Bellatrix Exploration Ltd (Re), 2020 ABQB 809

Court of Queen’s Bench of Alberta Citation: Bellatrix Exploration Ltd (Re), 2020 ABQB 809 Date: 20201222 Docket: 1901 13767 Registry: Calgary In the Matter of the Companies' Creditors Arrangement Act , R.S.C. 1985, c. C-36 , as amended -and- In the Matter of the Compromise or Arrangement of Bellatrix Exploration Ltd. _______________________________________________________ Reasons for Decision of the Honourable Madam Justice B.E.

Romaine _______________________________________________________ I Introduction [ 1 ] The ultimate issue in this application is whether BP Canada Energy Group ULC or the First Lien Lenders to Bellatrix Exploration Ltd. have priority to certain funds held by the Monitor and by Bellatrix pending resolution of disputed claims.

These claims include BP’s breach of contract claim arising from Bellatrix’s purported disclaimer of, and ongoing failure to perform under, a GasEDI agreement between Bellatrix and BP. [ 2 ] Bellatrix has obtained protection from its creditors under the Companies Creditors’ Arrangement Act , RSC 1985, c. C-36 , as amended. It holds approximately US$14.2 million of the funds in issue and approximately US$1.6 million is held by PricewaterhouseCoopers Inc. in its capacity as Court-appointed Monitor of Bellatrix.

II Relevant Facts [ 3 ] Bellatrix and BP were parties to a GasEDI Base contract for the short-term sale and purchase of natural gas and a Special Provisions for GasEDI Base Contract, both dated as of March 1, 2010 (collectively, with transaction confirmations, the “GasEDI Agreement”). [ 4 ] Bellatrix and BP entered into two transaction confirmations pursuant to the terms of the GasEDI Agreement, dated as of December 12, 2017. [ 5 ] Pursuant to the GasEDI Agreement, Bellatrix was required to deliver natural gas to an agreed delivery point in Alberta. BP would then purchase and take title to that natural gas.

Pursuant to the transaction confirmations, BP agreed to pay for the natural gas in accordance with a pricing formula based on posted index prices at specific or designated downstream pricing hubs in the US and Ontario, on a month to month basis.

The GasEDI Agreement does not provide BP with a security interest in respect of Bellatrix’s obligations under the contract. [ 6 ] Bellatrix was granted protection under the CCAA by an initial order dated October 2, 2019. [ 7 ] On November 25, 2019, with the Monitor’s approval, Bellatrix sent BP a Disclaimer Notice with respect to the GasEDI Agreement, pursuant to section 32(1) of the CCAA. The Disclaimer Notice provided that the disclaimer of the GasEDI Agreement, unless successfully objected to by BP, would not take effect until December 25, 2019, 30 days later.

[ 8 ] On November 25, 2019, BP responded to the Disclaimer Notice, advising Bellatrix of its view that the GasEDI Agreement constituted an eligible financial contract (“EFC”) under the CCAA, and that therefore it could not be disclaimed. [ 9 ] On November 26, 2019, Bellatrix stopped delivering gas to BP. [ 10 ] On November 27, 2019, Bellatrix offered to resume delivery of natural gas under the GasEDI Agreement during the disclaimer period if BP would agree not to withhold revenues owed to Bellatrix. Bellatrix proposed that BP pay Bellatrix revenue without any set-off, reduction or deduction.

On the same day BP responded, refusing to accept the terms of this proposal. [ 11 ] On November 28 and November 29, 2019, BP sent letters reiterating its position that the GasEDI Agreement was an EFC and could not be disclaimed, and demanding that Bellatrix immediately resume performance under the contract.

In its letters, BP stated that, even if the GasEDI Agreement was not an EFC, Bellatrix continued to be bound by the terms of the agreement until the expiry of the disclaimer notice period, and that Bellatrix’s unilateral breach thereof constituted a post-filing breach. [ 12 ] Bellatrix had delivered natural gas to BP in accordance with the GasEDI Agreement from November 1 to November 25, 2019. The amount payable to Bellatrix by BP for that natural gas was US$1,583,859.38, subject to any valid rights of set-off.

That amount would ordinarily have been paid on December 24, 2019. [ 13 ] On December 6, 2019, Bellatrix, BP and the Monitor entered into an agreement pursuant to which BP paid the December payment to the Monitor in trust pending further resolution of matters relating to Bellatrix’s disclaimer of the GasEDI Agreement.

The agreement reserved all rights of BP in respect of the December payment, including the right, if applicable, to set-off or net the December payment against any obligations of Bellatrix to BP under the GasEDI Agreement. [ 14 ] BP filed an application seeking a declaration that the GasEDI Agreement is an EFC within the meaning of the CCAA.

BP sought additional relief in its application, including an order enjoining Bellatrix from unilaterally suspending deliveries of gas under the agreement, but due to time constraints, the parties agreed to limit submissions to the single issue of whether the GasEDI Agreement is an EFC. If BP had proceeded with the other relief it sought and been successful, Bellatrix would have been required to deliver gas to BP, but not entitled to receive the proceeds of sale. [ 15 ] On February 4, 2020, Jones, J. held that the agreement was an EFC: Re Bellatrix Exploration Ltd. [2020] AJ No 329 (the “EFC Decision”).

This decision is under appeal, leave granted 2020 ABCA 178 .

