NEP Canada ULC v MEC OP LLC, 2021 ABQB 180

Court of Queen’s Bench of Alberta Citation: NEP Canada ULC v MEC OP LLC, 2021 ABQB 180 Date: 20210401 Docket: 1201 09690 Registry: Calgary Between: NEP Canada ULC Plaintiff - and - MEC OP LLC, MEC OP Transaction I ULC and Merit Energy Company LLC Defendants Corrected judgment: A corrigendum was issued on May 21, 2021; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice D.B. Nixon _______________________________________________________ Table of Contents I.

Introduction . 8 II. Issues and Claims . 9 A. The Issues . 9 B. NEP Claims . 10 III. The Parties and Connected Persons . 10 A. Entities Connected to the Plaintiff . 10

1. NEP USA .. 10 2. NEP Canada (also known as NEP) 10 B. The Defendants . 10 1. Merit USA .. 10 2. Merit LLC .. 11 3. Merit ULC .. 11 4. Merit Corporate Chain

Summary . 11 C. Individuals Connected to the Defendants . 12 IV. Business Background . 12 A. NEP Business Plan . 12 B. The Transaction Assets – The MEC OpCo Properties . 13 C. Merit USA – Decision to Sell Canadian Oil and Gas Assets . 13 D. Due Diligence . 14 E. The RAE Report 14 F. The 2011 SPA –

Schedule D .. 14 G. Employees Retained . 14 H. NEP Protective Steps – Self-Disclosure and Production Shut-In . 15 V. Overview – Facts and Context 15 A. Key Lay Witnesses . 15 1. Mr. Plunk . 15 2. Mr. Hagge . 19 3. Mr. Moffitt 22 4. Mr. Carr 26 5. Mr. Lambert 26 6. Ms. Hall 27 7. Mr. Terpstra . 27 8. Mr. Shihinski 27 B. Expert Witnesses . 27 1. Ralph David Webster 27 2. Daryl Glenn Foley . 28 3. Patrick Edmund Keck . 28 4. Kenneth Brandon Mullen . 28 5. Deryck Harold Helkaa . 29 6. Neal Nissim Mizrahi 29 7. Nora Tennant Stewart 29 8. Ronald Steve Burdylo . 29 9. Alicia Kim Quesnel 30 10. Theresa Lucy Watson . 30

11. Alan John Goddard . 30 12. Keith Murray Braaten . 31 13. Dale Edwin Tremblay . 31 14. John Williams . 31 C. Background – The Parties and Transaction . 32 1. The MEC OpCo Evaluation . 32 2. The Transaction . 33 D. Regulatory Non-Compliance – MEC OpCo . 34 1. Pipelines . 34 a. Sweet-to-Sour 34 b. Discontinued Pipelines . 35 c. Depth of Cover 35 2. Facilities . 36 a. 9-16 Facility . 37 b. 11-20 Facility . 38 c. 3-3 Facility . 38 d. 7-4 Facility . 38 3. Surface Casing Vent Flows . 39 4. Suspension Requirements for Wells – Directive-13 . 39 E. Merit’s Knowledge – Regulatory Non-Compliance . 40 1.

Witness Credibility . 40 a. General Comments . 40 b. NEP’s Lay Witnesses . 40 i. Mr. Bud Newton . 41 ii. Ashley Cross . 41 iii. Darcy Turner 41 iv. Mr. Shihinski and Ms. Hall 41 c. Merit’s Witnesses – Lay and Expert 41 i. Mr. Hagge . 41 ii. Mr. Carr 42 iii. Mr. Moffitt 43 iv. Mr. Williams . 44 d. Credibility Assessment –

Summary Comments . 44 2. Persons of Knowledge . 44 a. Mr. Lambert 45 b. Mr. Carr 45 c. Mr. Moffitt 45 d. Mr. Hagge . 45

e. Mr. Terpstra . 46 f. Ms. Hall 46 g. Mr. Shihinski 46 h. Mr. Plunk . 46 3. Pipelines – Non-Compliance Knowledge . 46 a. Sweet-to-Sour 46 b. Discontinued Pipelines . 54 c. Depth of Cover 55 4. Facilities . 55 a. 7-4 Facility . 55 b. 3-3 Facility . 55 5. Surface Casing Vent Flows . 55 6. Directive-13 . 57 7. Drafting

Schedule D .. 60 8. Conclusion on Merit’s Knowledge . 65 F. Merit’s Representations – Regulatory Non-Compliance . 66 1. Contractual Representations . 66 2. Due Diligence Calls with Mr. Carnahan . 69 a. Mr. Carr 70 b. Ms. Hall 71 3. Divino Meeting – “Just Paperwork” . 71 4. Persons of Knowledge Meetings . 72 a. Ms. Hall 72 b. Mr. Shihinski 73 c. Mr. Lambert 73 d. Mr. Terpstra . 74 VI. Analysis . 74 A. Evidentiary Burden . 74 B. The Issues . 74 1. Was there a breach of contract? . 74 a. The Law .. 75 i. The Contract – Representations and Warranties . 75 ii. Interpretive Issue – The Term “Potential” . 76 b. Applying the Law to the Facts . 77 i.

Schedule D – Interpreting the Term “Potential” . 77 ii. The 2011 SPA – Representations and Warranties . 83 (

I) Unqualified Warranties . 83 (II) Qualified Warranties . 86

(III)

Schedule D – Non-Compliances Not Disclosed . 87 (

A) Pipelines . 88 (

B) Facilities . 90 (

C) Directive-13 . 91 (

D) Surface Casing Vent Flows . 92 iii. Conclusion on Breach of Contract 93 2. Was there deceit in this case? . 93 a. The Law – The elements of deceit 93 i. Misrepresentation by silence or incomplete disclosure . 94 ii. Misrepresentation by a half-truth . 95 iii. Plaintiff’s Position . 95 iv. Defendant’s Position . 96 v. Judicial Thoughts – The Historical Framework . 96 b. Applying the Law to the Facts . 101 i. Admissions of Deceit 102 (

I) Ms. Hall 102 (II) Mr. Shihinski 102 ii. Other Deceit with Admitted Actual Knowledge . 103 (

I) Mr. Terpstra . 103 (II) Mr. Carr 103 (III) Mr. Lambert 104 iii. “Potential” . 104 iv. The Actual Knowledge and Recklessness – Merit Deal Team & Other Persons of Knowledge 105 (

I) Mr. Carr 106 (II) Mr. Hagge . 107 (III) Mr. Plunk . 110 (IV) Mr. Moffitt 112 (

V) Other Persons of Knowledge . 116 (VI) Conclusion on Actual Knowledge and Recklessness . 116 v. Intention . 118 vi. Conclusion on Deceit 119 3. Was there a conspiracy between Merit ULC (the transaction entity) and Merit USA (its ultimate corporate parent)? . 120 a. The Law – What are the elements of conspiracy? . 120 b. Applying the Law to the Facts . 121 4. Did Merit breach its duty of good faith? . 122 a. The Law – What are the elements of good faith? . 122 b. Applying the Law to the Facts . 123 i. Vendor Representation and Warranties Re: No Material Violations –

Section 4.1(u) 125

ii. Purchaser’s Conditions Re: True and Correct Representations and Warranties of Vendor –

Section 5.1(b) 125 iii. Maintenance of Assets Until Closing – Sections 9.1(a), (

b) and (e) 126 5. Is Merit USA subject to vicarious liability? . 127 a. The Law – The elements of vicarious liability . 127 b. Applying the Law to the Facts . 129 i. The Merit Deal Team – Their Particulars . 129 (

I) Mr. Plunk . 129 (II) Mr. Hagge . 130 (III) Mr. Moffitt 130 (IV) Mr. Carr 130 ii. The Mind and Management of Merit 130 6. Is Merit USA subject to alter ego liability? . 134 a. The Law .. 134 b. Applying the Law to the Facts . 136 VII. Damages . 137 A. Revised Claims . 137 B. Damages Sought – A

Summary . 138 C. Damages – General Comments . 139 1. Damages in Contract 139 2. Damages in Tort 139 3. Guideline Comments – No Windfall 139 D. Incremental Evidence . 139 E. Contractual Restrictions . 140 F. Remediation . 141 1. Pipeline remediation . 142 a. Sweet-to-Sour 142 b. Depth of cover 143 c. Inefficient management 143 2. Facility Remediation . 144 a. 9-16 Facility . 145 b. 11-20 Facility . 145 c. 7-4 Facility and 3-3 Facility . 145 d. Grandfathering Provisions . 146 3. Surface Casing Vent Flow and Casing Failure Remediation . 146 4. Directive-13 Remediation . 147 5. Future Remediation Efforts . 148 6. De Minimus Default Provisions . 149 7. The Pinchin Report 150

8. Betterment 150 9. Conclusion – Remediation Costs . 151 F. Loss of Opportunity . 151 1. Preliminary Issue . 153 2. Test for Loss of Opportunity . 153 3. Application of the Folland Test 154 4. Remoteness . 155 5. Mitigation . 157 6. Double recovery . 158 7. Quantum of damages . 159 a. Bookends . 159 b. Discount 160 8. Conclusion – Loss of Opportunity . 161 G. Shut-in Production Costs . 162 H. Borrowing Costs . 163 I. Punitive Damages . 164 J. Conclusion – Damages . 165 VIII. Conclusions . 166 IX. Costs . 167 I. Introduction [ 1 ] This case concerns a contractual dispute.

