Manitok Energy Inc (Re), 2021 ABQB 288

Court of Queen’s Bench of Alberta Citation: Manitok Energy Inc (Re), 2021 ABQB 288 Date: 20210414 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 - Yangarra Resources Limited and Orlen Upstream Canada Ltd..

Respondents _______________________________________________________ Reasons for Decision of the Honourable Madam Justic e B.E. Romaine _______________________________________________________ I. Introduction [ 1 ] The Receiver of Manitok applies to strike various claims made by Yangarra Resources Limited arising from Manitok’s pre-

receivership sale of assets to Yangarra, and subsequent litigation between Yangarra and Orlen Upstream Canada Ltd involving a third- party claim against the Receiver. [ 2 ] The issue involves the

interpretation of the purchase and sale agreement between Yangarra and Manitok, and the scope and

interpretation of a pre-receivership approval and vesting order relating to such sale. [ 3 ] The Receiver's application to strike Yangarra's claims is allowed. A cross-application by Orlen is dismissed. II.

Facts [ 4 ] 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 . [ 5 ] Concurrently, Manitok, Raimount and another subsidiary, Corinthian Oil Corp. were deemed bankrupt and Alvarez & Marsal became the trustee in bankruptcy of each of them. [ 6 ] On October 15, 2020, the Receiver applied for an order dismissing Yangarra Resources Inc.'s claim to funds relating to production from certain oil and gas property.

Yangarra opposes the application. [ 7 ] On October 21, 2020, while the decision was on reserve, Orlen Upstream Canada Ltd. sought, and was granted, leave to provide evidence and submissions with respect to the Receiver's application, and the application was resumed on November 25, 2020. [ 8 ] Pursuant to an asset purchase agreement made effective October 1, 2017, Yangarra purchased certain assets, including natural gas wells, from Manitok (the "Ferrier transaction"). The Ferrier transaction closed on February 16, 2018, just prior to the date the receivership order was granted.

As Manitok had filed a notice of intention to make a proposal under the BIA on January 11, 2018, the transaction had to be, and was, approved by an approval and vesting order dated February 14, 2018 (the "February Order").

The February Order order was obtained by Manitok as debtor-in-possession and not by the yet to be appointed Receiver, and the Ferrier purchase and sale agreement refers to the vendor as Manitok, not the proposal trustee or the Receiver. [ 9 ] The February order approves the transaction and authorizes Manitok to take such additional steps as necessary to complete it and to convey the purchased assets to Yangarra.

It provides that, upon the delivery of a certificate from the proposal trustee, and subject to the approval of the Alberta Energy Regulator, Manitok's title to the purchased assets "shall vest absolutely" in the name of the purchaser Yangarra. [ 10 ] The form of Proposal Trustee's certificate attached to the February order stipulates that the order provides for the vesting in the purchaser of Manitok's title in the purchased assets, "such vesting ... to be effective ... upon the delivery by [the proposal trustee] to the purchaser of [the certificate”]. [ 11 ] Prior to the sale, Orlen processed the natural gas and related products from the purchased wells through its facilities and charged Manitok processing and related fees.

Manitok took production in kind and arranged for its sale to various third party purchasers, who paid Manitok directly. By assignment dated October 1, 2017, Manitok assigned its rights under its agreements with Orlen to Yangarra "from and after October 1, 2017".

Manitok requested Orlen to consent to the assignments on February 16, 2018, and Orlen did so on February 28, 2018. [ 12 ] Under the terms of the assignments, Yangarra agreed to assume all of Manitok’s obligations under the Orlen agreements “from and after the Effective Date”, and indemnified Manitok from any claims arising from the assignment. [ 13 ] Orlen invoiced Manitok in December, 2017 for processing fees for October, November and December, 2017, which were unpaid.

After consenting to the assignments, Orlen billed Yangarra for all fees arising from the Orlen agreements from October 1, 2017 onward, totalling $120,900 (net approximately $95,000). [ 14 ] The Ferrier purchase and sale agreement includes the following provisions relevant to this application:

a) The purchase price to be paid at closing was a certain sum plus or minus any adjustments made pursuant to sections 2.6 and 2.7 of the agreement;

b) Pursuant to

section 2.6, all costs and expenses relating to the assets were to be apportioned as of the Effective Date of the agreement on an accrual basis in accordance with generally accepted accounting principles, with Manitok bearing and paying the costs and expenses accruing on the closing date and Yangarra bearing costs and expenses accruing thereafter, subject to certain exceptions;

c) Manitok was only liable to make an adjustment in respect to a liability that related to the period prior to the closing date "if and to the extent that the proprietary interest to which such liability relates continues to be binding upon the assets, or the payment thereof must be made in order to ensure such proprietary interest is not terminated", but "such liability shall be paid by [Manitok] from the Purchase Price";

d) Under

section 2.7, "[a]s soon after the Closing Date as reasonably practicable, and in any event within sixty (60) days following the Closing Date, the Parties shall cooperate in preparing a final accounting of the adjustments pursuant to