The decision makes no reference to any obligation of Bellatrix with respect to continued performance of the agreement. [ 16 ] On February 6, 2020, BP counsel wrote to Bellatrix counsel advising, among other things, that, as a result of the EFC Decision, BP expected Bellatrix to resume performance of the GasEDI Agreement. [ 17 ] On February 11, 2020, counsel to Bellatrix responded noting that the EFC Decision did not address any of the other relief sought in BP’s application, including a requirement that Bellatrix perform its obligations under the GasEDI Agreement.

The response reiterated Bellatrix’s position that BP has an unsecured claim in Bellatrix’s CCAA proceedings. The response also advised that Bellatrix did not expect any potential purchaser or credit bid party to assume the terms of the GasEDI Agreement. [ 18 ] Counsel to BP filed an order with respect to the EFC Decision on March 5, 2020.

The order, among other things, grants BP leave to apply to the Court for such further advice and direction as may be required with respect to the remainder of relief sought in the GasEDI Agreement application. [ 19 ] BP brought no application to address the remainder of the relief sought in the EFC determination application until BP filed its cross-application on August 7, 2020 to the application filed by the Agent to the First Lien Lender, five months later. [ 20 ] On March 20, 2020, Bellatrix applied for, among other things, an order extending the stay of proceedings under the CCAA to May 7, 2020.

As a result of Court closures due to the COVID-19 pandemic, the application was made via desk application, subject to any interested party objecting to the application. [ 21 ] There were no objections to the application, and on March 31, 2020, the Court granted an order extending the stay of proceedings to May 7, 2020.

The order provided for a further automatic stay extension to June 8, 2020, subject to, among other things, any objections from interested parties. [ 22 ] In a May 1, 2020 decision allowing leave to appeal the EFC Decision, Strekaf, J.A. directed that the determination of how the interests of BP and other parties to the CCAA proceedings could best be protected pending the hearing of the appeal of the EFC Decision should be determined by this Court.

No party has sought a stay of the EFC Decision. [ 23 ] There were no objections to the automatic stay extension on June 8, 2020 from any interested parties, and the stay has continued. Applications for the stay extension orders submit that Bellatrix has been acting in good faith and with due diligence in carrying out the terms of all orders of the Court and in respect of all matters relating to the CCAA proceedings. [ 24 ] On May 8, 2020, Hollins, J. granted an Approval and Vesting Order approving the sale of substantially all of Bellatrix’s assets to Spartan Delta Corp. Bellatrix closed the sale on June 1, 2020.

The GasEDI Agreement was not assumed by the purchaser. [ 25 ] Pursuant to the Spartan transaction, the purchaser acquired substantially all of Bellatrix’s assets and assumed all of Bellatrix’s liabilities in respect of its wells, environmental obligations, pre-filing cure costs in respect of assumed contracts and certain other assumed labilities.

The Spartan transaction also permitted the purchaser to make offers of employment to Bellatrix’s employees. [ 26 ] The First Lien Lenders are secured creditors of Bellatrix pursuant to a credit agreement dated June 4, 2019 and certain security granted in relation to that agreement. In contrast to the GasEDI Agreement, the credit agreement and the security granted in relation thereto secure any indebtedness that may become owing by Bellatrix under any swap contracts or other derivative agreements

with the First Lien Lenders.

The Agent of the First Lien Lenders, on behalf of the lenders, has a registered, valid and enforceable firstpriority security interest in all of Bellatrix’s present and after-acquired personal property and a first priority floating charge on all ofBellatrix’s present and after-acquired real property. [27] On May 22, 2020, the Court granted a Stay Extension and Distribution Order authorizing Bellatrix to distribute $47.5 million,a portion of the net proceeds from the Spartan sale, to the Agent of the First Lien Lenders in partial satisfaction of their secured claim.Bellatrix held back certain funds from distribution, including funds for disputed claims such as the BP claim. [28] Bellatrix remains indebted to the First Lien Lenders in excess of $44.5 million.

Bellatrix may not be able to pay the securedclaim of the First Lien lenders in full given the results of the sale process. In the circumstances, a claims process has not been initiated inthese CCAA proceedings. [29] The First Lien Lenders seek a declaration that they have a first priority interest in all the property of Bellatrix, including fundsheld back in relation to the BP claim, a declaration that amounts owing to BP, if any, are an unsecured claim, and an order directing theMonitor to make a further distribution to the Agent in the amount of approximately $28.9 million.

Bellatrix supports this position andsubmits that the Agent for the First Lien Holders is entitled to distribution of the sale proceeds and the December payment ofapproximately $1.6 million held in trust by the Monitor in priority to BP. [30] In a cross application, BP seeks judgement for damages in an amount equivalent to US$14.2 million, an order lifting the stayin the CCAA proceedings to permit BP to enforce the judgement, and an order directing the Monitor to pay BP the approximatelyUS$1.6 million December payment from the held-back funds, an order directing Bellatrix to pay the remainder of the claimed damagesout of the sale of proceeds of its assets, or, in the alternate, granting BP a charge over the property of Bellatrix in the amount of theclaimed damages with priority over the secured creditors and pari passu with the Interim Lenders Charge, or in the further alternative, anorder declaring that any funds held by the Monitor and Bellatrix up to the amount of the claimed damages are held in trust for BP.