The Plaintiff is NEP Canada ULC (“ NEP ” or “ NEP Canada ”). [ 2 ] There are three Defendants in this action (the “ Action ”). They are MEC Op LLC (“ Merit LLC ”), MEC OP Transaction I ULC (“ Merit ULC ”) and Merit Energy Company LLC (“ Merit USA ”) (collectively, the “ Defendants ”, and generally referred to as “ Merit ”). [1] [ 3 ] NEP alleges that the Defendants misled and deceived it in the context of the Share Purchase Agreement dated August 18, 2011 (the “ 2011 SPA ”).

In addition to the ancillary causes of action discussed below, NEP asserts the conduct of the Defendants constituted multiple breaches of the 2011 SPA, as well as actionable deceit. [ 4 ] In the underlying transaction, NEP acquired the shares of MEC Operating Company ULC (“ MEC OpCo ”). The 2011 SPA documented that share acquisition (the “ Share Transaction ”). [ 5 ] The parties to the 2011 SPA were Merit ULC (the Vendor), NEP (the Purchaser) and MEC OpCo (being the operating corporation that was acquired).

MEC OpCo held the assets that NEP was targeting. [ 6 ] Under the terms of the 2011 SPA, the Share Transaction closed on September 30, 2011 (the “ September 2011 Closing Date ”). The assets of MEC OpCo included wells, pipelines and facilities in various producing oil fields in Central, West Central and Northern Alberta. [ 7 ] The assets specific to the Action involve a number of oil fields in central Alberta.

Those assets include Pembina (the “ Pembina Field ”), the Leduc-Woodbend (the “ Leduc Field ”) and others (collectively, the “ Transaction Assets ”). [ 8 ] NEP alleges that the Defendants did not truthfully disclose what they knew about the Transaction Assets. NEP asserts that these entities opted for half-truths.

Knowing they would leave the impression that there were no known problems, the Defendants are alleged to have promised regulatory compliance, and used vague and misleading words within which they hoped to conceal actual problems. [ 9 ] In the weeks leading up to the September 2011 Closing Date, NEP asked whether there were any “huge hidden liabilities lurking”. The individuals representing Merit allegedly stated that there were none. NEP now asserts that such was not the case, and that it has suffered numerous wrongs.

[ 10 ] In 2018, NEP Canada Corp (“ NEP HoldCo ”) sold its equity interest in NEP to 1830575 Alberta Ltd (“ 183Co ”) for $479,150,000, subject to adjustments. This 2018 sale of NEP was effected through the Share and Partnership Interest Purchase and Sale Agreement (the “ 2018 PSA ”). [ 11 ] The 2018 PSA was entered into amongst NEP HoldCo, 183Co and Aspenleaf Energy Limited (“ AspenleafCo ”). The 2018 PSA was dated July 9, 2018. II. Issues and Claims A. The Issues [ 12 ] Framed in the context of questions, the issues that I address in this case are as follows: 1. Was there a breach of contract? 2.

Was there deceit in this case? 3. Was there a conspiracy between Merit ULC (the transaction entity) and Merit USA (its ultimate corporate parent)? 4. Did Merit breach its duty of good faith? 5. Is Merit USA subject to vicarious liability? 6. Is Merit USA subject to alter ego liability? B. NEP Claims [ 13 ] As a result of the numerous alleged wrongs, NEP asserts that it has suffered significant damages.

NEP seeks aggregate damages in the range of $365,565,024 to $515,181,453, with a claimed midpoint of $440,373,238. [ 14 ] NEP seeks judgment in the above amounts against the Defendants, jointly and severally, plus prejudgment interest. III. The Parties and Connected Persons [ 15 ] The underlying corporate structure is relevant in this litigation. For that reason, I provide the following overview of the parties and other persons with a connection to the dispute. A. Entities Connected to the Plaintiff 1.

NEP USA [ 16 ] Newton Energy Partners, LLC (“ NEP USA ”) was incorporated pursuant to the laws of Delaware. [ 17 ] The President and Chief Executive Officer of both NEP USA and NEP Canada is Mr. George (Bud) Newton (“ Mr. Bud Newton ”). [ 18 ] Kayne Anderson Capital Advisors, LP (“ Kayne Anderson ”) is a private equity firm with offices in Houston, Texas. 2. NEP Canada (also known as NEP) [ 19 ] As part of the underlying transaction, NEP acquired the shares of MEC OpCo.

Shortly after that acquisition, NEP amalgamated with MEC OpCo. [ 20 ] Subsequent to that amalgamation, NEP carried on business in the oil and gas industry in Alberta. Its business headquarters was in Calgary. B. The Defendants

1. Merit USA [ 21 ] As mentioned above, Merit USA is one of the Defendants. It is a Delaware limited liability company, and it is based in Dallas, Texas. [ 22 ] Merit USA specializes in owning and operating oil and gas assets. It maintains its ownership interest in those assets through various affiliates and subsidiaries. 2. Merit LLC [ 23 ] Merit LLC is a Delaware limited liability company. Merit LLC is wholly owned by Merit USA. 3. Merit ULC [ 24 ] Merit ULC is an Alberta unlimited liability corporation. It is an indirect subsidiary of Merit USA.

Merit ULC is wholly owned by Merit LLC. [ 25 ] Merit ULC was formed for the purpose of completing the sale of the shares of MEC OpCo to NEP Canada. It was the sole shareholder of MEC OpCo before the shares of that corporation were acquired by NEP Canada. 4. Merit Corporate Chain

Summary [ 26 ] In diagram format, the relevant corporate chain of Merit immediately before the Share Transaction on September 30, 2011 is illustrated as follows: C. Individuals Connected to the Defendants [ 27 ] At all material times, the following individuals held positions within Merit USA: a. Mr. Jake Plunk was the Vice President of Business Development. b. Mr. Chris Hagge was the Vice President, General Counsel and Secretary. c. Mr. Ben Moffitt was the Corporate Counsel. [ 28 ] At all material times prior to September 30, 2011, Mr. Plunk, Mr. Hagge and Mr. Moffitt were based in Dallas, Texas.

Each of these individuals remained based in Dallas after the September 2011 Closing Date. [ 29 ] Prior to February 2007, Mr. Gayden Carr was the Vice President of Finance for Merit USA. He was based in Dallas, Texas at

that time. [ 30 ] Between February 2007 and September 30, 2011, Mr. Carr was employed by MEC OpCo as Vice President and General Manager. During that period, he lived in Calgary, Alberta. [ 31 ] Between September 30, 2011 and December 28, 2011, Mr. Carr was the Vice President and Chief Financial Officer for NEP Canada. His employment with NEP Canada came to an end on December 28, 2011. [ 32 ] By way of an email issued by Mr. Hagge on July 21, 2011, certain individuals “in management positions associated with [its] Canadian assets” were designated by Merit to be persons of knowledge. Those individuals were Mr.

Plunk, Mr. Hagge, Mr. Moffitt, Mr. Carr, Mr. Jason Shihinski, Ms. Sheri Hall, Ms. Keisha Smith, Mr. Tommy Lambert, Ms. Heather Fofonoff and Mr. Travis Terpstra, together with all other current officers of Merit ULC (defined as the “ Vendor ” in the 2011 SPA) and the officers of MEC OpCo (defined as the “ Corporation ” in the 2011 SPA) before the September 2011 Closing Date (collectively, “ Persons of Knowledge ”). [ 33 ] Four of the Persons of Knowledge were designated by Merit to take lead roles on the divestiture of Merit’s Canadian assets. Those four individuals, whom Merit labels the directing minds, were Mr.

Plunk, Mr. Hagge, Mr. Moffitt and Mr. Carr (collectively, the “ Merit Deal Team ”): see also NEP Canada ULC v MEC OP LLC , 2017 ABQB 28 at para 8 [ Wilson 2017 NEP Decision ]. IV. Business Background A. NEP Business Plan [ 34 ] Mr. Bud Newton is a petroleum engineer. He has been in the oil and gas industry for 35 years. [ 35 ] In 2010, Mr. Bud Newton and his son, Mr. Mitchell Newton (collectively, the “ Newton Team ”), decided to establish their own oil and gas company. The plan of the Newton Team was to apply the expertise that Mr.

Bud Newton had acquired in developing “legacy assets”. [ 36 ] The Newton Team wanted to identify, target, acquire and develop a “legacy asset” of their own. The commercial strategy conceived by the Newton Team had four steps. In

summary, those four steps were to: (

i) identify and acquire an appropriate “legacy asset”; (ii) invest capital to drill new wells in an aggressive drilling program; (iii) workover the existing and new well base to increase production and prove up additional reserves; and (iv) sell the “legacy asset” within three years (collectively, the “ Newton Business Plan ”). [ 37 ] Financial backing for the Newton Business Plan was needed. Mr. Bud Newton leveraged a contact at Kayne Anderson to secure funding. [ 38 ] The Newton Business Plan meshed with the Kayne Anderson business model.

The collective objective of Kayne Anderson and the Newton Team was to invest in oil and gas plays that could generate a 25% return with an exit timeline of approximately three years. [ 39 ] Kayne Anderson and NEP developed economic models for their joint investment with an exit or realization date of December 2014. However, to persuade Kayne Anderson to buy into the Newton Business Plan, Mr. Bud Newton had to risk a great deal of his own net worth. [ 40 ] On the strength of the experience and personal financial commitment of Mr.

