ATB Financial v DLM Oilfield Enterprises Ltd, 2021 ABQB 377

Court of Queen’s Bench of Alberta Citation: ATB Financial v DLM Oilfield Enterprises Ltd, 2021 ABQB 377 Date: 20210512 Docket: 1803 22289 Registry: Edmonton Between: ATB Financial Plaintiff - and - D.L.M. Oilfield Enterprises Ltd. Defendant Corrected judgment: A corrigendum was issued on May 14, 2021; the corrections have been made to the text and the corrigendum is appended to this judgment.

Corrected judgment: A corrigendum was issued on May 13, 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 M. J. Lema _______________________________________________________

A. Introduction [ 1 ] Parties to an inter-creditor (subordination) agreement dispute its

interpretation. At stake is approximately $1 million in general-equipment recoveries. [ 2 ] Bond argues that the agreement gives a limited priority to ATB, for its operating-line claim only, with no carry-over of ATB’s security to its equipment-financing shortfall. That would leave the $1 million largely for Bond. [ 3 ] ATB counters that the agreement extends the reach of its operating-line security to the equipment-line shortfall, earmarking the entire fund for ATB. [ 4 ] Bond also challenges ATB’s reversal of an approximately $113,000 payment to Bond.

ATB defends the reversal as appropriate, with DLM “out of margin” at the time and ATB thus having a right to block the payment. [ 5 ] I find that Bond deferred to ATB across the board, that ATB is accordingly entitled to the $1 million in general-equipment recoveries, and that ATB acted appropriately in reversing the contested payment. B. Background [ 6 ] Bond Mezzanine Capital III Limited Partnership financed D.L.M.

Oilfield Enterprises Ltd. before ATB Financial arrived on the scene, with ATB first as an equipment lender and a few weeks later becoming DLM’s operating-line lender. [ 7 ] Bond holds a general security agreement anchoring its claim of approximately $11.3 million.

ATB has a later-registered GSA, as well as various specific-equipment-focused security. [ 8 ] Bond and ATB entered into two inter-creditor (IC) agreements, the first when ATB was solely an equipment lender, the second after ATB became the operating-line lender. [ 9 ] ATB’s equipment-financing claim is approximately $12.75 million; its operating line claim is approximately $1.19 million. [ 10 ] Setting aside approximately $1 million derived from certain (not-specifically-secured-by-equipment-security) equipment, three other (smaller) holdbacks, and final-stage realization costs, ATB’s projected recoveries on its two claims are approximately $3.9 million (equipment) and $966,000 (operating line).

In other words, ATB is facing projected shortfalls of $8.85 million and $224,000, respectively. [ 11 ] The main debate is whether ATB can apply the $1 million extracted from general equipment to both of its shortfalls (soaking up the entire amount), versus only its operating-line claim ($224,000), with Bond getting the rest of the $1 million. [ 12 ] I discuss the contested payment later. C. Entitlement to general-equipment proceeds [ 13 ] ATB is entitled to the general-equipment proceeds, for the following reasons.

Express wording of second IC agreement [ 14 ] Via the second inter-creditor agreement (dated August 25, 2015), Bond expressly took a back seat to both ATB’s operating- line claim and other obligations of DLM to ATB .

Here are the key provisions: [Recital B] [DLM] is indebted to or may become indebted from time to time to ATB pursuant to the Commitment Letter dated July 9, 2015 (the “Commitment Letter”) [i.e. the operating-line facility] and other agreements among [DLM], as borrower, and ATB, as lender (collectively … the “ Senior Credit Agreement ”). [Para 1(b)] “ Senior Debt ” means, collectively, all Obligations (as defined in the Senior Credit Agreement), indebtedness, liabilities and obligations of whatever nature or kind including, without limitation, under the Senior Credit Agreement , any indemnified amount, and whether similar to any of the foregoing or not, of the [DLM] to ATB …. [Para 2] So long as any Senior Debt is outstanding and until the Senior Debt is indefeasibly and irrevocably paid in full and satisfied : (

a) the payment of all Subordinated Debt [i.e. Bond’s claims] shall be, to the greatest extent permitted by law, postponed and subordinated as herein provided to the indefeasible and irrevocable payment in full and final satisfaction of all Senior Debt …. [emphasis added] [ 15 ] Via the bolded wording, Bond agreed, beyond deferring to ATB’s operating-line claim and associated security, to take a back seat to any other ATB claims against DLM , which includes ATB’s equipment-line shortfall. Existence of first IC agreement

[ 16 ] Bond points to the earlier inter-creditor (Bond and ATB) agreement (dated June 12, 2015) and says that the two such agreements created separate silos . Per Bond, it agreed, via the first agreement, to defer to ATB’s equipment-line claims anchored on specifically identified equipment. Via the second, it deferred to ATB’s operating-line claim (however secured) but with no additional deferral to any equipment-line shortfall claims against DLM’s assets generally.