Section 2.6 (the "Final Statement of Adjustments"), and no further or other adjustments whatsoever will be made thereafter." The

section provides for the appointment of an independent accounting firm if the parties are unable to agree. A Final Statement of Adjustments was never prepared;

e) Section 2.7 provides that all adjustments shall be adjustments to the purchase price.

[ 15 ] A general conveyance was executed at closing indicating that "title to and possession of [Manitok's] interest in and to the Assets will, subject to the terms of the Agreement, be effective as of the Closing Date”. [ 16 ] An interim statement of adjustments was prepared and delivered at closing, which adjusted the purchase price to reflect net operating expenses, net operating income, and net royalties for the period from October 1 to December 31, 2017. [ 17 ] Yangarra commenced action against Orlen in the Court of Queen's Bench of Alberta on December 4, 2018 claiming damages of $600,000.

In January, 2019, Orlen filed a counterclaim against Yangarra in the Orlen action seeking damages in the amount of $94,975 with respect to processing and related fees for the period from October 2017 to January 2018. [ 18 ] In a statement of defence to counterclaim filed March 4, 2019, Yangarra in addition to a general denial states that:

a) Further and in the alternative, ... [Orlen] has failed to properly mitigate its damages by failing to register its claim as against Manitok with the current [Receiver]. b) ... Orlen's avenue for recovery by way of Counterclaim is improper.

The proper course of recovery of any unpaid fees owed by Manitok to Orlen was to register a claim with the [Receiver]. c) ... the Counterclaim is an attempt to recover any unpaid liabilities of Manitok as against Yangarra, and is an attempt to circumvent the proper bankruptcy and insolvency procedure and is invalid and improper. [ 19 ] On October 29, 2019, Yangarra filed an amended third party claim against Manitok and the Receiver in the Orlen action seeking contribution and indemnity in respect of any liability for the amount being sought in the Orlen counterclaim.

The Yangarra third party claim asserts that the Ferrier purchase and sale agreement provides that the purchase funds included amounts owing to Orlen, defined as the Winter Service Funds, for the period of October 2017 through January 2018 (further defined as the Processing and Related Fees), and seeks payment of the "Proceeds", defined as "the related proceeds [of processing gas substances from the Ferrier property] for December 2017 and January 2018." [ 20 ] In the third party claim, Yangarra seeks:

a) indemnification in respect to any judgment, damages or interest given against Yangarra (presumable, the approximately $95,000 claimed by Orlen);

b) to have the Winter Service Funds returned to it by the Receiver; and

c) to have the Proceeds remitted to it by the Receiver. [ 21 ] The amended third party claim named the Receiver in its personal capacity.

The Receiver took the position that it did not disclose a proper claim against the Receiver, and, eventually, the parties entered into a consent order filed October 29, 2019 in the Orlen action that provides that Yangarra shall file an amended third party claim substituting the Receiver in its role as receiver for Alvarez & Marsal in its personal capacity, and "shall seek leave to file and serve an application in [the receivership action] for payment of the Winter Service Funds and Proceeds, as those terms are defined in its Third Party Claim (the "Receivership Application"). [ 22 ] The Yangarra third party claim was stayed pending the determination of the Receivership Application as defined in the consent order.

Yangarra has not made such an application. Therefore, aApproximately a year later, the Receiver brought this application. [ 23 ] Yangarra states that there was a general agreement that the dispute would be best resolved by an application pursuant to paragraph 15 of the Ferrier purchase and sale agreement, which appears to be an error as the agreement does not have a paragraph 15.

However, paragraph 15 of the February order provides that Manitok, the proposal trustee, Yangarra, and any other interested party may apply for advice and directions in order to give effect to the order and to assist the parties in closing the purchase and sale transaction. III.