Bud Newton, Kayne Anderson agreed to provide NEP with an initial investment of $75,000,000. That investment allowed NEP to seek an investment opportunity. [ 41 ] With the Kayne Anderson commitment in-hand, the Newton Team began the process of identifying and evaluating “legacy assets” across North America. They were seeking an old oil field: (

i) with multiple producing formations; (ii) where numerous wells had been drilled a long time ago; and (iii) which had not had much drilling activity in recent decades. B. The Transaction Assets – The MEC OpCo Properties [ 42 ] Between 2003 and September 30, 2011, MEC OpCo operated the Transaction Assets in Alberta. A portion of these properties had been acquired from PricewaterhouseCoopers Inc, in its capacity as the receiver-manager of Probe Exploration Inc. C. Merit USA – Decision to Sell Canadian Oil and Gas Assets [ 43 ] In December 2010, Merit decided to sell all of its Canadian oil and gas interests. Merit was going to effect the proposed exit from Canada through a sale of: (

i) all of the assets of MEC OpCo; (ii) all of the shares of MEC OpCo; or (iii) some combination thereof. [ 44 ] Merit USA and MEC OpCo retained the law firm Heenan Blaikie LLP as their Canadian counsel for the transactions. Mr. Brian Bidyk, from the now-defunct law firm of Heenan Blaikie LLP, was the primary Canadian counsel involved with the transaction on behalf of Merit. [ 45 ] The Transaction Assets appeared to have the characteristics of the legacy asset that Mr. Bud Newton was seeking. He was particularly interested in the Leduc Field. The characteristics of that field were as follows: (

i) the Leduc Field was old; (ii) the Leduc Field had a lot of acreage; and (iii) it appeared that after initial exploration by a major company, very little capital had been invested in the Leduc Field for development.

[ 46 ] Mr. Bud Newton was also attracted to the existing pipeline infrastructure in the Leduc Field. That infrastructure would assist in moving hydrocarbons from existing and new oil wells to the point of sale. [ 47 ] In June 2011, NEP made a bid to purchase the Transaction Assets. That offer was in the form of a purchase of the shares of MEC OpCo, which held the Transaction Assets. [ 48 ] During the summer of 2011, NEP and Merit negotiated the terms of the Share Transaction.

On August 18, 2011, NEP and Merit agreed to the terms of the Share Transaction, and the 2011 SPA was signed on that date (the “ August 2011 Signing Date ”). As mentioned above, the Share Transaction contemplated by the 2011 SPA closed on the September 2011 Closing Date. D. Due Diligence [ 49 ] NEP was assisted in performing due diligence on MEC OpCo by Niven Fischer Energy Services Inc (“ Niven Fischer ”) and Bennett Jones LLP (“ Bennett Jones ”). The due diligence pursued by Niven Fischer was overseen by Mr. Brian Carnahan. The due diligence pursued by Bennett Jones was overseen by Mr.

Pat Maguire. [ 50 ] As part of the sales process, Merit established both an electronic data room and a physical data room, which contained information on MEC OpCo. Upon request, Merit also provided additional information not contained in the electronic data room or the physical data room. E. The RAE Report [ 51 ] In 2010, MEC OpCo retained RAE Engineering and Inspection Ltd. (“ RAE Engineering ”) to complete various projects with respect to its pipelines. RAE Engineering was a third-party consultant. [ 52 ] On July 22, 2011, RAE Engineering issued a draft report to MEC OpCo (the “ Draft RAE Report ”).

That report was forwarded to the attention of Ms. Hall. She was principally in charge of regulatory matters at MEC OpCo. F. The 2011 SPA –

Schedule D [ 53 ] In negotiating the terms of the Share Transaction, Merit and NEP exchanged multiple versions of the 2011 SPA (collectively, the “ Draft 2011 SPA ”). [ 54 ] The Draft 2011 SPA included a

Schedule D. Merit provided NEP with the first draft of

Schedule D on July 22, 2011. Both NEP and Merit were involved in the drafting and negotiation of the wording and contents of

Schedule D. [ 55 ] On or about July 27, 2011, Mr. Carnahan had a telephone call with Mr. Carr concerning

Schedule D. The duration of the call was approximately fourteen minutes. During this phone call, Mr. Carr and Mr. Carnahan discussed the items listed on

Schedule D. [ 56 ] Merit provided NEP with a second draft of

Schedule D on August 3, 2011. That second draft incorporated some of the items discussed between Mr. Carnahan and Mr. Carr. [ 57 ] NEP provided Merit with a third draft of

Schedule D on August 17, 2011. [ 58 ] Merit provided NEP with a fourth draft of

Schedule D on August 18, 2011. This fourth edition of

Schedule D became the final version used in, and attached to, the 2011 SPA. G. Employees Retained [ 59 ] Following the September 2011 Closing Date, some of the former employees and contractors of MEC OpCo became employees of, or were contracted by, NEP Canada. These individuals included Ms. Hall, Mr. Terpstra, Mr. Shihinski, Mr. Carr, Mr. Darcy Turner, Ms. Sylvia King and Mr. Michael Reinhart. [ 60 ] Of these retained individuals, only Ms. Hall and Mr. Shihinski remained employed by NEP Canada as of January, 2018. H.

NEP Protective Steps – Self-Disclosure and Production Shut-In [ 61 ] Subsequent to the September 2011 Closing Date, NEP took protective steps concerning the Transaction Assets. On December 23, 2011, NEP shut-in certain wells in the Leduc Field that were situated on the north side of the North Saskatchewan River (the “ NS River ”). By September 2012, NEP had shut-in the remaining wells in the Leduc Field north of the NS River. [ 62 ] These protective steps were taken for health and safety reasons.

The underlying concerns raised regulatory issues. [ 63 ] During the relevant period, there were changes to the regulatory bodies. Prior to June 17, 2013, the Energy Resources Conservation Board (“ ERCB ”) was the regulatory body established under the Energy Resources Conservation Act , RSA 2000, c E-10 . On and after June 17, 2013, the Alberta Energy Regulator (“ AER ”) was, and is, the regulatory body established under the Responsible Energy Development Act , SA 2012, c R-17.3 (The ERCB and AER are collectively, the “ Regulator ”). V. Overview – Facts and Context

A. Key Lay Witnesses [ 64 ] The evidence of a number of individuals is relevant to the issues in this case. I focus on the evidence of eight individuals. [ 65 ] My primary focus is on five individuals. They are: (

i) Mr. Plunk, Vice President of Business Development within Merit USA; (ii) Mr. Hagge, Vice President, General Counsel and Secretary within Merit USA; (iii) Mr. Moffitt, Corporate Counsel within Merit USA; (iv) Mr. Carr, Vice President and General Manager of MEC OpCo, prior to the signing of the 2011 SPA; and (

v) Mr. Lambert, Director of Operations of MEC OpCo, prior to the signing of the 2011 SPA. [ 66 ] Both Mr. Carr and Mr. Lambert were employed by Merit USA in Texas prior to becoming employed with MEC OpCo in 2007 and 2008, respectively. Immediately before the Share Transaction closed, Mr. Carr reported directly to the President of Merit USA in Dallas, Texas. [ 67 ] After the Share Transaction, Mr. Carr remained in Alberta and became employed by NEP. In contrast, Mr. Lambert transitioned back to Texas. [ 68 ] My secondary focus is on three individuals who were employed by MEC OpCo prior to the Share Transaction. They are: (

i) Ms. Hall, who looked after regulatory matters; (ii) Mr. Shihinski, who looked after Field Operations; and (iii) Mr. Terpstra, who was the Region Manager. 1. Mr. Plunk [ 69 ] In February 2011, Mr. Plunk informed Mr. Bud Newton that Merit was going to divest itself of its Canadian assets. Mr. Plunk was the chief business person overseeing the Share Transaction. He was present at the management presentations that Merit gave to NEP. [ 70 ] In cross-examination, Mr. Plunk testified that it was the role of senior management within Merit to review the schedules to the 2011 SPA.

In further cross-examination, he confirmed that it was the responsibility of senior management to ensure that the schedules were accurate. [ 71 ] On July 20, 2011, Mr. Plunk received an email from Mr. Carr (the “ Carr July 2011 Email ”). The subject of the email was “regulatory issues”. That email stated: There will be significant dollars associated with these clean-up efforts and we will need to discuss how to disclose them to Newton as it is probably a larger amount of expense than they would have seen on past years’ lease operating statements. [ 72 ] The testimony of Mr.

Plunk regarding his prior knowledge of the Carr July 2011 Email fluctuated. In cross-examination, he initially said he had “possibly” read it. Still in cross-examination, he said that he “most likely didn’t even read it”. He then said that he did not recall reading it at the time he received it. Within that same cross-examination, he subsequently claimed to recall reading only a portion of the email. [ 73 ] The evidence is that Mr. Plunk sent an email on July 21, 2011 asking the Persons of Knowledge to gather information about known regulatory non-compliances (the “ Plunk July 2011 Regulatory Email ”).

He asked the recipients of the email to provide the information to Mr. Moffitt, Mr. Hagge or himself. [ 74 ] Having made the request for information in the Plunk July 2011 Regulatory Email, Mr. Plunk acknowledged in cross- examination that the Persons of Knowledge would be responding to him in respect of that request. The evidence is that Mr. Terpstra responded within hours of having received the Plunk July 2011 Regulatory Email. In his response, Mr. Terpstra attached a spreadsheet of non-compliances, including the sweet-to-sour pipeline issue. When asked about this response from Mr. Terpstra, Mr.