In other words, Bond went behind ATB only to the extent of the explicitly identified ATB claims in each agreement: equipment-financing claims in the first IC agreement , and operating-line claims in the second . [ 17 ] As noted, the specifically-secured equipment did not generate enough to clear ATB’s equipment-financing claim (instead, leaving the noted multi-million-dollar shortfall). Accordingly, we are not concerned with ATB trying to pay an operating-line shortfall from the specific-equipment side. [ 18 ] However, other (general) equipment, reached by both parties’ GSAs, yielded the noted $1 million.

The controversial aspect is ATB’s wish to bring its equipment-line shortfall to these general-asset proceeds. [ 19 ] Bond’s separate-silos approach ignores the sequencing here. The first IC agreement was necessarily focused on equipment specifically secured to ATB because, at that time, ATB was an equipment lender only .

However, just 2.5 months later, ATB became DLM’s general lender, setting up the operating-line facility. [ 20 ] It was at this (second) stage that Bond expressly agreed that it would take a back seat to both ATB’s operating-line claims and any other ATB claims . [ 21 ] In making that deferral only a few weeks after making the first IC agreement with ATB, Bond was obviously aware of ATB’s equipment-line claims i.e. knew that ATB’s “other claims” potentially included equipment-line claims.

In fact, the second IC agreement explicitly refers to the first: see para 21, making a correction to the first IC agreement. (The reference, in the correction, to the first agreement being dated “June 12, 2014” is an error, with no evidence of any earlier IC agreement than that made July 12, 2015.) [ 22 ] Bond fails to explain why the existence of the first agreement has any bearing on the

interpretation of the second. Bond first went behind ATB in relation to specifically identified assets, when they were ATB’s only security. It then went behind ATB generally i.e. for all of ATB’s claims , when ATB later became DLM’s principal lender. [ 23 ] Nothing in commercial practice, logic or otherwise compels the Bond-asserted conclusion that the existence of the first IC agreement somehow precluded Bond from deferring again, and more generally, to ATB later.

Impact of lending caps [ 24 ] Bond also points to the explicit ($7 million) cap, in the second IC agreement (para 19), on ATB’s operating-line lending. It argues that this cap implicitly confirms the second agreement’s sole focus on the operating line. [ 25 ] I disagree. [ 26 ] The second agreement explicitly distinguishes between “Commitment Letter” references (i.e. references to ATB’s operating line) and “Senior Credit Agreement” (SCA) references i.e. the wider term embracing the operating line and other ATB claims . The second agreement is replete with SCA references.

It only refers to “Commitment Letter” in Recital B and para 19.

The latter reads: ATB shall not, without [Bond’s] prior consent (which shall not be unreasonably withheld or delayed), for any period in excess of 60 consecutive calendar days, allow the aggregate principal amount of the Senior Debt advanced to [DLM] pursuant to the Commitment Letter to exceed $7,000,000[.] [ 27 ] The clear reason for this narrower (operating-line-only) cap is that Bond and ATB had already agreed to an express cap on ATB’s equipment-line financing , in the first IC agreement (para 19 -- $13,000,000 – later amended (four times) to $16,500,000, $11,000,000, $13,061,595.28, and eventually $18,249,995. [ 28 ] The $7 million cap on operating-line lending does not negate the wider scope of the second IC agreement.

It simply provided a brake on ATB’s operating-line lending. [ 29 ] Bond was not exposed to runaway lending on either front , with the two specific caps limiting the extent of Bond’s deferrals. [ 30 ] And, as seen by the above numbers, ATB’s lending on each front was well inside the applicable caps . ATB’s reliance on May 30, 2018 commitment letter [ 31 ] Bond also argues that ATB relies unduly on a restated commitment letter (as of the noted date), which explicitly folded in the equipment-financing dimension, compared to the 2015 commitment letter, which made no reference to that financing.