Positions of the Parties [ 24 ] The Receiver takes the position that, given that the Ferrier transaction giving rise to the claim was pre-receivership, the Receiver has no obligation or requirement to pay any claim relating to or arising from that transaction. [ 25 ] The Receiver submits that, as the Winter Service Fees were pre-receivership obligations, they are unsecured claims in the receivership, subordinate to both the secured claim of the National Bank of Canada and end-of-life obligations to the Alberta Energy Regulator. [ 26 ] The Receiver submits that Orlen's knowledge of a claim for Proceeds and for Winter Service Fees would have existed in late 2017, and that, to the extent that Orlen has a claim against Manitok, the limitation period for these claims has lapsed and that they are now statute-barred.

The Receiver also submits that Yangarra's claim against Manitok is statute-barred. [ 27 ] Yangarra seeks a direction that it is entitled to the Winter Proceeds, and that the Receiver should remit them to Yangarra forthwith, on the basis that the Receiver is in breach of the terms of the Ferrier purchase and sale agreement. [ 28 ] Orlen submits that this Court should address the issue of whether Yangarra has an independent obligation to pay Orlen the Winter Service Fees irrespective of its ultimate recovery from the Receiver. Orlen seeks the following relief: (

a) in the event that the Court directs that the Receiver disburse the funds in its possession to Yangarra on the basis they are benefits or proceeds of the agreements with Orlen, an order directing:

(i) $94,975.00 plus interest and costs be paid out of the funds directly to Orlen for the Winter Service Fees; or, in the alternative (ii) that $94,975.00 plus interest and costs be paid out of the funds into Court pending the outcome of the Orlen action; or (

b) in the event that the Court directs that Yangarra has a provable claim against Manitok's estate, an order directing that Yangarra's indebtedness to Orlen under the Orlen agreements is not affected by such a direction. [ 29 ] Yangarra submits that Orlen lacks standing to participate in the application. However, I find that Orlen has standing as an interested party, particularly as Yangarra in its statement of defence to counterclaim alleges that Orlen failed to mitigate its damages by failing to make a claim against Manitok’s estate and that Orlen’s counterclaim is an attempt to circumvent proper bankruptcy procedure. IV. Analysis A. Yangarra Claim –

Interpretation of Approval and Vesting Order [ 30 ] Yangarra submits that this dispute can and should be addressed through a proper

interpretation of the February order. However, there is nothing in that order that would change the status of any claim that Yangarra may have from an unsecured claim in the Manitok receivership to a secured claim or that obliges the Receiver to treat the claim as anything other than an unsecured claim. [ 31 ] Yangarra submits that the only possible

interpretation of the February order is that Yangarra is legally entitled to the rights and obligations arising from the February order, “without limitation”, relying on Extreme Retail (Canada) Inc v Bank of Montreal , [2002] OJ No 3304 .

While the approval and vesting order in that case included wording similar to that in the February order with respect to vesting of title, the Extreme case is distinguishable on its facts. [ 32 ] Extreme involved a priority dispute between Extreme, as purchaser of certain franchise agreements and security with respect to such agreements from a CCAA debtor, the Denninghouse Group, and the BMO, a secured creditor of the franchisees. [ 33 ] Extreme’s purchase of the assets occurred during the course of the CCAA proceedings and BMO was represented when the Court granted an approval and vesting order with respect to the purchase.

In fact, BMO provided a comfort letter on the closing of the transaction that, on its face, waived any rights it had to pursue Extreme for enforcement of money arising from any security executed in favour of BMO by the Denninghouse Group. Subsequently, several franchisees encountered financial problems and their assets were liquidated. A dispute arose between Extreme and BMO as to which of them was entitled to priority over the proceeds of realization.

The security agreements registered by BMO were subsequent to the registration of the security interests acquired by Extreme. [ 34 ] Extreme relied on the paragraph of the approval and vesting order providing that the assets, which including the franchisee security, “... are vested in Extreme ... absolutely and forever, free and clear of ... any security interests, whether contractual, statutory, by operation of law, or otherwise, whether secured, unsecured or otherwise.” [ 35 ] BMO argued that the CCAA debtors had either signed subordination agreements on behalf of a subsidiary that dealt directly with the franchisees, or that there was an oral subordination agreement between the subsidiary and BMO.

It submitted further that the order was never intended to deprive BMO of its priority. [ 36 ] The Court found that the dispute was governed by the plain language of the approval and vesting order. In the Court’s view, the language of the order: ...makes it plain that the assets that Extreme acquired were not subject to any higher rights. In this respect, the language of the order is unambiguous and far-reaching.