Plunk testified in cross-examination that he would not have opened the attachments. [ 75 ] Mr. Plunk was subjected to cross-examination on his assertion that he would not have opened the attachments to the responding emails. It was put to him that failing to review the email and its attachments would have been a dereliction of his duty. He then shifted gears, and testified that he could not recall whether he reviewed the attachments. [ 76 ] In further cross-examination, Mr. Plunk testified that he understood that it was important for him to pay attention to the answers from the responding Persons of Knowledge.

As part of that cross-examination, he conceded that by the summer of 2011, he was aware that MEC OpCo had a project related to pipelines and non-producing wells, and that RAE Engineering had been retained for that task. [ 77 ] Mr. Plunk also gave equivocal answers in cross-examination as to whether he reviewed other key emails. The evidence is that he received an email from Mr. Carr in September 2011 enclosing the consolidated comments on

Schedule D (the “ Carr September 2011 Responding Email ”). Those consolidated comments were from the field staff and Mr. Carr. [ 78 ] Mr. Plunk received the Carr September 2011 Responding Email five days before the September 2011 Closing Date. That email included particulars concerning the notice from the Regulator that 67 wells had been identified as being non-compliant with Directive-13 (“ D-13 ”). That directive governs the suspension and abandonment requirements for inactive wells. [ 79 ] In cross-examination, Mr.

Plunk testified that he did not recall reading the Carr September 2011 Responding Email or other similar emails, including emails marked as being of high importance. Mr. Plunk also confirmed in cross-examination that he did not read many of these emails despite the fact that the information in these emails was the specific information that he expected to be addressed in

Schedule D.

[ 80 ] Throughout the sales process, Mr. Terpstra had continuing communications with Mr. Plunk and others, regarding the anticipated Share Transaction. [ 81 ] Ms. Hall testified in direct examination that she had conversations with Mr. Plunk and others, during the summer of 2011 regarding the scope of the non-compliance concerning the surface casing vent flows (“ SCVF ”). She did this in an effort to communicate her knowledge of the SCVF issue to Mr. Plunk and others. [ 82 ] The evidence is that before signing off on

Schedule D, Mr. Bud Newton wanted to meet with Mr. Carr and Mr. Plunk. This meeting was scheduled in mid-August 2011, and it occurred at the Divino Restaurant in Calgary (the “ Divino Meeting ”). [ 83 ] Mr. Carr testified in direct examination that at the Divino Meeting, Mr. Plunk chimed in and commented on the work that RAE Engineering was doing. Counsel for NEP objected, arguing that the narrative of Mr. Carr concerning what Mr. Plunk said about RAE Engineering was hearsay.

I allowed counsel for Merit to continue with the questioning, but I stated that I would not be considering any evidence that was hearsay, unless there was an exception to the hearsay rule. [ 84 ] As I now consider this testimony, I find that the reference Mr. Carr made to Mr. Plunk’s comments about RAE Engineering is not hearsay. I make that determination because the subject testimony from Mr. Carr is only evidencing that Mr. Plunk was aware of RAE Engineering. [ 85 ] In cross-examination, Mr. Carr testified that during the Divino Meeting, Mr. Plunk led the discussion about what RAE Engineering had been doing.

In contrast, in cross-examination, Mr. Plunk denied having any knowledge of RAE Engineering before the Divino Meeting. Indeed, during that cross-examination, Mr. Plunk testified that the first time he heard the name RAE Engineering was at the Divino Meeting. [ 86 ] Given the consistency of the evidence of Mr. Carr in both direct examination and cross-examination, I accept his testimony on this point. Based on Mr. Carr’s evidence, it would seem that Mr. Plunk was aware of RAE Engineering before the Divino Meeting, and that he addressed RAE Engineering at that meeting. The evidence of Mr.

Carr concerning that point is not inconsistent with the Wilson 2017 NEP Decision because that decision only made a finding concerning Mr. Plunk’s lack of knowledge concerning the Draft RAE Report, which has nothing to do with: (

i) whether Mr. Plunk was aware of RAE Engineering as an operating entity; and (ii) whether Mr. Plunk addressed that entity in some fashion at the Divino Meeting. [ 87 ] As mentioned above, Mr. Plunk testified that he had not heard of RAE Engineering until the Divino Meeting. Notwithstanding the Wilson 2017 NEP Decision , the evidence is that Mr. Plunk received the Draft RAE Report by email. While I accept the finding in the Wilson 2017 NEP Decision , I note that during this trial, Mr. Plunk explained his failure to review the Draft RAE Report. In particular, Mr.

Plunk testified that he failed to review the Draft RAE Report because he was attending a high school reunion, and was therefore not answering work emails. [ 88 ] While that seems to be a viable explanation, on cross-examination, Mr. Plunk testified that he had answered multiple work- related emails the day of the high school reunion. He also testified that he had enough time to address certain emails concerning the fact that “El Paso got bought by Apollo”, which I infer was irrelevant to the MEC OpCo deal. I note these evidentiary points because they are inconsistent with the assertion of Mr.

Plunk that he was not answering or addressing work emails on that date. [ 89 ] In cross-examination, Mr. Carr admitted that in September 2011, he was aware of the effect that the “can of worms” opened by United Hunter Oil & Gas Corp (“ United Hunter ”) would have on the Share Transaction, and that he discussed this with Mr. Lambert. Briefly, United Hunter engages in the exploration of oil and gas properties, and it had engaged in a project with Merit, out of which, a dispute arose. As the dispute with United Hunter continued, Mr. Carr involved a number of individuals, including Mr.

Plunk. [ 90 ] In direct examination, Mr. Carr testified that he explained to his colleagues in an email communication, which included Mr. Plunk, that the pipelines that United Hunter was seeking to tie into, as well as the downstream facilities, were not licensed to carry the sour products that the subject well would produce. The advice MEC OpCo consistently received from Mr. Lambert was not to “open a can of worms” with the Regulator while there was a sales process in place. Otherwise, the pipeline non-compliance would become public. [ 91 ] In cross-examination, Mr.

Plunk testified that he was aware that the main concern of a purchaser is knowing what liabilities they are assuming. In that same cross-examination, he again confirmed that it would be very important for a purchaser, such as NEP, to know what liabilities it was assuming in the transaction. [ 92 ] In a later cross-examination, Mr. Plunk testified that he was aware that NEP would be relying on Merit to ensure that

Schedule D was truthful, accurate and complete. Mr. Plunk also confirmed that as the individual signing the Officer’s Certificate at closing, he expected

Schedule D would incorporate, with specifics, all known instances of non-compliance of which key employees, like Ms. Hall, were aware. In cross-examination, Mr. Plunk testified that if Merit had any specific information regarding non-compliances with pipeline licences, SCVFs or suspended wells, the information would be set out in

Schedule D in appropriate detail for the purchaser. [ 93 ] In cross-examination, Mr. Carr testified that he sent the Carr July 2011 Email to Mr. Plunk and other Persons of Knowledge because he knew that the costs associated with clean-up of the MEC OpCo assets were both large and undetectable from a review of the information disclosed to NEP. The Carr July 2011 Email was sent to Mr. Hagge and Mr. Moffitt on July 20, 2011, and Mr. Plunk was copied on the communication. [ 94 ] In cross-examination, Mr. Plunk testified that he knew Mr. Bud Newton was seeking assurances regarding non-compliance matters and

Schedule D. [ 95 ] The evidence is that none of the Persons of Knowledge were permitted to meet with NEP alone. Mr. Plunk confirmed in direct examination that he personally sat in on some of the meetings. He stated that he attended those meetings because he “...had been the one that put out the persons of knowledge e-mail so [he] felt like [he] needed to be there for the meetings”. That said, he later testified that he

never spoke to the Persons of Knowledge about their responses before he attended the Persons of Knowledge meetings with Mr. Bud Newton on August 16, 2011 (collectively, the “ POK Meetings ” and individually, the “ POK Meeting ”). [ 96 ] As a

summary comment, the evidence is that under the Newton Business Plan, NEP planned to drill between 100 and 250 new wells within three years after it purchased the Transaction Assets. Mr. Bud Newton communicated these plans to Mr. Plunk before the September 2011 Closing Date. [ 97 ] Based on the evidence provided by Mr. Plunk, he signed the Officer’s Certification notwithstanding that he allegedly made no effort to review the information put forward by the other Persons of Knowledge. That is, given his version of the story, Mr. Plunk made no effort to compare the data provided by other Persons of Knowledge to what had been disclosed on

Schedule D. 2. Mr. Hagge [ 98 ] Mr. Hagge was the head legal counsel on the Share Transaction. As early as 2009, Mr. Hagge was included in email communications concerning compliance issues. The evidence is that in an email dated February 23, 2009, D-13 non-compliance was noted as a “high-enforcement” issue. The issue was serious enough to “place MEC on Global Refer” status. A status of that nature would have prevented MEC OpCo from getting approval for new licence applications, and could lead to production being shut-in. This information was circulated by Mr. Carr to Mr. Hagge and others. [ 99 ] Mr.