But the narrow gauge of the 2015 agreement is immaterial; what matters is that, via the second IC agreement, Bond deferred to “all obligations.” Definition of “Obligations” [ 32 ] Bond next argues that the second IC agreement is unclear, with an unanchored reference to “Obligations.” This refers to the “Senior Debt” definition in that agreement: “Senior Debt” means, collectively all Obligations (as defined in the Senior Credit Agreement), indebtedness, liabilities and obligations

of whatever nature or kind including, without limitation, under the Senior Credit Agreement … of [DLM] to ATB … [ 33 ] Bond is correct that the 2015 commitment letter (one component of “Senior Credit Agreement”) did not define “Obligations.” And neither party pointed to any other anchor for this term. [ 34 ] But that does not matter: the following words in the “Senior Debt” definition – “indebtedness, liabilities, and obligations … including … under the Senior Credit Agreement …” – are sufficiently broad to capture any and all DLM obligation to ATB, including on the equipment-financing side. “Borrowings” [ 35 ] Bond submits that, while the 2015 commitment letter did not define “Obligations”, it did define “Borrowings” (in para 16), with the latter limited to operating-line lending (with no other lending facility in that commitment letter engaged).

But the second IC agreement does not tie in the “Borrowings” concept and, more importantly, the critical aspect is not the scope of the 2015 commitment letter (acknowledged by ATB to focus on operating-line lending) but the wide-gauge (“all obligations”) deferral in the second IC agreement. Bond’s understanding of priorities [ 36 ] Bond’s witness swore (December 6, 2019) that (in part): Bond’s understanding in respect of each Inter-Creditor Agreement and contractual chain [i.e. the two IC agreements] is that: (

b) ATB is in first priority position with respect to the security it has in support of the ATB Operating Line Indebtedness, Bond is in second. However, once ATB is paid in full in respect of the Operating Line, Bond has priority to any other assets which may otherwise be secured to ATB in respect of the operating loan. This [Bond] understanding was provided to the Receiver very early in the Receivership proceedings.

Attached and marked as Exhibit “B” is an e-mail from myself to the Receiver dated February 13, 2019. [Email presents a bottom-line description of the priorities, per Bond.] [ 37 ] Bond did not, and does not, explain the basis of its understanding here. In particular, it does not explain how that understanding squares with the “all obligations” breadth of the second IC agreement. It is hard, if not impossible, to see what basis Bond could have for that understanding in the face of the explicit “all obligations” wording. Contextual

interpretation of contract [ 38 ] Bond calls for a contextual

interpretation of the second IC agreement. But the only context that matters here is that, with knowledge of pre-existing ATB (equipment) financing, Bond agreed, via the second IC agreement, to defer to ATB’s operating-line lending and other DLM obligations to ATB , obviously including the equipment financing.

Impact of amendments to ATB’s equipment financing [ 39 ] Bond then argues that “if it were intended by [Bond and ATB] that the [second IC agreement] was to operate as an overarching inter-lender subordination agreement, there would have been no need [for ATB, Bond and DLM] to enter into [amendments to the first IC agreement i.e.] if the [second IC agreement] was the umbrella agreement.” [ 40 ] However, the second IC agreement did not purport to become “overarching” or “an umbrella.” Adjustments to Bond’s deferral on the equipment side (e.g. changing the maximum-lending cap a number of times) were still usefully accomplished by amendments to the first IC agreement.

And that did not undercut the “all obligations deferral” aspect of the second IC agreement. [ 41 ] There is nothing illogical or nonsensical in Bond having made an “all obligations” deferral to ATB and agreeing to various adjustments of the deferral on the equipment side.

Lack of explicit reference to equipment financing in second IC agreement [ 42 ] Next is ATB’s argument that the second IC agreement did not specify the “other agreements” to which Bond was deferring: “If it were intended to include the Equipment Financing in the ambit of the definition of [Senior Credit Agreement], this was the place to achieve that.” [ 43 ] But there is actually no ambiguity in “other agreements among [DLM], as borrower, and ATB, as Lender” (preamble B of the second IC agreement) or in “all … indebtedness, liabilities and obligations … under [such other agreements]” (definition of “Senior Debt).

Bond agreed to take a back seat to all such ATB claims, with its equipment-financing claims obviously falling within the scope of this wide-as-possible description of ATB’s claims . “Commercial sense”

[44] Bond does not offer any particular

interpretation of the “and other agreements” element in

Preamble B or the “all …indebtedness, liabilities and obligations” element of the para 1(

b) definition of “Senior Debt.” Effectively it asks me to disregard thoseelements. [45] Contrast this to Prizm Income Fund (Re), 2012 ONSC 6144 (Morawetz J.), where the party resisting subordination offered aplausible non-subordination reading of apparently subordinating contractual language (para 70). [46] As well, contrast Bond’s lack of an counter-explanation of the apparent (and now recognized as actual) wide-scopesubordination here to the “no commercial sense” argument accepted by Newbould J. in Barclays Bank v Metcalfe & