Manitok Energy Inc (Re), 2021 ABQB 227

Court of Queen’s Bench of Alberta Citation: Manitok Energy Inc (Re), 2021 ABQB 227 Date: 20210324 Docket: B201 332583, B201 332610, B201 335351 Registry: Calgary In the Matter of the Notice of Intention to Make a Proposal of Manitok Energy Inc. In the Matter of the Notice of Intention to Make a Proposal of Raimount Energy Corp. In the Matter of the Notice of Intention to Make a Proposal of Corinthian Oil Corp. Between: Alvarez & Marsal Canada Inc. in its capacity as the Court-appointed receiver and manager of Manitok Energy Inc. Applicant - and - Prentice Creek Contracting Ltd. and Riverside Fuels Ltd.

Respondents _______________________________________________________ Reasons for Decision of the Honourable Madam Justic e B.E. Romaine _______________________________________________________ I. Introduction [ 1 ] The sole issue in this application is whether end-of-life obligations associated with the abandonment and reclamation of

unsold oil and gas properties must be satisfied by the Receiver from Manitok's estate in preference to satisfying what may otherwise be first-ranking builders' lien claims based on services provided by the lien claimants before the receivership date. [ 2 ] In the specific circumstances of these proceedings, the respondent lien claimants, if their lien claims are valid, have priority to funds held in trust arising from the sale of certain property by the Receiver. II.

Facts [ 3 ] On February 20, 2018, Alvarez & Marsal Canada Inc. was appointed receiver and manager (the "Receiver") of all of the assets and properties, including all proceeds of sale thereof, of Manitok Energy Inc. and its wholly owned subsidiary Raimount Energy Corp. pursuant to section 243(1) of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 , as amended and section 13(2) of the Judicature Act , RSA 2000, c J-2 . [ 4 ] Concurrently, Manitok, Raimount and another subsidiary, Corinthian Oil Corp., were deemed bankrupt and Alvarez & Marsal became the trustee in bankruptcy of each of them. [ 5 ] At the time of its insolvency, Manitok was an Alberta Energy Regulator licensee of 907 wells and 137 facilities and pipelines with an associated deemed liability for end-of-life obligations of $72.2 million. [ 6 ] Subsequently, the Receiver entered into a purchase and sale agreement with Persist Oil & Gas Inc. for certain property of the debtors.

The sale approval and vesting order, filed on January 18, 2019, discharged certain lien registrations, including those of the applicants Prentice Creek Contracting Ltd. and Riverside Fuels Ltd., and required the Receiver to establish separate holdbacks for Prentice and Riverside in the total amount of $581,778.48 to stand in the place and stead of their lien registrations pending further order of the Court.

The lien claims arise from services provided prior to the receivership. [ 7 ] The sale to Persist had not closed when the Supreme Court decision in Orphan Well Association v Grant Thornton Ltd., 2019 SCC 5 (" Redwater ") was released on January 31, 2019. [ 8 ] The sale of Persist closed on April 15, 2019. Under the purchase and sale agreement, Persist assumed all environmental liabilities with respect to the assets that are the subject of the discharged liens. [ 9 ] The purchase and sale agreement includes the following terms: 11.

For the purposes of determining the nature and priority of Claims, and pending any further or other distribution Order of this Court. (

a) The net proceeds from the sale of the Purchased Assets (to be held in an interest bearing trust account by the Receiver) shall stand in the place and stead of the Purchased Assets, and from and after the delivery of the Receiver's Certificate all Claims and Encumbrances shall attach to the net proceeds from the sale of the Purchased Assets with the same priority as they had with respect to the Purchased Assets immediately prior to the sale, as if the Purchased Assets had not been sold and remained in the possession or control of the person having that possession or control immediately prior to the sale ...(emphasis added) 12 ... the amount to be [held in trust by the Receiver] shall include at least the following with respect to the following contingent or disputed claims: (a) $119,093.08 in relation to builders' lien claims filed by [Riverside] in relation to certain Purchased Assets; (b) $462,685.4 0 in relation to builders' lien claims filed by [Prentice] in relation to certain Purchased Assets; ... [ 10 ] Although the agreement and the order have been amended, the parties are in agreement that the amendments do not impact the provisions relating to the lien holdbacks. [ 11 ] In accordance with a Partial Discharge Order filed July 9, 2019, the Receiver renounced and disclaimed and was discharged over the majority of the remaining unsold oil and gas assets in the Manitok estate.