Hagge engaged outside counsel to assist with the sale of the Transaction Assets, and he travelled to Calgary in January 2011. The purpose of that travel was to assist with the sale of the Canadian assets held by Merit, which included the Transaction Assets. [ 100 ] During the Share Transaction, Mr. Hagge was the legal point-person. He assumed the role of lead legal counsel on the transaction. [ 101 ] In this role, Mr. Hagge prepared the draft 2011 SPA that was provided to NEP. Based on the evidence, he was intimately involved in the negotiation and drafting of the 2011 SPA. [ 102 ] Mr.

Hagge repeatedly denied any knowledge of the sweet-to-sour issue. This denial was made despite the evidence that he received communications on the issue from numerous sources, and Mr. Carr expressly testified to discussing the issue with him on multiple occasions. [ 103 ] In cross-examination, Mr. Hagge acknowledged that Mr. Lambert was the most knowledgeable person concerning MEC OpCo from an operations perspective. Similarly, in cross-examination, Mr. Hagge testified that Mr. Shihinski was the most knowledgeable MEC OpCo employee from a field operations perspective. [ 104 ] Ms.

Hall testified in direct examination that during the summer of 2011, she had conversations regarding the scope of SCVF non-compliance with Mr. Hagge and others. She did this in an effort to communicate her knowledge of the SCVF issue to him and others. Prior to circulating the first draft of

Schedule D, Mr. Hagge had a discussion concerning a spreadsheet that indicated the scope of the non-compliance and identified as many as 40 SCVFs. [ 105 ] In cross-examination, Mr. Hagge initially testified he had no “specific” recollection of reviewing the communications concerning the SCVFs. He then hedged his comments. [ 106 ] Based on my review of his evidence, Mr. Hagge did not deny: (

i) having opened the attachments; and (ii) reviewing Ms. Hall’s email. In reviewing the evidence, I note that on July 26, 2011 at 8:23 am Mr. Hagge sent an email to Mr. Lambert (with copies to Mr. Plunk, Mr. Carr and Mr. Moffitt) wherein he specifically addressed the SCVFs. In that communication, two key field staff had informed Mr. Carr that they “guestimated” that there were 30 to 40 SCVFs in the area. In response to that communication, Mr. Hagge made the following comment in an email: If there are currently leaks or other non compliance, we need to list it.

If we’re just guessing that there may be leaks in the future, I don’t think it’s appropriate to list (akin to listing a spill that may occur simply because we produce and transport oil around our properties). We can catch up more later when I’m back from Heenan’s offices Thank you [ 107 ] Based on my review of the evidence, there is no indication that Mr. Hagge further investigated this 30 to 40 SCVF reference. I infer from this communication that Mr. Hagge was turning a “blind eye” to the SCVF exposure, but that he had been informed of there existence. [ 108 ] Ms. Hall prepared additional notes on

Schedule D. She circulated those notes to Mr. Hagge and others on July 27, 2011 (the “ Hall July 2011 SCVF Email ”). She attached a copy of the Draft RAE Report to the Hall July 2011 SCVF Email. In an effort to draw attention to the Draft RAE Report, Ms. Hall wrote the following at the top of the email – “Added the Sweet-to-Sour Draft Technical Report”. [ 109 ] In her notes concerning

Schedule D that accompanied the Hall July 2011 SCVF Email, Ms. Hall specifically noted that the best information available indicated that there were between 30 and 40 SCVFs. She also underscored that the sweet-to-sour issue should be properly reflected in

Schedule D by writing the following in red – “Sour Pipeline License Issue (attached draft report)”. [ 110 ] On July 28, 2011, Ms. Hall forwarded the same email directly to Mr. Carr. By attaching the Draft RAE Report and referencing it in the body of the Hall July 2011 SCVF Email, Ms. Hall also brought that report to the attention of Mr. Shihinski and Mr. Terpstra. [ 111 ] Mr. Hagge claims that he missed the Hall July 2011 SCVF Email and its attachment. Mr. Carr also claims to have missed the Hall July 2011 SCVF Email and its attachment. [ 112 ] In cross-examination, Mr. Hagge admitted that he knew that the cost of repairing a single SCVF was a material matter that

needed to be disclosed to NEP. The evidence is that the repair cost amount was in the range of $140,000 per well, although the cost could vary significantly. [ 113 ] On August 18, 2011, Mr. Hagge was copied on a communication from Mr. Carr, wherein Ms. Hall was asked to answer questions raised by Mr. Carnahan concerning an Environment Canada matter on

Schedule D. However, she was expressly directed not to “engage him on any other items”. [ 114 ] Based on the evidence before me, I find that Ms. Hall was presenting Mr. Hagge with the “best information” she had available at the time. In contrast, Mr. Hagge was relying on a “guestimate” comment to avoid addressing the issue on

Schedule D. [ 115 ] In cross-examination, Mr. Hagge described

Schedule D as a “disclosure schedule”. He testified that

Schedule D was referred to as such because its purpose was to disclose or identify matters which qualified the representations that pertain to particular subjects. At another juncture in cross-examination, Mr. Hagge conceded that that Merit needed to accurately disclose on

Schedule D the regulatory non-compliances of which the Persons of Knowledge were aware. [ 116 ] Throughout the sales process, Mr. Terpstra had continuing communications regarding the transaction with Mr. Hagge and others. [ 117 ] In an email dated July 20, 2011, Mr. Hagge expressed concerns about a statement that Ms. Hall had made about “unsafe” conditions associated with pipelines. This was a regulatory issue. Mr. Carr responded with the Carr July 2011 Email. [ 118 ] In cross-examination, Mr. Hagge testified that he made no effort to follow up with the various Persons of Knowledge to ensure that he had received responses to the request for items to be disclosed on

Schedule D. Further, while Mr. Hagge conceded that he received a number of responses to his request for information, in cross-examination, he testified that “there’s many attachments that I didn’t open”. [ 119 ] In cross-examination, Mr. Hagge testified that he was aware that D-13 was on

Schedule D. Notwithstanding that knowledge, he testified that he made no efforts to inform himself on D-13 or who within MEC OpCo might have the best information in respect of that issue, except to ask Mr. Moffitt to work on the schedule. [ 120 ] In cross-examination, Mr. Hagge testified he did not bother to investigate whether D-13 was a regulatory or a financial matter. When Mr. Carr sent him an email marked “high importance” to advise of the notice from the Regulator regarding 67 newly flagged D-13 non-compliant wells, Mr. Hagge testified that he was not sure if he had read the attachments. Mr.

Hagge had selective recall of reading only certain paragraphs of the email. [ 121 ] In cross-examination, Mr. Hagge testified that he made no efforts to gather information about the reports of sweet licensed pipelines carrying sour products. In fact, Mr. Hagge said that he had no awareness of this issue before the September 2011 Closing Date. He made this statement notwithstanding that the issue was put forward for inclusion on

Schedule D multiple times. [ 122 ] In cross-examination, Mr. Hagge testified that despite having been involved in a number of conversations and email correspondence involving the sweet-to-sour issue (including the United Hunter issues), he professed to having no recollection of the matter. [ 123 ] In direct examination, Mr. Carr testified that he explained to his colleagues in an email communication, which included Mr. Hagge, that the pipelines that United Hunter was seeking to tie into, as well as the downstream facilities, were not licensed to carry the sour products that the well would produce.

The advice that MEC OpCo consistently received from Mr. Lambert and agreed with during this time was not to “open a can of worms” with the Regulator while there was a sales process in place. Otherwise, the pipeline non- compliance would become public. [ 124 ] The evidence is that none of the Persons of Knowledge were permitted to meet with NEP alone. Mr. Hagge confirmed in direct examination that he personally listened in on some of the POK Meetings. In his testimony, Mr. Hagge described himself as a “quiet listener”.

He stated that he attended those meetings because Merit was “...at the point of signing any day and if an issue came up, [he] wanted to hear it so [he] could address it”. That said, he later testified that he never spoke to the Persons of Knowledge about their responses before he attended those POK Meetings with Mr. Bud Newton. He also testified that he was not aware that any constraint had been placed on any individual who was a member of the Persons of Knowledge group. [ 125 ] With Mr. Carr directly beside Ms. Hall and Mr. Hagge on the phone, Mr. Bud Newton asked Ms.

Hall “if there was anything that should be added to

Schedule D” and she responded “No”. On this point, Ms. Hall testified that she had been told

Schedule D was the method by which Merit was going to communicate the regulatory issues. She further stated that she toed the line because she was between “a rock and a hard place”. [ 126 ] Based on read-ins, Mr. Lambert testified that, in the course of dealing with the United Hunter dispute, he had a conversation with Mr. Hagge regarding: (

i) the sweet-to-sour issues; (ii) the involvement of RAE Engineering with the sweet-to-sour issues; and (iii) the so-called “can of worms” that the sweet-to-sour issues would open with the Regulator. I infer from that evidence that Mr. Hagge was informed of those three issues. Further, my review of email correspondence from Mr. Hagge to Mr. Carr, dated September 13, 2011, proves, on a balance of probabilities, that Mr. Hagge had more than a passing knowledge of the challenges associated with United Hunter. [ 127 ] Based on the evidence before me, Mr.