III Issues [31] The main issue is whether the CCAA grants BP, as the non-insolvent counterpart to an EFC that has not chosen to terminatethe agreement, any security or priority for its damages as a result of Bellatrix’s ongoing failure to perform under the agreement. In otherwords, does the exception to the debtor’s right to disclaim an EFC set out in section 34(7)(

a) of the CCAA create an obligation for thedebtor to continue to perform the EFC throughout insolvency proceedings? [32] Other issues include the following: (

a) Is BP entitled to the funds held by the Monitor in respect of the December payment pursuant to a right of set-off? (

b) Is BP entitled to lift the stay to permit it to obtain and enforce a judgment against the sale proceeds? (

c) Is BP entitled to equitable relief? (

d) Has BP proved the amount of its claim for damages? IV Analysis A. Does the exception to the debtor’s right to disclaim an EFC set out in section 34(7)(

a) of the CCAA create an obligation for the debtorto continue to perform the EFC throughout insolvency proceedings? [33] The stay provision of the CCAA, which prevents termination of an agreement because of a contractual counterparty’sinsolvency, does not apply to an EFC: section 34(7). [34] Section 34(8)(

a) of the CCAA allows solvent counterparties to EFCs certain “permitted actions” during the stay period if theyare allowed to take such actions under the specific EFC agreement, including netting or setting off or compensation of obligationsbetween the company and the other parties to the EFC. However, section 34(10) does not permit enforcement actions to recover nettermination values once they are determined.

Rather, if net termination values are owed by the company to another party to the EFC,section 34(10) deems the non-insolvent counterparty “to be a creditor of the company with a claim against the company in respect ofthose net termination values”. [35] As noted by the First Lien Lenders, the purpose of protection for EFCs under the CCAA is to provide stability to financialmarkets by allowing a non-defaulting counterparty the right to terminate and crystallize claims arising under an EFC. [36] Like other creditors of the company, the net claims of a non-insolvent counterparty after termination are subject to the stay ofproceedings.

The Canadian Bankers Association in its submissions in favour of EFC amendments to the Bankruptcy and Insolvency Actin 1991 commented that: ... it cannot be overemphasized that our proposal is not to benefit either party to an eligible financial contract. ... Any net amount, if owedto the other party, would be fully subject to the proposed stay provisions.

What would be achieved is that the rights of both parties wouldhave been reduced to a fixed and certain amount, just like an amount owed under a regular contract at the time of the stay. (emphasisadded): as cited in Re Androscoggin Energy LLC, (ON SC), [2005] OJ No. 395 at para 3. [37] The Insolvency Institute of Canada Report of the Task Force on Derivatives dated September 26, 2013 notes at pages 2 and 3that:

EFC protection is a significant exception to the stay of proceedings under the CCAA and BIA. There are two main purposes of the EFC safe harbours: (

i) to protect non-defaulting counterparties from the risk of increasing exposure to the insolvent counterparty under the EFC and (ii) to reduce systemic risk in Canadian and global financial markets. Non-defaulting counterparties may be at risk because, in certain instances, the amounts under the EFCs are very substantial and the value of the underlying products subject to EFCs are volatile in nature and can change dramatically during an insolvency proceeding.

If the solvent counterparty to an EFC is subject to a stay of proceedings and therefore unable to terminate its EFCs with the insolvent counterparty, there is a risk that the value of such EFCs could deteriorate sufficiently (from the insolvent counterparty’s perspective) to put the solvent counterparty at risk. Systemic risk may arise where the solvent counterparty is a systemically important institution or where the solvent counterparty has entered into EFCs with one or more other counterparties.

In extreme cases, the failure of one counterparty could have a domino effect, where the failure of one counterparty, particularly a derivatives dealer, triggers the failure of a second counterparty who is also a derivatives dealer and the failure of the second counterparty could trigger the failure of others. Multiple insolvencies may cause a lack of liquidity in the financial sector and unavailability of credit to solvent enterprises and, ultimately, systemic risk.

The systemic risk could spread to global markets and lead to world-wide financial instability and, in extreme cases, recession. [ 38 ] The protection offered to non-insolvent counterparties to an EFC is the ability to terminate the EFC and crystallize its loss despite the stay provision of the CCAA, a protection not afforded to other creditors. The other protection is allowing set-off if the EFC agreement itself permits it. The exceptions were included in the Act for the protection of the derivative market generally from volatile and systemic risk.

They do not compel a CCAA debtor to continue to perform an EFC that has not been terminated, nor does the CCAA provide the non-insolvent counterparty with any priority for its claim, apart from the protection of the exemption. [ 39 ] Unless the non-insolvent counterparty to the EFC has a security interest, it is an unsecured creditor, and participates in the CCAA proceedings on the same footing as other creditors: Re Blue Range Resource Corp. , 2000 ABCA 239 at para 9 . [ 40 ] Therefore, assuming that the GasEDI Agreement is an EFC, BP is allowed to terminate it and crystallize its loss.

However, as BP has not done so, its remedy for Bellatrix’s breach of the GasEDI Agreement is a claim in the CCAA proceedings as an unsecured creditor unless there are other remedies available to it in the specific circumstances. [ 41 ] BP submits that, unless it is granted the relief it seeks, the practical effect of Bellatrix’s conduct would be to render the disclaimer rules of the CCAA meaningless. It notes that a valid disclaimer under section 32(7) of the CCAA results in a “provable claim”, unsecured unless otherwise provided for in the disclaimed contract.

However, if CCAA debtors are allowed to breach executory contracts at will, the result is identical: the solvent party has a provable claim, unsecured unless otherwise provided for under the contract. BP submits that, if that is true, section 32(7) of the CCAA is without a purpose, as there is no practical difference between contracts that can and cannot be lawfully disclaimed.