Despite the Receiver's further efforts in collaboration with the AER, many of the retained assets had proved to be unsaleable. [ 12 ] The AER issued abandonment and reclamation orders to Manitok on August 1, August 12, August 21 and August 30, 2019, including to its remaining working interest participants. Where there were no remaining responsible parties, the AER designated the sites as "orphan" to enable the abandonment and reclamation work to be conducted by the Orphan Well Association.

It is anticipated that end- of-life obligations are in the neighbourhood of $44.5 million, substantially more than the proceeds of sale of the debtors' estates. [ 13 ] According to the lienholders, the AER orders do not relate to any of the assets sold to Persist. [ 14 ] The Receiver anticipates renouncing and disclaiming the remaining unsold assets.

Total realizations from the receivership will be substantially less than the cost of satisfying the end-of-life obligations associated with the discharged assets. [ 15 ] Although the parties have agreed to proceed with this application on the basis that the lien claims are valid, the Receiver has concerns about such validity, and reserved the right to dispute that issue if the lien claimants are found to have priority over end-of-life obligations. [ 16 ] The most significant stakeholders in the receivership are the National Bank of Canada and the Alberta Energy Regulator.

The NBC continues to hold a first charge over all of the undistributed assets of the debtors and the proceeds therefrom. As a result of the Redwater decision, the AER is a significant stakeholder in the receivership even though it is not a "creditor" per se ( Redwater at para

122 ). III. Analysis A. Prentice Creek Contracting Ltd. [ 17 ] Prentice Creek submits that it was not the intention of the decision in Redwater to extend the enforcement of end-of-life obligations against specific assets improved by a lienholder that are unrelated to the environmental condition or damaged properties of Manitok.

Prentice Creek notes that its liens were registered against property that was sold to Persist, which has assumed all of the end-of- life obligations of that property. [ 18 ] The work performed by Prentice Creek related to the reclamation and clean-up of specific oil and gas sites. [ 19 ] The Receiver submits that, in accordance with Redwater, end-of-life obligations must be satisfied in preference to any builders' liens that may otherwise be first ranking. B.

Riverside Fuels Ltd. [ 20 ] Riverside submits that the holdback funds should be used to satisfy the debt owing to Riverside on the basis of equity and unjust enrichment. It notes that the materials furnished and services provided enhanced the particular assets, and that the liened assets are unrelated to the environmental claims and end-of-life obligations for the remaining assets. [ 21 ] Riverside's liens relate to the provision of fuels and lubricants on a periodic basis for use at specific production and operation sites.

While Riverside continued to provide services after the commencement of the receivership, its lien claims relate to services provided before that time. [ 22 ] The Receiver responds with the same submission as it made with respect to Prentice Creek: end-of-life obligations must be satisfied in preference to builders' liens that may otherwise be first ranking. C. The Effect of the Redwater Decision on the Claims [ 23 ] In order to determine whether the Redwater decision is dispositive of this application, it is necessary to analyze the decision. [ 24 ] Counsel for the Receiver has provided a useful

summary of the Redwater decision as follows: • Trustees in bankruptcy are bound by and must act in compliance with valid provincial laws, provided the obligations thereunder do not constitute provable claims and no conflict engages the paramountcy doctrine. • Regulatory laws governing abandonment and reclamation are valid provincial laws of general application.

They do not conflict with the BIA or frustrate the purpose of the BIA, even though estate assets may have to be expended to comply with provincial regulatory laws. • Abandonment and reclamation obligations are not provable claims because a regulator is not a creditor when enforcing a public duty.

Further, any right of reimbursement in the circumstances of the case was too speculative to be accepted as a provable claim by the AER. • In the result, the Redwater estate must comply with ongoing environmental obligations that are not claims provable in bankruptcy (para 162). [ 25 ] However, as submitted by the lien claimants, the facts and certain comments of the Court in Redwater are relevant to add context to the findings of the Court. [ 26 ] Redwater was the AER licensee of about 84 oil and gas wells, seven facilities, and 36 pipelines. Of these, only 19 wells were producing: the remainder were inactive.