Accordingly, assuming that there had existed an enforceable subordination agreement as between [the subsidiary] and BMO in relation to BMO’s [security interests], and assuming that BMO’s rights ranked ahead of [the subsidiary’s] rights, that higher BMO security interest was a right or encumbrance that was deleted by the Approval and Vesting Order’: para 17. [ 37 ] The Court noted that BMO was a party to the proceedings, was represented in court when the order was granted, and even provided a comfort letter in order to fulfill one of the conditions for the closing of the sale transaction. [ 38 ] There are a number of important distinctions between Extreme and this case.

Manitok’s Receiver had not been appointed at the time of the February order, and there is no evidence that it had any involvement in the sale or the application for the order.

While the February order includes similar, usual-course vesting language, the issue in this application is not whether any existing security has been expunged by the order, and the Receiver is not seeking to amend or vary the order, which was essentially what was sought in Extreme . [ 39 ] What the February order affected was approval of a sale transaction, defined as the Transaction, contemplated by an agreement for purchase and sale, and the execution of the sale agreement. [ 40 ] As stated previously, the sale agreement provides that expenses and revenue that may accrue between the Effective Date and closing are to be adjusted by adjustment to the purchase price. [ 41 ] Such a final adjustment of purchase price was never done, but the interim statement of adjustments delivered at closing indicates the intention of the parties to make such adjustments through the purchase price, as does the paragraph of the agreement stipulating that any adjustments shall be adjustments to the purchase price. [ 42 ] In

summary, the February order does not create any rights in Yangarra or obligations of Manitok with respect to the Ferrier purchase and sale that are not contemplated by the agreement. [ 43 ] While the February order provides that the vesting of the purchased assets will be binding on any trustee in bankruptcy, it

does not expand Yangarra’s rights under the purchase and sale agreement. [ 44 ] It is not necessary that I decide whether Yangarra’s various direct claims against Manitok accrue from the Effective Date of the agreement or the closing date of the transaction. Either case would have the same result: Yangarra's claim, to the extent it has a claim, would be a contingent unsecured claim in the Manitok receivership.

It is academic whether such a claim would be made, or allowed to be made, at this late date, as the proceeds of any recovery in the receivership will likely be insufficient for any unsecured claim to be recovered. [ 45 ] Even if the Receiver had a responsibility to cooperate with Yangarra in preparation of a Final Statement of Adjustments, despite Yangarra’s inaction, any claim arising from such obligation would only result in an adjustment to the purchase price and would be unsecured. [ 46 ] With respect to the indemnity claim, if, as Yangarra submits, Orlen should have made a claim directly against the Manitok estate in the receivership, such a claim would have been known to Orlen in December, 2017, when it billed Manitok for processing fees for October through December, 2017.

At any rate, Orlen appears to be relying on the terms of the assignment agreements, and makes no claim against Manitok. [ 47 ] While Yangarra’s indemnity claim against Manitok may not be statute-barred, it would still be a contingent unsecured claim in the receivership. [ 48 ] In the circumstances, the Receiver is entitled to the relief it seeks: Yangarra’s claim to the funds held by the Receiver pending the resolution to its claim relating to the sale of property to Yangarra is struck. B.

Orlen Intervention [ 49 ] For the reasons set out herein, Yangarra is not entitled to an order disbursing funds from the Manitok estate. Therefore, the relief sought by Orlen in terms of a redirection of funds payable by the estate is not available. The relief sought with respect to Yangarra’s indebtedness under the operating agreements relates to the action between Orlen and Yangarra, and this is not the appropriate forum for the determination of that issue. [ 50 ] Given my decision, it is not necessary to address whether the relief sought is essentially

summary judgment or an attachment order, other than to agree with Yangarra that there is no basis for Orlen seeking to have an issue in the Yangarra action determined in this application, and no prejudice to Orlen arising from the resolution of the application. V. Conclusion [ 51 ] The Receiver’s application to strike Yangarra’s claims is allowed, and Orlen’s cross-application is dismissed. [ 52 ] If the parties are not able to agree on costs, they may make written submissions on that issue. Dated at Calgary, Alberta this 14th day of April, 2021. B.E. Romaine J.C.Q.B.A. Appearances: Eugene J. Bodnar for the Receiver Andrew E. Stead for Yangarra Resources Limited Ryan Algar and Alison Scott

for Upstream Canada Ltd.