Either way, if the debtor chooses to breach the contract, the solvent counterparty is left with the same remedy – which in many cases, is no remedy at all. [ 42 ] Therefore, BP submits that the “clear implication” of the statutory disclaimer provisions of the CCAA is that a company is required to perform its obligations under executory contracts as of the filing date, unless and until those contracts can be validly disclaimed under

section 32. [ 43 ] As noted previously, the exception from EFCs included in the disclaimer provisions of the Act do not expressly provide that an EFC must be performed. Such a mandatory requirement would thwart the objectives of the CCAA, since compelling a CCAA debtor to performs an EFC that it cannot afford to perform would in many cases affect its ability to attempt to restructure. [ 44 ] The disclaimer provisions, while initiated by the debtor, provide the solvent party to a disclaimable contract an opportunity to object to the disclaimer and a process for doing so.

Section 32(4) of the Act sets out factors that the court must consider in deciding the issue. [ 45 ] While the solvent party to a contract that the debtor merely stops performing may not have available to it the same statutory process, it may apply to the court for an order compelling performance as BP initially purported to do.

The court supervising the CCAA proceedings in its consideration of such an application would likely take into account factors similar to those set out in section 32(4), including whether compelling performance would interfere with the prospect of a viable arrangement, and whether refusing such an order would cause significant financial hardship to a party to the contract. [ 46 ] While the considerations may be similar, a disclaimer proceeding is initiated by the debtor, provides for a statutory process and mandates a termination date for the disclaimer.

As noted by Morawetz, J. in Re Target Canada Co , 2015 CarswellOnt 3274 , the disclaimer is beneficial to creditors generally because it enables the debtor to move forward with a liquidation plan without further delay.

In contrast, the unilateral non-performance of a contract gives rise to uncertainty for both the debtor and the counterparty as to the status of the contract, including whether or not the solvent counterparty at its election will accept the termination of the contract as repudiated, and the date of its termination. [ 47 ] The disclaimer provisions are thus not rendered meaningless by the existence of a less formal option, but provide an opportunity for orderly termination and certainty to the parties to the disclaimed contract.

Implying an obligation to perform an uneconomic contract that may affect the ability of the CCAA debtor to attempt to restructure would require more direct statutory language. [ 48 ] It must be noted that Bellatrix attempted to resolve the issue through the disclaimer option before the GasEDI Agreement was found to be an EFC. B. Is BP entitled to the funds held by the Monitor in respect of the December payment pursuant to the right of set-off? [ 49 ] Assuming that the GasEDI Agreement is an EFC, section 34(8)(

a) of the CCAA permits the netting or setting off of obligations between the debtor company and the other party to the EFC if the EFC is terminated on or after the commencement of the CCAA proceedings and if such action is “in accordance with the provisions of the contract”.

[50] However, BP has not terminated the GasEDI Agreement and is not seeking to terminate and set-off its position to reduceexposure to risk. Therefore, the set-off provisions of section 34(8)(

a) are not available to it. [51] BP seeks to maintain Bellatrix’s obligation to perform the agreement but set-off amounts it owes to Bellatrix for previouslydelivered product. Whether or not the GasEDI Agreement is an EFC, the agreement does not on its terms allow the set-off of theDecember payment. [52]

Section 10.2 of the base contract in the GasEDI Agreement permits the non-defaulting party to withhold any amounts owed tothe defaulting party when there is an event of default or a potential event of default and to set-off such amounts against “any amountsowed to the Defaulting Party under the [GasEDI Agreement] whether or not yet due” and set-off against such withheld amounts “anyamounts owed the non-Defaulting Party hereunder (whether or not yet due)”. BP submits that it is entitled to set-off its damages claimagainst the December payment, relying on the language “whether or not due” in

section 10.2. [53] However, BP is the payor, not the payee under the agreement and Bellatrix was not obligated to pay BP anything“hereunder”, either when the agreement to hold the funds in trust was entered into or when the funds would normally be paid later inDecember. Although an event of default includes a party’s failure to deliver gas “for the greater of 4 cumulative days or 5% of thenumber of days in a Delivery Period .... in any one transaction”, and BP may have a claim for damages in an amount has not yet beendetermined, there were no amounts “owed to” BP at the time of the December payment in respect of which it could exercise anycontractual right of set-off. [54]

Section 10.5 of the agreement states that a “Performing Party” has the right to withhold any or all payments due the non-performing party for the period of the applicable non-performance and net or set-off amounts due the Performing Party against suchwithheld amounts. Bellatrix stopped delivering gas on November 26, 2019. The December payment was for the delivery of gas betweenNovember 1 and November 25, 2019. Therefore, for the same reasons,

section 10.5 of the agreement does not give BP a right of set-off. [55] BP thus has no contractual right of set-off with respect to the December payment but submits that it has a right of equitableset-off, citing Re Blue Range Resource Corp., 2000 ABCA 200. In Blue Range, the appellants were allowed to set-off anticipateddamages they would incur under certain natural gas marketing contracts against payments owed under those contracts for the delivery ofnatural gas. [56] In that case, as in this, the cost to the appellants to replace the gas was higher than the cost they were paying under thecontracts.

The Court of Appeal in Blue Range set out the principles from the Supreme Court of Canada decision in Telford v Holt (1987), (SCC), 41 D.L.R. (4th) 385(S.C.C.), at 398 that apply when dealing with equitable set-off: 1. The party relying on a set-off must show some equitable ground for being protected against his adversary’s demands; 2. The equitable ground must go to the very root of the plaintiff’s claim before a set-off will be allowed; 3.

A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow theplaintiff to enforce payment without taking into consideration the cross claim; 4. The plaintiff’s claim and the cross-claim need not arise out of the same contract; and 5. Unliquidated claims are on the same footing as liquidated claims. [57] The Court noted at para 19: The important point for invoking equitable set-off is the close connection of the transactions.

Would it be manifestly unjust to require theappellants to pay the costs of the February and March deliveries in view of the fact that they will suffer significant losses due to the earlytermination of the same contract that called for the delivery of gas in February and March? In our view, such a requirement is unjust. [58] In Blue Range, the CCAA debtor terminated the contracts.

Here, BP’s position is that the GasEDI Agreement has not beenterminated, remains in full force and effect and that Bellatrix is required to perform the agreement. [59] The First Lien Lenders and Bellatrix submit that BP does not meet the test for equitable set-off because it would not be“manifestly unjust” to allow Bellatrix to claim the December payment without taking into consideration the cross-claim. [60] They point out that, in a letter dated February 11, 2020, Bellatrix’s counsel advised BP on its position on the ability of aCCAA debtor to elect non-performance of an agreement.

Bellatrix responded that the EFC Decision did not deal with the issue ofperformance or set-off. Bellatrix has been consistent in its position throughout the CCAA proceedings. Despite this, BP did not apply tolift the stay or to claim a right of set-off until this application was filed. [61] While I have found later in this decision that BP’s delay in taking action would not disentitle it from a equitable remedy, BPhas not established an equitable ground for being protected, and therefore fails the Telford test for that reason.

BP is not entitled to set-off the December payment, whether or not the GasEDI Agreement is an EFC. [62] Bellatrix submits that, since BP does not fit within the permitted set-off provisions of section 34(8), but for the agreementamong Bellatrix, BP and the Monitor to have the Monitor hold the December payment in trust, BP would have been in violation of thestay under the initial CCAA order had it purported to withhold the December payment.

If it had unilaterally withheld the payment, BPwould have deprived Bellatrix of substantial liquidity at a time when Bellatrix was seeking to pursue its strategic process to identify agoing concern transaction for the benefit of its many stakeholders, relying on funds drawn under its Interim Financing Facility, andBellatrix would have been unable to make various payments to secured and other unsecured creditors. [63] However, as I have found that BP has neither a legal nor an equitable right of set-off, it is not necessary that I decide this

issue. C. Is BP entitled to lift the stay to permit it to obtain and enforce a judgement against the sale proceeds? [64] As a corollary to the relief of lifting the stay, BP asks the Court to direct immediate payment of the alleged damages to BP outof the sale proceeds, less the December payment. [65] The test for lifting a stay focuses on the totality of circumstances and the relative prejudice to the parties involved: AlbertaEnergy Regulator v Lexin Resources Ltd, 2019 ABQB 23 in the context of a receivership, citing Alignvest Private Debt Ltd. v SurefireIndustries Ltd., 2015 ABQB 148 (Alta.

Q.B.) at para 40 and 43 (appeal on other grounds dismissed, [2015] A.J. No. 1234 (Alta. C.A.)). [66] Guidance can be drawn from the provisisons of

section 69.4 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 asamended, in determining whether a stay in CCAA proceedings should be lifted. The Court should be satisfied that the party applying tolift the stay is likely to be materially prejudiced by the stay or that it would be equitable to lift the stay on other grounds. The burden ison the applicant: Re Ma, (ON CA), [2001] O.J. No. 1189 (Ont.

C.A.). [67] Lifting the stay is not routine: there must be sound reasons to relieve against the stay: Re Ma, at para 3. [68] In order for a party applying to lift the stay to show material prejudice, it must show that it would be treated differently orsome way unfairly or would suffer worse harm than other creditors if the stay is not lifted: Golden Griddle Corp. v Fort Erie Truck &Travel Plaza Inc. (2005), (ON SC), 29 C.B.R. (5th) 62 (Ont. S.C.J.) at para 18-19.

Examples may include hardshipcaused by the stay or necessity of payment or a situation where it is in the interests of justice to allow the stay to be lifted: Re CanwestGlobal Communications Corp, (2009), 61 CBR (5th) 200 (Ont S.C.J.).

The prejudice to the applicant should be different qualitativelyfrom that suffered by other creditors, who also lose, in whole or part, the benefit of their contracts by reason of the debtor’s insolvency. [69] BP submits that it suffers unique harm from the breach of the GasEDI Agreement, and argues that such prejudice favours thelifting of the stay to allow it to enforce its damages claim against Bellatrix. However, BP does not provide any valid reason why itsdamages claim is unique. [70] First, BP submits that it is a post-filing creditor.

This is incorrect: its damages claim arises from a pre-filing contract, whetherit is an EFC or not. [71] Second, BP notes, relying on Bank of Montreal v Probe Exploration Inc., (AB KB), [2000] AJ No 1752,that courts are reluctant to interfere with the rights of contractual parties in a liquidation scenario where the result would be to prefer theinterests of the debtor and its primary secured creditor.