Most of these were spent and burdened with abandonment and reclamation liabilities that exceeded their value ( Redwater , para 48 ). [ 27 ] Redwater was placed into receivership on May 12, 2015. Within two days, the AER advised the Receiver that it must fund its abandonment obligations before it distributed any funds or finalized a proposal to creditors.

The AER warned that it would not approve a transfer unless both transferee and transferor would be in a position to fulfil all regulatory obligations (para 47). [ 28 ] In response, the Receiver advised that it was only taking possession and control of the productive wells and, in its view, it had no obligation with respect to renounced assets (para 50).

Almost immediately, the AER issued orders requiring Redwater to suspend and abandon the renounced assets, such work to be carried out within a short period of time (para 51). [ 29 ] Soon after that, the AER and the OWA applied for an order declaring that the Receiver's renunciation of assets was void, requiring the Receiver to comply with the abandonment orders and requiring it to fulfill its statutory obligations as licensee in relation to the abandonment, reclamation and remediation of all of Redwater's licensed properties.

The AER did not seek to hold the Receiver liable for these obligations beyond the assets in the Redwater estate. [ 30 ] The Receiver cross-applied, seeking approval to pursue a sales process excluding the renounced assets and an order directing that the AER could not prevent the transfer of the licenses of the retained assets on the basis of, among other things, a failure to comply

with the abandonment orders, refusal to take possession of the renounced assets or Redwater's outstanding debts to the regulator (para 52). [ 31 ] The chambers judge approved the sale procedure.

It appears that at the time of the hearing before the Supreme Court, Redwater's assets had been sold and the sale proceeds were being held in trust (para. 108). [ 32 ] Chief Justice Wagner made certain comments in the majority decision that are relevant to this application. [ 33 ] At para 75, on the issue of paramountcy, he noted that the result of a trustee's "disclaimer" of real property, " where an environmental order has been made in relation to that property is that the trustee is protected from personal liability, while the ongoing liability of the bankrupt estate is unaffected." [ 34 ] In interpreting

section 14.06(4) of the BIA , the Chief Justice stated that "[u]nder s. 14.06(4)(a)(ii), a trustee is not personally liable for an environmental order where the trustee abandons, disposes of or otherwise releases any interest in any real property", thus making it clear that s.14.06(4)'s scope in limiting the personal liability of a trustee is not narrowed to disclaimer in the formal sense (para 87). [ 35 ] He notes further that "the provision is clear that, where an environmental order has been made , the result of

an act of 'disclaimer' is the cessation of personal liability" (para 86). [ 36 ] In para 96, the Court noted that, prior to 1997, "it was unclear what effect 'disclaimers' might have on the liability of the bankrupt estate, given that environmental legislation imposed liability based on the achievement of the status of owner, party in control or licensee " (emphasis added) (see also para 97). [ 37 ] Thus, the Court concluded, disclaimer by a trustee "has no effect on the bankrupt estate's continuing liability for orders to remedy any environmental condition or damage" (para 98).

"[The trustee] continues to have the responsibilities and duties of a 'licensee' to the extent that assets remain in the Redwater estate " (para 114 ). [ 38 ] In the majority's conclusion on whether end-of-life obligations are claims provable in bankruptcy, Wagner, CJ found that such obligations are not claims, and therefore do not conflict with the general priority scheme in the BIA .

In support of this conclusion, he notes at para 159: In crafting the priority scheme set out in the BIA , Parliament intended to permit regulators to place a first charge on real property of a bankrupt affected by an environmental condition or damage in order to fund remediation (see s. 14.06(7)). Thus, the BIA explicitly contemplates that environmental regulators will extract value from the bankrupt's real property if that property is affected by an environmental condition or damage.

Although the nature of property ownership in the Alberta oil and gas industry meant that s.14.06(7) was unavailable to the Regulator, the Abandonment Order and the LMR replicate s.14.06(7)'s effect in this case. Furthermore, it is important to note that Redwater's only substantial assets were affected by an environmental condition or damage. Accordingly, the Abandonment Orders and LMR requirements did not seek to force Redwater to fulfill end-of-life obligations with assets unrelated to the environmental condition or damage .

In other words, recognizing that the Abandonment Orders and LMR requirements are not provable claims in this case does not interfere with the aims of the BIA - rather, it facilitates them. (emphasis added) [ 39 ] It is here that the distinction between the facts of Redwater and the facts in this case becomes apparent. In this case, the AER is seeking to require Manitok to fulfill end-of-life obligations with assets unrelated to the environmental condition or damage represented by the abandonment orders it has issued, assets over which Manitok no longer has ownership or control.