Hagge was designated by Merit as one of the people trusted and selected to represent the collective mind of “the company”. He was, by his own correspondence, designated as a Person of Knowledge. 3. Mr. Moffitt [ 128 ] Mr. Moffitt was Associate Counsel of Merit USA at the time of the Share Transaction. Mr. Moffitt first travelled to Calgary to

assist with the Share Transaction in early 2011. [ 129 ] Merit USA brought Mr. Moffitt into the Share Transaction to assist Mr. Hagge with negotiating and drafting the 2011 SPA. He also prepared other ancillary documents associated with the 2011 SPA. [ 130 ] The drafting of

Schedule D began in May 2011. Mr. Moffitt created the first draft of

Schedule D, and he was responsible for the alterations to that document. [ 131 ] Mr. Moffitt prepared spreadsheets to be populated with known non-compliances and circulated them to a number of employees within Merit, including Ms. Hall. Mr. Moffitt’s original email regarding

Schedule D described it as a “list of: any notices of default any laws or contracts; any known issues where MEC could be in default under applicable laws...”. [ 132 ] The response of Ms. Hall to the request to report regulatory non-compliances for inclusion on

Schedule D listed two and a half pages of regulatory non-compliances. The detail in the email included MEC OpCo’s: (

i) D-13 non-compliance requiring downhole work; (ii) pipeline non-compliance; (iii) improperly abandoned pipelines; and (iv) sour products flowing through sweet pipelines as separate regulatory non-compliances. That email was then forwarded from Mr. Lambert to Mr. Hagge and Mr. Moffitt for discussion, albeit in two separate emails. [ 133 ] Mr. Moffitt met with Ms. Hall to discuss known regulatory non-compliances on June 7, 2011. In that meeting, Ms.

Hall explained that in the Leduc Field, MEC OpCo had sweet-licensed lines carrying sour products and that there were public safety concerns arising from that non-compliance. She also confirmed that there were 20 to 40 unreported SCVFs in the Leduc Field. [ 134 ] In cross-examination, Mr. Moffitt testified it was important for him to seek specific details of the non-compliances, given the broad scope of the representation and warranties in the 2011 SPA. The evidence is that Mr. Moffitt was provided with additional information concerning non-compliance items. [ 135 ] The evidence is that in mid-June 2011, Ms.

Hall provided Mr. Moffitt with an email detailing the non-compliance of MEC OpCo in respect of D-13 and SCVFs (the “ Hall June 2011 Email ”). Mr. Moffitt subsequently asked for additional details on the comments she had provided in the Hall June 2011 Email. In responding to that request, Ms. Hall informed Mr. Moffitt that she did not then have a “complete list of licences that are not compliant”.

However, she advised him that she would request a list of non-compliant pipelines identified by RAE Engineering. [ 136 ] Amongst the items communicated, the Hall June 2011 Email specifically distinguished between the Pipeline Integrity Management Program (“ PLIMP ”) and the pipeline licencing issue. However, in cross-examination, Mr. Moffitt could not provide the Court any assurance that he had read the Hall June 2011 Email, notwithstanding that it was a direct response to his request. [ 137 ] I find the testimony by Mr. Moffitt on this point troubling. He had asked Ms. Hall specific questions.

Since he asked the questions, I infer that he was expecting an answer. [ 138 ] Ms. Hall provided the answer, but Mr. Moffitt testified that he did not recall reading the response. He provided that testimony to the Court notwithstanding the fact that his primary task was to draft the schedules to the 2011 SPA. [ 139 ] In contrast, Mr. Moffitt had a specific recollection of reading two separate email responses from Mr. Carr, one of which informed him that Ms. Hall would be providing a “detailed response”. Notwithstanding that recollection, in cross-examination, Mr.

Moffitt testified he had no recollection of the portions of email from Mr. Carr that would have alerted him to the severity of the sweet-to- sour problem, including the cost of compliance. [ 140 ] In cross-examination, Mr. Moffitt testified he had no recollection of opening the attachments to Mr. Carr’s email. That email attached: (

i) the consolidated comments from the Leduc Field staff; (ii) the RAE Report; and (iii) the email from Ms. Hall referencing the RAE Report. [ 141 ] I have four comments concerning the testimony of Mr. Moffitt wherein he alleged that he did not recall opening the attachments to this email. [ 142 ] First, Mr. Moffit provided this testimony notwithstanding he was asking Mr. Carr to “incorporate” the comments which had been provided by Ms. Hall. That is, Mr. Moffit asked Mr. Carr to incorporate the very comments that he alleges he did not read. [ 143 ] Second, Mr.

Moffit provided this testimony in the context of direct examination. During the corresponding questioning, it was mentioned that this particular email was the subject matter of the trial before Justice Wilson. While I accept the findings that were made in the Wilson 2017 NEP Decision , I note that when asked in direct examination where he was when he received the email on July 28, 2011 at 7:11 pm, Mr. Moffitt answered with great precision. He was with his wife at a weekly church group meeting. [ 144 ] Third, this was the same email that both Mr. Plunk and Mr. Hagge had no recollection opening.

I find it remarkable that all three of these individuals did not open the same email. [ 145 ] Fourth, in cross-examination, Mr. Moffitt testified that while he did not read the email from Ms. Hall, he did answer other business emails forthwith on that same day. This was evidenced by the fact that he responded to an email from Ms. Fofonoff within four minutes of having received it. [ 146 ] In direct examination, Mr. Moffitt denied that he had ever been aware of any public safety issues prior to the September 2011 Closing Date.

Notwithstanding that denial, in cross-examination, he testified that after his first meeting with Ms. Hall, he typed the words “Public Safety concerns” into a

schedule which would become the first draft of

Schedule D. I view that as an internal inconsistency.

[ 147 ] In cross-examination, Mr. Carr testified he had reviewed the changes Ms. Hall made to the “regulatory issues.xslx” spreadsheet, and had been alerted to Ms. Hall’s public safety concerns. [ 148 ] Based on my review of the email communications that are in evidence, the comments of Ms. Hall regarding safety concerns prompted an exchange of emails amongst Mr. Carr, Mr. Hagge, Mr. Plunk and Mr. Moffitt. Of particular interest is the email from Mr. Carr to Mr. Moffitt and Mr. Hagge on Wednesday, July 20, 2011.

This was the Carr July 2011 Email, where it stated that there will be significant dollars associated with the cleanup efforts, and that they needed to discuss how to disclose the to Mr. Bud Newton. [ 149 ] Concerning the Draft RAE Report, Ms. Hall forwarded the document to Mr. Lambert directly, and provided a brief

summary of its findings in the covering email. She also sent it to Mr. Terpstra, advising that she would send it to “Tommy/Gayden for direction on desire to include in any divest schedules (or not)”. [ 150 ] On the following Monday, July 25, 2011, Ms. Hall discussed the Draft RAE Report with Mr. Carr. He instructed her to send the Draft RAE Report to Mr. Moffitt. She then sent the Draft RAE Report to Mr. Moffitt, with a covering email specifically noting that the attached report related to “licence issues with Leduc field”. I find that this email is one of many communications that Mr.

Moffitt received concerning details on pipeline non-compliance. In making this finding, it is not intended to contradict the determination in the Wilson 2017 NEP Decision . I just note that Mr. Moffitt received the communication. [ 151 ] In direct examination, Mr. Carr testified that he explained to his colleagues in an email communication, which included Mr. Moffitt, that the pipelines that United Hunter was seeking to tie into, as well as the downstream facilities, were not licensed to carry the sour products that the well would produce. As noted above, the advice that MEC OpCo consistently received from Mr.

Lambert was not to “open a can of worms” with the Regulator while there was a sales process in place. The apparent concern was that the pipeline non- compliance would become public. [ 152 ] In direct examination, Mr. Moffitt testified that Ms. Hall never raised any issues with the accuracy of drafts of

Schedule D. Notwithstanding that denial, in cross-examination, he conceded that Ms. Hall had raised issues with respect to whether various drafts of

Schedule D included references to certain items. Based on the evidence before me, I accept that Ms. Hall had raised issues concerning inaccuracies that she had identified. [ 153 ] Ms. Hall testified in direct examination that during the summer of 2011, she had conversations regarding the scope of SCVF non-compliance with Mr. Moffitt and others. She did this in an effort to communicate her knowledge of the SCVF issue to him. [ 154 ] The evidence is that Mr. Moffitt was sent a list of specific wells with SCVFs. I reviewed the attachment, and the detail therein. In cross-examination, Mr.

Moffitt testified that he could not provide the Court any assurance that he had read the attachment. His specific testimony was that he did not recall ever seeing this worksheet. He then went on to comment that Ms. Hall would not have told him about a “guesstimate” if MEC OpCo had a list. [ 155 ] Concerning this particular email and its attachments, I have three comments. [ 156 ] First, counsel for NEP cross-examined Mr. Moffitt on how the word “guesstimate” got into his head. Mr. Moffitt responded to the question by stating that: (

i) he had seen the word “guesstimate” in other places; and (ii) he did not remember from where he got the word “guesstimate”. [ 157 ] The word “guesstimate” has importance in this case because it ties into an email that Mr. Moffitt asserts that he did not read. The narrative in that email was as follows – “As discussed, Jason and Ed guesstimate 30 to 40 SCVF in the area”. [ 158 ] Second, this is yet another example of Mr. Moffitt allegedly not reading what I view to be important documents, for which he is responsible. [ 159 ] Third, in earlier cross-examination, Mr.