However, I agree with the First Lien Lenders that the Probe case isdistinguishable from the situation of Bellatrix’s failure to perform under the GasEDI Agreement. [72] In Probe, the unique facts included the existence of an intercreditor agreement that contemplated the mutual intent betweenthe secured creditor and the party opposing the termination of the agreement at issue that any purchaser of Probe would be bound byProbe’s obligations under the contract. [73] BP submits in proposing the lifting of the stay that Bellatrix has abused and violated the CCAA process.

As noted later in thisdecision, there is no basis for this allegation. [74] BP also submits that the stay should be lifted because the GasEDI Agreement as an EFC is entitled to certain benefits. Thesebenefits do not imply a right to lift the stay in the context of a damages claim. Section 34(10) of the Act makes it clear that such a claimmerely makes the holder a creditor, in this case an unsecured creditor. The unique risks inherent in the status of an EFC contract arerecognized in the limited relief offered in

section 34. The CCAA does not provide any special security or priority for a damages claimarising from an EFC. [75] Finally, as noted by the Agent, this is the end of the CCAA process, and in the nature of a priorities dispute. There exists novalid reason to lift the stay or to order the immediate payment to BP of damages out of the sale proceeds or to grant BP a priority chargeon the sale proceeds ranking pari passu with the Interim Lenders Charge unless consideration of good faith or equity compel that result. D.

Is BP entitled to equitable relief? [76] BP seeks a declaration of constructive trust as a remedy for Bellatrix’s breach of the GasEDI Agreement, arguing thatBellatrix’s stakeholders have been unjustly enriched. BP also submits that Bellatrix has engaged in a pattern of abusive conduct and hasunjustly appropriated approximately $14.5 million by breaching a contract that it is prohibited from disclaiming. [77] The onus of proving a constructive trust rests with the claimant.

It is a discretionary remedy that will not be imposed withouttaking into account the interest of others who may be affected by granting the remedy: Re Hoard, 2014 ABQB 426 at para 26. [78] As noted at para 23 of Hoard, given that the BIA provides a code by which legislators have balanced the interest of thoseadversely affected by the bankruptcy, the legal rights of creditors should not be defeated unless it would be unconscionable not torecognize a constructive trust. The same reasoning applies to the CCAA. 1.

Unjust enrichment [79] A constructive trust can be used to remedy unjust enrichment where monetary damages are inadequate and there is a link orcausal connection between the claimant’s contribution and the property in which the constructive trust is claimed: Moore v Sweet, 2018SCC 52 at para 91. Therefore, even if the elements of unjust enrichment are satisfied in this case, there is no link between the funds thatare the proceeds of sale of Bellatrix’s assets and BP. The most that could be recovered through this remedy would be the Decemberpayment.

[80] The doctrine of unjust enrichment requires an enrichment, a corresponding deprivation, and the absence of a juristic reasonfor the enrichment: Hoard, at para 26. [81] With respect to the requirement of enrichment, the Alberta Court of Appeal noted in Luscar Ltd v Pembina Resources Ltd,1994 ABCA 356 at para 129 that: where there exists a contract under which parties are governed, and one party gains by the breach of the same, that party is not trulyenriched, because the breaching party takes that gain subject to its liability for breach of contract. [82] With respect to deprivation, BP was not required to provide any goods or services to Bellatrix or take on any financial risk orexposure.

As noted in this decision, BP has failed to establish the amount of any financial hardship it may have suffered as a result ofBellatrix’s disclaimer or breach of the GasEDI Agreement. [83] BP concedes that the provisions of the CCAA can provide a juristic reason for an enrichment, but submits that BP is in aunique position as compared to other CCAA creditors in that Bellatrix has breached a contract that it was prohibited from breaching, bothby the CCAA and by the Court. [84] As noted previously, the CCAA does not prohibit a debtor from failing to perform a contract, be it an EFC or otherwise.

Noris it correct that in failing to perform the GasEDI Agreement, Bellatrix is in breach of a court order. There is nothing in either the EFCDecision or the order that emanates from it that compels performance of the agreement. [85] The statutory priority of the First Lien Lenders under the CCAA constitutes a juristic reason to deny recovery to BP throughthe doctrine of unjust enrichment. [86] BP submits that Bellatrix conceded in its submissions before the Court in the application to determine whether the agreementis an EFC that, if it was, Bellatrix would be obligated to perform it.

However, Bellatrix actually stated that if the agreement was an EFC,it would be required either to perform it “or otherwise to pay damages to BP”. [87] Therefore, BP is not entitled to a constructive trust as a remedy for unjust enrichment. 2. Wrongful Conduct [88] In Soulos v Korkontzilas, (1997) (ON CA), 36 C.B.R (3d) 1, the Supreme Court held that a constructivetrust can also be used to right wrongful conduct.

The following conditions must be met : the insolvent company must be under anequitable obligation in relation to the activities giving rise to the assets in its hands; the property in the hands of the insolvent companymust be shown to have resulted from deemed or actual agency activities in breach of its equitable obligation to the claimant; the claimantmust show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like theinsolvent company remain faithful to their duties; and there must be no factors that would render the imposition of a constructive trustunjust in all the circumstances. [89] Subsequent decisions emphasize that the property sought to be impressed with the trust must be the property obtained throughthe wrongful act, Hoard at para 35. [90] BP submits that the timing of Bellatrix’s purported disclaimer and breach of contract was not a coincidence, in that Bellatrixknew payments for gas delivery under the GasEDI Agreement would be subject to BP’s contractual right to set them off against BP’sdamages for Bellatrix’s breach of contract.

It argues that Bellatrix timed its delivery of the disclaimer notice and its breach of contract forthe day immediately after BP made its payment for October gas deliveries on November 25, 2019, thus depriving BP of the ability to setthat payment off against damages. [91] However, although it issued a disclaimer notice on November 25, 2019, Bellatrix continued to deliver gas under theagreement until November 24, 2019 and thus was not in breach of the contract until after that date. It did not mislead BP about thetiming of its decision.

While the decision on the timing of the disclaimer notice may have been strategic, it was not wrongful conduct. [92] BP also alleges that the timing of the disclaimer notice put it in the position of being an involuntary interim lender, asBellatrix was able to use funds that BP may have been able to set-off if it had known about the disclaimer earlier. [93] BP’s position is different from the position of an interim lender that advances funds to an insolvent debtor to finance anuncertain restructuring process.

BP did not advance the roughly $14.5 million that Bellatrix estimated it would be able to achieve inadditional revenue by selling its gas elsewhere, and BP it is not out of pocket for that amount. [94] BP also submits that failure to perform the agreement allowed Bellatrix to sell the gas it would have been required to sell BPto other parties and use the proceeds to fund operations and pay other creditors, including the actual interim lender, and that this waswrongful conduct. [95] As noted previously, Bellatrix’s decision to cease performing an uneconomic contract during the CCAA process is notwrongful conduct: it allowed the company to generate increased revenue it would not be able to generate under the BP agreement to fundthe company’s operations while it attempted to restructure.

BP was not required to pay for gas that was not delivered or provide anyservices to Bellatrix. While the outcome of the process was a liquidation, it was a going concern liquidation that was the best opportunityfor the preservation of jobs and likely the maximization of value. [96] As noted previously, there is no merit to the allegation that Bellatrix misled the Court. As was the case with unjustenrichment, there is no link or causal connection between the alleged wrongful acts and the proceeds of sale of Bellatrix’s assets. [97] In short, BP has no basis to claim a constructive trust based on wrongful conduct.

[ 98 ] In Re Hollinger Inc , 2013 ONSC 531 at para 39 , leave to appeal denied in 2014 ONCA 282 , the Ontario Court of Justice found that there is no legitimate reason for the proprietary remedy where the claimant relies on the remedy to try and gain a super- priority over other creditors in the CCAA. BP has an unsecured monetary damages claim and it should not be entitled to a constructive trust that would subvert the priorities of other creditors unless it has established that it would be unconscionable not to recognize such a trust. BP has not done so. 3. Bad Faith [ 99 ] BP also relies on

section 18.6 of the CCAA, a new provisison that provides that any interested person in any proceedings under the Act shall act in good faith with respect to the proceedings, and that if it is satisfied that an interested person fails to act in good faith, the Court may make the appropriate order. The duty of acting in good faith is not a new duty for a CCAA debtor: sections 11.02(3), 33(3), 50(12), 50.4(11) and 65.12(2) [ 100 ] As I have noted previously, BP has not established any wrongful conduct by Bellatrix, which has merely used the tools available to it under the CCAA.

Bellatrix was faced with an uneconomic agreement that it could not afford to perform while attempting to restructure. Bellatrix advised BP at an early stage of the proceedings that, in the circumstances, the agreement would never be accepted by a purchaser of Bellatrix’s assets, which BP as a sophisticated party would likely have recognized.

BP had the option of terminating the agreement as an EFC and exercising its right to set-off after termination, but chose the option of maintaining that Bellatrix was required to continue to perform the agreement. [ 101 ] While Bellatrix breached the GasEDI Agreement by non-performance, it has been transparent and candid throughout with respect to its position and conduct.

Although it did not abide by the statutory 30 days notice under its notice of disclaimer, that was after BP refused to accept the disclaimer and advised Bellatrix of its view that the agreement was an EFC. [ 102 ] It is not unusual for a CCAA debtor to fail to perform uneconomic ongoing monthly contracts, both before and after filing, whether formally disclaimed or not, and such failure to perform is not per se bad faith. [ 103 ] The December payment has been held in trust pending a resolution of the issues of set-off and priority, so Bellatrix has not failed to act in good faith with respect to the payment.

The timing of the disclaimer notice, while strategic, was not bad faith conduct, and Bellatrix has not, as alleged by BP, misled the Court or failed to comply with a Court order. [ 104 ] The Monitor has stated that it is satisfied that Bellatrix has acted in good faith throughout the proceedings. [ 105 ] As noted by Dr.

Janis Sarra in “La bonne foi est une considération de base – Requiring Nothing Less than Good Faith in Insolvency Law Proceedings”, Annual Review of Insolvency Law, eds Janis Sarra & Barbara Romaine, Toronto: Thomson Reuters Canada, 2014: The court will find bad faith conduct where a debtor, creditor or their professionals fail to meet the requirements to act candidly, honestly, forthrightly and reasonably in their dealings with one another and the court; where parties act capriciously and arbitrarily; or where they lie or otherwise knowingly mislead each other about matters relating to the insolvency proceedings. [ 106 ] Bellatrix has not exhibited conduct that would fall within these categories and has not acted in bad faith. [ 107 ] The First Lien Lenders and Bellatrix point out that BP failed to allege that Bellatrix was not acting in good faith through four stay applications, and only raised the allegation at the end of August, 2020.