This change in ownership occurred prior to any action by the AER, so that the orders

a) do not apply to property over which the respondents claim a lien, and

b) do not apply to contiguously owned property at the time. [ 40 ] The Supreme Court in paragraph 159 finds support for the conclusion that requiring Redwater to pay for abandonment before distributing value to creditors does not disrupt the priority scheme of the BIA by referring to

section 14.06(7), which allows a regulator to place a charge on the real property of the debtor that is contaminated or affected by an environmental condition, but only on that property or contiguous property. [ 41 ] The Court notes that abandonment orders "replicate s.14.06(7)'s effect". Clearly, the decision of the Court in Redwater expands the limited scope of

section 14.06(7), but it does not appear to expand it to cover trust funds relating to the proceeds of sale of property to which the debtors no longer have the status of "owner, party in control, or licensee" at the time the orders were issued. [ 42 ] Thus, the findings in Redwater do not extend to a situation, such as in this case, where property unrelated to property that is affected by an environmental condition is sold to a new licensee before any abandonment or reclamation orders are made, and where the new licensee assumes the inherent end-of-life obligations for that property.

In this case, the AER is not at risk for any current costs of reclamation of the transferred property. [ 43 ] The lien claimants were protected by the purchase agreement terms that were approved by court order. As the funds have been held in trust in accordance with the order and the purchase and sale agreement pending resolution of the claims, they are not property of the estate, and would not become part of the estate unless the claims are denied.

As the Court in Redwater comments at para 114 , a trustee, or Receiver/trustee in this case, has the responsibilities and duties of a licensee "to the extent that assets remain in the ... estate". [ 44 ] Therefore, the decision in Redwater does not provide priority to the trust funds to the AER in these circumstances. Assuming that the liens are valid, and that they only refer to the Persist lands, there is no reason to deny the lien holders' claims to the proceeds in trust. [ 45 ] It is not necessary to consider the claims of other creditors, as this application involves only the amounts held in trust.

D. Other Submissions 1. Unjust Enrichment [ 46 ] Both Prentice Creek and Riverside submit that the release of the trust funds to satisfy end-of-life obligations of Manitok would be an unjust enrichment of the AER. However, whether or not the enrichment and corresponding deprivation requirements for a finding of unjust enrichment could be satisfied in this case, there would have been a juristic reason for the enrichment if I am incorrect in finding that the decision in Redwater does not extend to the facts in this case, arising from the statutory obligation. Therefore, if I am incorrect in my

interpretation of Redwater , I would not find a constructive trust arising from unjust enrichment to be an appropriate remedy. 2. Equity and Fairness [ 47 ] Riverside submits that this Court could find for the lien claimants on the basis of equity and fairness. Neither the Judicature Act nor the BIA give the Court carte blanche to do what is fair despite binding authority.

In any event, the same argument could be made on behalf of any creditor of the debtors that supplied goods or services, particularly secured creditors, who prior to the decision in Redwater had reason to think that they had done all that was necessary or possible to ensure the priority of their claims. 3. Status of Lien Claimants [ 48 ] Riverside also submits that lien claimants are not creditors; that they have a proprietary claim that is not subject to the BIA priority scheme. This is incorrect.

The essence of the lien provisions is that they create a lien over the property that was improved or remediated, and if the property is sold, the lien goes with the property, or, in this case the proceeds of sale held in trust. It is a security interest subject to the priority scheme of the BIA in the same way as other provable claims: BIA

section 2, definition of "secured creditor". IV. Conclusion [ 49 ] In the specific circumstances of this case, I find that the Redwater decision does not affect the rights of Prentice Creek and Riverside to the trust funds arising from the Persist purchase of Manitok's property. [ 50 ] If the parties are unable to agree on costs, they may make written submissions on that issue. Dated at Calgary, Alberta this 24 th day of March, 2021. B.E. Romaine J.C.Q.B.A. Appearances: Howard A. Gorman, QC, D. Aaron Stephenson and Meghan Parker for the Receiver/ Trustee Glyn L. Walters for Prentice Creek Contracting Ltd.

Garrett S.E. Hamilton for Riverside Fuels Ltd. Maria Lavelle for the Alberta Energy Regulator