Moffitt conceded to having known that MEC OpCo had numerous wells that were actually non-compliant with D-13. Notwithstanding that knowledge, there is no evidence that Mr. Moffitt made any effort to reconcile that knowledge with the disclosure that is on

Schedule D. [ 160 ] On July 27, 2011, Mr. Carr circulated an email to Mr. Moffitt and others, in which he stated that he would meet with Ms. Hall to discuss incorporating her comments from the Hall July 2011 SCVF Email. He attached those two documents to his email, being her notes on

Schedule D and the Draft RAE Report. [ 161 ] Mr. Moffitt responded, explaining that he had reviewed the email from Mr. Carr, and understood that Mr. Carr would be the one to revise

Schedule D in order to capture the comments in the attachments ( i.e. , Ms. Hall’s email). In cross-examination, Mr. Moffitt testified that he did not read the contents of the email or the attachments which had come from Ms. Hall, notwithstanding that he specifically referenced her email. [ 162 ] The testimony of Mr. Moffitt in cross-examination is troubling. His testimony concerning which email he opened and reviewed follows a pattern. In making these comments, I am mindful that he is a lawyer. That said, the credibility of Mr. Moffitt was undermined. [ 163 ] Throughout the sales process, Mr.

Terpstra had continuing communications regarding the transaction with Mr. Moffitt and others. [ 164 ] On September 23, 2011, the Regulator issued a notice to MEC OpCo identifying 67 wells that were offside D-13 (the “ Regulator September 2011 D-13 Notice ”). That notice was received by Ms. Hall approximately one week before the September 2011 Closing Date. The evidence is that Ms. Hall sent Mr. Carr an email concerning this matter on Friday, September 23, 2011. Mr. Carr took this lengthy note and wrote to Mr. Hagge, Mr. Plunk, Mr. Moffitt and Mr.

Lambert to update them on the D-13 non-compliances. [ 165 ] This email from Mr. Carr to Mr. Moffitt and others was sent on Sunday, September 25, 2011 (the “ Carr September 2011

Email ”). The Carr September 2011 Email specifically acknowledged that the non-compliances would lead not only to paperwork but “follow up and associated costs”. Mr. Carr went on to say to Mr. Moffitt and the others that these costs would “be NEP’s problem for the Central AB assets going forward…”. [ 166 ] When Mr. Carr sent Mr. Moffitt and others the Carr September 2011 Email, he marked it as being of “high importance”. I infer that Mr.

Carr marked the email as being of high importance because of the obvious significance of the Regulator September 2011 D-13 Notice. [ 167 ] Based on the evidence before me, it is clear that Mr. Moffitt was focused on D-13 compliance. This is supported by a number of communications that were directed to Mr. Moffitt, including the August 17, 2011 email from Ms. Hall to him alone where she reported to him that she had “…called over to the ERCB to see what/if any D13 suspension information may be ‘publicly available’”. I infer from this particular email that Mr.

Moffitt was concerned with D-13 compliance. [ 168 ] Based on the evidence before me, I also find that Mr. Moffitt was designated by Merit as one of the people trusted and selected to represent the collective mind of “the company”. 4. Mr. Carr [ 169 ] Mr. Carr moved to Calgary in late 2006, and officially became the Vice President and General Manager of MEC OpCo on February 1, 2007. [ 170 ] The knowledge that Mr. Carr had concerning the Share Transaction has been touched on thoroughly above. By way of

summary, the following key points evidence his actual knowledge: (

i) the Carr July 2011 Email, where he stated that there will be significant dollars associated with the cleanup efforts; (ii) despite his claim that he had not read the Draft RAE Report, on Monday, July 25, 2011, he and Ms. Hall discussed the report, after which he instructed her to send the report to Mr. Moffitt; (iii) he explained to his colleagues that the pipelines that United Hunter was seeking to tie into, as well as the downstream facilities, were not licensed to carry the sour products that the subject well would produce; and (iv) Mr. Carr wrote to Mr. Hagge, Mr. Plunk, Mr. Moffitt and Mr.

Lambert to update them on the Regulator September 2011 D-13 Notice. [ 171 ] Based on the evidence before me, I find that Mr. Carr was designated by Merit as one of the people trusted and selected to represent the collective mind of “the company”. 5. Mr. Lambert [ 172 ] At the time of the Share Transaction, Mr. Lambert was at second-in-command at MEC OpCo in Canada. The only person above him within the MEC OpCo organization was Mr. Carr. [ 173 ] While he was the second-in-command at MEC OpCo, the evidence is that Mr. Lambert was the primary operational individual in Canada.

He was the individual to whom everything was reported. [ 174 ] In cross-examination, Mr. Hagge acknowledged Mr. Lambert to be the most knowledgeable person concerning the MEC OpCo operations. Merit considered Mr. Lambert sufficiently important that he was expressly named as an individual within the Persons of Knowledge. In cross-examination, Mr. Plunk testified that Mr. Lambert assisted in hiring consultants for the divestiture, including Sproule as the reservoir engineer. [ 175 ] Mr. Mark Teshoian was a partner in Kayne Anderson. In cross-examination, he testified that Mr.

Lambert was “one of the senior guys at MEC involved in the deal”. [ 176 ] Mr. Lambert was selected both to prepare materials for, and be a presenter at, the presentation that Merit and its investment bankers gave to NEP. This evidence was reinforced by the cross-examination of Mr. Carr, where he testified that Mr. Lambert was present for many of the presentations put on by Royal Bank of Canada to market MEC OpCo. [ 177 ] Based on the evidence, it is clear that Mr. Lambert effectively managed all of the field operations for MEC OpCo. Mr. Lambert also dealt directly with Mr.

Teshoian during the transaction process. [ 178 ] Based on the evidence before me, it is clear that the sale of the Transaction Assets was an important component of Mr. Lambert’s job. This determination is supported by a comment made by him during his oral deposition. In particular, Mr. Lambert indicated that the sales efforts concerning MEC OpCo were a significant component of his job. 6. Ms. Hall [ 179 ] At the time of the Share Transaction, Ms. Hall was the Regulatory Manager for MEC OpCo, and the most senior regulatory employee at the corporation. Ms.

Hall was responsible for staying on top of regulatory non-compliance issues. 7. Mr. Terpstra [ 180 ] Mr. Terpstra held a senior position as the Region Manager for MEC OpCo in the Leduc area. In this role, Mr. Terpstra reported to Mr. Lambert and oversaw, among others, Mr. Shihinski. 8. Mr. Shihinski [ 181 ] Mr. Shihinski was the Operations Manager for MEC OpCo at the time of the Share Transaction. He was the head of all field

operations in the Leduc area. B. Expert Witnesses [ 182 ] A number of individuals gave evidence during this hearing. Since those experts are referred to throughout this decision, I thought it appropriate to outline their respective expertise at this juncture of the decision. 1. Ralph David Webster [ 183 ] Mr. Webster was an expert for NEP. He issued an expert report dated November 30, 2017. [ 184 ] I qualified Mr. Webster as an expert for the purpose of giving opinion evidence in the following three areas: a.

The operation and remediation of upstream oil and gas pipelines and related infrastructure within the applicable regulatory framework, including the time, costs and scope associated with such remediation work. b. Industry practice regarding acquisition due diligence on upstream oil and gas pipelines and related infrastructure. c. The use and application of pipeline operations manuals in pipeline integrity management within the upstream oil and gas industry, including the meaning accorded to each term within the industry. 2. Daryl Glenn Foley [ 185 ] Mr. Foley was an expert for NEP.

He issued an expert report dated November 30, 2017. [ 186 ] I qualified Mr. Foley as an expert for the purpose of giving opinion evidence in the following three areas: a. The operation and remediation of upstream oil and gas facilities and related infrastructure, including pipelines, within the applicable regulatory framework, including time, cost and scope associated with such remediation work. b. The use and application of pipeline operations manuals and pipeline integrity management programs within the upstream oil and gas industry, including the meaning accorded to each term within the industry. c.

Industry practice regarding upstream oil and gas facility. 3. Patrick Edmund Keck [ 187 ] Mr. Keck was an expert for NEP. He issued an expert report dated November 30, 2017, a Power Point in response to the Report on Surface Casing Vent Flow, Casing Failure and Well Suspension by Theresa Watson. [ 188 ] I qualified Mr. Keck as an expert for the purpose of giving opinion evidence in the following four areas: a. Industry incident rates of SCVFs and casing failures. b. Industry practice on inspection, monitoring, detection and repair of SCVFs and casing failures, including wellbores and related infrastructure. c.

Cost associated with the assessment of and repairs to SCVFs and casing failures, including wellbores and related infrastructure. d. Industry practice on due diligence of wellbores and related infrastructure, including SCVFs and casing failures in a purchase and sale transaction. 4. Kenneth Brandon Mullen [ 189 ] Mr. Mullen was an expert for NEP. He issued an expert report dated February 21, 2018. His expert report was responding to the Report of Dale Tremblay dated November 28, 2017. [ 190 ] I qualified Mr. Mullen as an expert for the purpose of giving opinion evidence in the following two areas:

a. The availability and costs of drilling and completion equipment and its effect on drilling programs during the relevant periods. b. Whether NEP could have completed its original drilling plans as intended. 5. Deryck Harold Helkaa [ 191 ] Mr. Helkaa was an expert for NEP. He issued an expert report dated September 15, 2017 as part of FTI Consulting Inc (“ FTI ”) and an Expert’s Responding Report dated March 1, 2018 as part of FTI. [ 192 ] I qualified Mr. Helkaa as an expert for the purpose of giving opinion evidence in the following two areas: a.