However, BP responds that, as Bellatrix as a concession to BP agreed to hold back an amount from the sale proceeds to cover BP’s damages claim, it had no need to object to the stay extension. While I have not found bad faith by Bellatrix, I accept that BP’s failure to object to the stay does not preclude its claim of bad faith in the circumstance. 4.

Delay [ 108 ] The First Lien Lenders and Bellatrix submit that it would be inequitable to grant BP the super-priority it seeks for damages in priority to the stakeholders of Bellatrix. [ 109 ] They note that BP initially applied for various forms of relief, including orders directing Bellatrix to resume performance of the GasEDI Agreement and to remedy any existing default, but ultimately only pursued the issue of characterization of the GasEDI Agreement as an EFC.

While BP may have been constrained by time limits in its initial application heard on January 23, 2020, it knew by February 25, 2020, that Jones, J’s decision dealt only with the characterization of the GasEDI Agreement as an EFC, and that it was free to proceed with the remainder of the relief it sought before any other commercial duty judge.

The order emanating from the decision grants BP leave to apply for further advice and direction with respect to the remaining relief. [ 110 ] While the pandemic interfered with regular commercial duty chambers in March and April, during Bellatrix’s May 22, 2020 application before Hollins, J. to make interim distributions to certain priority and secured lenders. BP advised the Court that it may have a priority claim against Bellatrix and asked the Court to set aside US$14.5 million to be held in trust pending resolution of the disclaimer dispute with Bellatrix.

The Court refused and suggested that BP bring its own application if it was concerned that it was facing disadvantage. It was not until August 7, 2020, in response to First Lien Lenders priority application, that BP brought a cross-application seeking relief similar to that it had originally sought in December, 2019. [ 111 ] The First Lien Lenders submit that it would be inequitable and prejudicial to the First Lien Lenders if BP were now allowed a priority claim in relation to Bellatrix’s breach of the GasEDI Agreement.

Bellatrix remains indebted to the First Lien Lenders in excess of $44 million and it is clear that Bellatrix would not be able to pay the First Lien Lenders’ secured claims in full if BP’s unsecured damages claim is paid in priority to its claim. [ 112 ] Bellatrix points out that BP did not proceed to seek the remainder of its relief at a time when Bellatrix may have been able to

perform the contract if ordered to do so. Now, nine months later, it has no assets that would allow performance. [113] BP responds that it has protested its treatment from the start, and that the First Lien Lenders have suffered no prejudice from thedelay, as they and Bellatrix were aware of BP’s claim from December, 2019, even though BP did not act on it until after the sale of assetshad been concluded.

As noted in Re Blue Range Resources Corp., 2000 ABCA 285, albeit in a different context, the fact that creditorswill receive less money if late claims are allowed is not prejudice. “Re-organization under the CCAA involves compromise. Allowing alllegitimate creditors to share in the available proceeds is an integral part of the process. A reduction in that share can not be characterizedas prejudice: Cohen, Re (1956), (AB CA), 36 C.B.R. 21 (Alta.

C.A.) at 30-31”: Blue Range at para 40. [114] Bellatrix and the First Lien Lenders were fully aware of BP’s claim, and there is no evidence that earlier determination of theclaim would have caused Bellatrix to do anything differently with respect to the sale of assets. This is not a case of a creditor “lying inthe weeds”, or even a case where BP implied that it had changed its position even though it did not take earlier action.

In the specificcircumstances of this case, including the disruption of court proceedings caused by the COVID pandemic, I would find that BP is notdisentitled to relief on the basis of delay if I am incorrect on its entitlement to equitable relief. E.

Has BP proved the amount of its claim for damages? [115] The amount of damages claimed by BP, in this application, $14.5 million, is equal to the amount that Bellatrix estimated, as partof the EFC determination application, that it could generate as additional revenue from the date of the disclaimer until the end ofOctober, 2020, based on certain assumptions. [116] BP concedes that its damages claim is based on this estimate.

However, that estimate must be reduced by the fact that Bellatrixdid not realize any revenues for its natural gas after the sale of its assets closed on June 1, 2020. [117] I agree with Bellatrix and the First Lien Lenders that benefits to Bellatrix of the disclaimer do not necessarily equate to BP’sentitlement to damages.

BP has not provided any evidence of its actual damages relating to the disclaimer of or non-performance underthe GasEDI Agreement, taking into account any mitigation BP would have been able to obtain by entering into other arrangements forthe purchase of natural gas or otherwise. [118] Therefore, the claim remains an unliquidated unsecured claim. V Conclusion [119] The First Lien Lenders are entitled to a declaration that they have a first priority interest in all the property of Bellatrix,including the December payment held in trust and funds held back from the sale of assets.

Any amounts owing to BP are an unsecuredclaim. The Monitor is authorized to make a further distribution to the Agent in the amount of approximately $28.9 million, the exactamount subject to its final calculations. [120] BP’s cross-application is dismissed. Dated at the City of Calgary, Alberta this 22nd day of December, 2020. B.E. Romaine J.C.Q.B.A. Appearances: Kelly Bourassa and James Reid for National Bank of Canada, as Agent Robert J Chadwick and Caroline Descours for Bellatrix Exploration Ltd. Howard A Gorman, Q.C. and Gunnar Benidiktsson

for BP Canada Energy Group LLC Joseph G.A. Kruger, Q.C. and Robyn Gorofsky for the Monitor Pricewaterhousecoopers Inc.