employer, Twin Butte, did nothing. It was the court that appointed the Receiver, which resulted in Mr. Wollmann’s role being suspended. Neither Twin Butte nor the Receiver did anything unilaterally to change the Agreement. Mr.

Wollmann undertook that task when he resigned. [ 24 ] Mr. Wollmann bears the burden of meeting the 2-part test. Even if the appointment of the Receiver can somehow been seen to require the Receiver to undertake the role of Twin Butte, which this Court unreservedly rejects, Mr. Wollmann’s role in Twin Butte did not substantially change on the appointment of the Receiver. The Receiver’s cross-examination of Mr. Wollmann on his affidavit shows that Mr.

Wollmann acknowledged that Twin Butte’s dire financial situation was due to the rapid decrease in commodity prices and his role in Twin Butte was to sell Twin Butte to generate the best return for stakeholders. It was not to undertake a “big picture” strategic plan, which he argues that the receivership scuttled. In other words, he cannot show that the order appointing the Receiver resulted in a “fundamental and unilateral breach” in the Agreement. That “breach” if any occurred long before the court appointed the Receiver. Besides, it was not a “breach” at all.

He was already undertaking that task so it was not detrimental to him. Furthermore, the reduction in his compensation did not result from the de-listing of Twin Butte’s shares. It resulted from Twin Butte’s overall financial performance pre-receivership. [ 25 ] As for the second part of the Potter test, this Court finds that Mr. Wollmann made certain unreasonable assumptions concerning his role and that of the Receiver, which were not borne out by the facts of this case. The Receiver continued to undertake the tasks that Mr.

Wollman had begun undertaking in the year before the court appointed the Receiver, and it retained Mr. Wollmann to assist it. This is not how a reasonable person would have established whether the essential terms of the Agreement had substantially changed. [ 26 ] Accordingly, Mr. Wollmann has not met his onus of establishing that the Potter applies to show that he was constructively dismissed. IV.

Post-Receivership Interest: Background Facts [ 27 ] Much of this background is taken from the bench brief that the Receiver provided to this Court. [ 28 ] On May 16, 2017, Canada Revenue Agency (“CRA”) submitted a claim in the Twin Butte claims process in the amount of $6,199,879, including claims for penalties and interest. The Receiver has filed Twin Butte’s 2016 tax returns that offset CRA’s claim. CRA is reviewing the returns. [ 29 ] On May 2, 2017, Alberta Treasury submitted a claim in the amount of $3,191,487 in connection with 2014 and 2015 income tax that it had in 2016.

On June 15, 2017, the Receiver filed a notice of disallowance on the basis that the Receiver had filed 2016 tax returns with losses sufficient to fully offset Alberta Treasury's claim. [ 30 ] On June 21, 2017, Alberta Treasury issued a notice of re-assessment to the Receiver advising that it had carried back the 2016 losses as filed in the 2016 tax returns which offset the 2014 and 2015 re-assessed taxes owing. Nevertheless, Alberta Treasury continues to assert a claim for interest and penalties totalling $247,859.25, concerning post-filing interest. V.

Post-Receivership Interest: Discussion [ 31 ] Alberta Treasury did not appear at the hearing of this matter. CRA made representations arguing, in particular, that interest should stop accruing at the time when the court approves the claims procedure, which, in the case at bar, is April 27, 2017.

The Receiver argues that interest should stop accruing on the date the Receiver was appointed, which was September 1, 2016. [ 32 ] In Canada (Attorney General) v Confederation Life Insurance Co , 2001 CarswellOnt 2299, [2001] OJ No 2610 (Sup Ct J) , Blair J was dealing with the winding-up of the Confederation Life Insurance Company. Although he was not dealing with a receivership, Blair J made the following general comment about insolvencies, and the distribution of the insolvent’s estate:

One of the governing principles of insolvency law — including proceedings in a winding-up — is that the assets of the insolvent debtorare to be distributed amongst classes of creditors rateably and equally, as those assets are found at the date of the insolvency. Thisprinciple has led to the development of the "interest stops rule", i.e., that no interest is payable on a debt from the date of the winding-upor bankruptcy. As Lord Justice James put it, colourfully, in Savin, Re (1872), 7 Ch. App. 760 (Eng. Ch.