The value of NEP and its assets at relevant points in time and market conditions at relevant points in time. b. Proper methods for the valuation of oil and gas companies and their assets. 6. Neal Nissim Mizrahi [ 193 ] Mr. Mizrahi was an expert for NEP. He issued an expert report dated September 15, 2017 as part of FTI and an Expert’s Responding Report dated March 1, 2018 as part of FTI. [ 194 ] I qualified Mr. Mizrahi as an expert for the purpose of giving opinion evidence in the following two areas: a.

The value of NEP and its assets at relevant points in time and market conditions at relevant points in time. b. Proper methods for the valuation of oil and gas companies and their assets. 7. Nora Tennant Stewart [ 195 ] Ms. Stewart was an expert for NEP. She issued an Expert’s Responding Report dated February 22, 2018. [ 196 ] I qualified Ms. Stewart as an expert for the purpose of giving opinion evidence in the areas of the evaluation of oil and gas reserves, well economics, evaluation of lost or shut-in production and the proper scope of expertise of independent qualified reserve evaluators. 8.

Ronald Steve Burdylo [ 197 ] Mr. Burdylo was an expert for Merit. He issued a Primary Report dated September 15, 2017 and a Rebuttal Report dated November 20, 2017. [ 198 ] I qualified Mr. Burdylo as an expert for the purpose of giving opinion evidence in the following five areas: a. The operation and remediation of upstream oil and gas pipelines and related infrastructure within the applicable regulatory framework. b. The design, operation, integrity management and maintenance of pipelines. c.

The timing, cost and scope of such remediation, including industry practice regarding pipeline construction and its planning/estimating. d. Industry practice regarding due diligence in the proposed acquisition of oil and gas companies and/or assets and related infrastructure. e. The use and application of pipeline operations manuals (“ POM ”) and PLIMP, within the oil and gas industry, including the understood meaning and scope ascribed to POM and PLIMP. 9. Alicia Kim Quesnel [ 199 ] Ms. Quesnel was an expert for NEP. She issued an Expert’s Responding Report dated September 17, 2017.

[ 200 ] I qualified Ms. Quesnel as an expert for the purpose of giving opinion evidence in the area of industry standards and practices surrounding due diligence and disclosure in the context of purchase and sale transactions generally and in respect of vendors as to the target involving oil and gas companies and assets comparable to those of MEC OpCo. 10. Theresa Lucy Watson [ 201 ] Ms. Watson was an expert for Merit. She issued an Expert’s Responding Report dated September 14, 2017. [ 202 ] I qualified Ms. Watson as an expert for the purpose of giving opinion evidence in the following six areas: a.

Industry incident rates of SCVFs and casing failures in Alberta, including the public availability of such information. b. The applicable regulatory requirements to wellbores, including suspended wells. c. Industry compliance with wellbore regulations. d. Subject to the caveat that Ms. Watson was not involved with due diligence at the relevant time, industry practice on due diligence of wellbores and related infrastructure, including as related to SCVFs and casing failures in a purchase and sale transaction. e.

Industry practice on the inspection, monitoring, detection and repair of SCVFs and casing failures, including wellbores and related infrastructure. f. The cost associated with the assessment of repairs to SCVFs and casing failures, including wellbores and related infrastructure. 11. Alan John Goddard [ 203 ] Mr. Goddard was an expert for Merit. He issued an undated expert report. [ 204 ] I did not qualify Mr. Goddard as an expert. 12. Keith Murray Braaten [ 205 ] Mr. Braaten was an expert for Merit. He issued an Expert’s Rebuttal Report dated November 30, 2017. [ 206 ] I qualified Mr.

Braaten as an expert for the purpose of giving opinion evidence in the following five areas: a. Oil and gas reservoir engineering. b. The analysis of well data and production performance. c. The evaluation of oil and gas reserves and resources. d. Well economics, including the valuation of lost or shut-in production. e. Field production plans and economic forecasting. 13. Dale Edwin Tremblay [ 207 ] Mr. Tremblay was an expert for Merit. He issued an Expert’s Rebuttal Report dated November 28, 2017. [ 208 ] I qualified Mr.

Tremblay as an expert for the purpose of giving opinion evidence in the following four areas: a. The availability and class of utilizing drilling and completion equipment.

b. The impact of the above on possible drilling programs. c. The timing of drilling programs. d. Whether NEP could have completed its alleged drilling plans given the above. 14. John Williams [ 209 ] Mr. Williams was an expert for Merit. He issued an Expert’s Rebuttal Report dated November 30, 2017. [ 210 ] I qualified Mr. Williams as an expert for the purpose of giving opinion evidence in the following four areas: a. The valuation of businesses. b. The assessment and qualification of economic loss. c. The calculation of damages relating to the loss of production and loss of opportunity. d.

Methods of calculating economic loss. C. Background – The Parties and Transaction 1. The MEC OpCo Evaluation [ 211 ] In 2011, NEP was enticed by the potential outlined in the marketing materials provided by Merit. It initiated an evaluation stage in its advance toward the Share Transaction. [ 212 ] During the evaluation stage, a purchaser is typically granted access to limited information in a data room for the purpose of doing “a calculation of how much oil and gas is left in the ground and what is it worth. What’s it going to cost to produce it.

What’s it going to cost to develop it”. [ 213 ] In the evaluation stage, NEP retained a number of consultants. Niven Fischer was retained to assess operational issues. Netherland Sewell was retained to perform an independent analysis of the reserves of MEC OpCo, and perform sensitivity runs. [ 214 ] The evaluation phase is distinguishable from the due diligence phase. During the due diligence phase, the assumptions made during the evaluation phase are validated. [ 215 ] NEP executed a standard form confidentiality agreement.

It was then granted access to Merit’s virtual data room (the “ VDR ”). [ 216 ] Merit then gave NEP a presentation. Merit described the formations and “upside” that they identified in each field. [ 217 ] After the presentations by Merit, Mr. Bud Newton determined that the Leduc Field was “the legacy asset of Alberta”. He made this initial assessment because of the size, number of formations, age and the way the Leduc Field had been developed (or not developed) in recent years. [ 218 ] Mr.

Bud Newton was particularly interested in the “upside” or “previously unquantified opportunity to make more oil and gas” that he saw in the Leduc Field. From his perspective, the Leduc Field was made up of four producing zones: the Nisku/D2 (the “ D2 ”), the Leduc/D3 (the “ D3 ”), the Blairmore ZZZ/Ellerslie (the “ Blairmore ”) and the Wabaman. [ 219 ] While Mr. Bud Newton knew that the D3 was a reliable and established play with quantifiable upside, he saw considerable potential in drilling the D2.

He made that assessment because 90 percent of MEC OpCo’s production was from the D3, and only two wells were producing from the D2. [ 220 ] The particular “upside” that NEP saw in the D2 was the opportunity to apply horizontal drilling techniques to prove additional reserves. Based on his knowledge and experience, he was hopeful that these additional reserves would be a “home run”. [ 221 ] With the assistance of Netherland Sewell, NEP ran numerous calculations to determine what the cash flows might be realized from the Transaction Assets.

The cash flow projections were based on different drilling plans, cost inputs, and market conditions. Those calculations were incorporated into an internal Kayne Anderson model that worked backward from the cash flow return required and exit date to sell for an appropriate purchase price (the “ Waterfall ”). [ 222 ] In the eight versions of the Waterfall reviewed at trial, Kayne Anderson forecast an exit date of December 2014. [ 223 ] Based on its calculations, Kayne Anderson created an internal assessment of the investment (the “ Kayne Assessment ”). While

Mr. Bud Newton was confident in the “upside” in the D2, it was not incorporated into the Kayne Assessment because there was limited data available to establish the economics. [ 224 ] The NEP plan was to drill up and sell the Transaction Assets in some form no later than 2014. NEP calculated that by the target 2014 exit date, the Transaction Assets would need to be producing approximately 8,000 barrels of oil equivalent per day (“ BOE/Day ”) to deliver the return it had promised its investors.

NEP set its development goals accordingly. [ 225 ] NEP developed an aggressive, multi-rig drilling plan to reach its production target and increase the value of the Transaction Assets before selling them. In broad strokes, NEP had planned to drill between 100 and 250 new wells within three years after it purchased the Transaction Assets. Mr. Bud Newton communicated these plans to Mr. Plunk, Mr. Carr and his soon to be employees before the September 2011 Closing Date. [ 226 ] NEP offered to purchase the Transaction Assets for $170,000,000 by way of a share deal.

This offer was based on the evaluation that NEP placed on the Transaction Assets that were held by MEC OpCo. [ 227 ] After being led to believe that there were legitimate competing offers, NEP increased its bid to $180,000,000. In cross- examination, Mr. Plunk conceded that there was only one offer. As a result, Mr. Plunk falsely led NEP to believe there were other legitimate competing offers. 2. The Transaction [ 228 ] The VDR contained a draft version of the 2011 SPA. NEP provided its first comments on the draft 2011 SPA on June 15, 2011.

The parties then began negotiating the terms of the 2011 SPA. [ 229 ] The due diligence process preceded the signing of the 2011 SPA. The due diligence undertaken by NEP (including public searches, title reviews and site visits) was industry standard. [ 230 ] To facilitate the unique sequence of the Share Transaction, Merit and NEP entered into an exclusivity agreement on June 24, 2011. That gave NEP three weeks “to conduct” its title and environmental due diligence. [ 231 ] NEP could not commence its regulatory due diligence process until the first draft of disclosure

Schedule D was provided to NEP on July

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