Div.), at p. 764: I believe, however, that if the question now arose for the first time I should agree with the rule [i.e. the "interest stops rule"], seeing thatthe theory in bankruptcy is to stop all things at the date of the bankruptcy, and to divide the wreck of the man's property as it stood atthat time. [33] Blair J also provided a quotation from the old case of Humber Ironworks & Shipbuilding Co., Warrant Finance Co.'s Case(1869), 38 LJ Ch 712 (Eng Ch Div), where Selwyn LJ said the following: ...

Now it has been admitted, very properly, that, as to interest due at the date of the winding-up, there can be no doubt ... because ...interest due at the date of the winding-up is just as much a debt as the principal. ... Justice, I think, requires ... that all the money of aninsolvent estate, being realized as speedily as possible, should be applied equally and rateably in payment of the debts as they existed atthe date of the winding-up. I think, therefore, that nothing should be allowed for interest from that date.

Consequently, in the presentcase, this debt of 25,000£, which had no interest due upon it at the date of the winding-up, should stand as a debt for that sum, and for nomore. ... I think that as the tree falls, so it must lie. It must be ascertained what are the debts which existed at the date of the winding-up,and all dividends in the case of an insolvent estate must be declared in respect of the debts so ascertained. [34] The “interest stops rule” has been applied in proceedings under the Companies’ Creditors Arrangement Act. See e.g. NortelNetworks Corp (Re), 2015 ONCA 681.

As well, the Bankruptcy and Insolvency Act adopts the “interest stops rule” in section 122(2),which provides as follows: 122.

(2) If interest on any debt or sum certain is provable under this Act but the rate of interest has not been agreed on, the creditor mayprove interest at a rate not exceeding five per cent per annum to the date of the bankruptcy from the time the debt or sum was payable, ifevidenced by a written document, or, if not so evidenced, from the time notice has been given the debtor of the interest claimed. [Emphasis added]. [35] Should the situation be any different in a receivership scenario?

This Court finds that it would be highly unusual to giveinterest in a receivership situation any different treatment than the courts have given in winding-up and arrangement scenarios. It is alsocognizant of the fact that Blair J did not single out only winding-up scenarios, but stated that the “interest stops rule” applies to anysituation where the parties are dealing with an insolvent debtor.

In Redstone Investment Corporation (8 March 2017), Toronto CV-14-10495-00CL (Ont Sup Ct J), Morawetz RSJ granted a distribution order in the receivership proceedings before him, based on thereceiver’s report, which argued in favour of the “interest stops rule,” as it related to certain creditors. [36] This Court rejects CRA’s argument that interest should continue to accrue until the date of issuance of a claims order. It fliesin the face of the “interest stops rule” in the sense that the creditors are not being treated rateably.

If for example one creditor is claiminginterest at 5% per annum and another is seeking interest at 20% per annum, there is no parity. The date on which the receivership orderis granted fixes those claims at a time certain; as the tree falls, so it must lie.

This Court agrees with Wachowich ACJQB, as he then was,said in Canada Deposit Insurance Corp v Canadian Commercial Bank (1993), (AB KB), 11 Alta LR (3d) 371, 143AR 266 at para 23 (QB),when he said the following: This solution will freeze the relative position of the different classes of creditors at the date of the Winding-up Order, and not permit thepassage of time to skew the result. [37] This Court declares that the “interest stops rule” applies to Alberta Treasury’s claim for interest post-receivership order.

It ispremature for this Court to declare that the “interest stops rule” applies to CRA’s claim, as CRA has not yet crystallized its claim. ThisCourt does not know how CRA will frame its claim. If, however, it seeks post-receivership order interest in the same manner as AlbertaTreasury, this Court’s decision applies with equal force to CRA’s claim. Heard on the 20th day of September, 2017. Dated at the City of Calgary, Alberta this 11th day of October, 2017. K.D. Yamauchi J.C.Q.B.A. Appearances:

Howard Gorman Q.C., Correna L. Jones & Aditya M. Badami Norton Rose Fulbright Canada LLP for the FTI Consulting Canada Inc., Receiver of Twin Butte Energy Ltd. Chris Simard Bennett Jones LLP for the Ad Hoc Committee of Debenture Holders Roxanne M. Davis Carbert Waite LLP for Robert Wollmann Jill Medhurst Canada Revenue Agency for Canada Revenue Agency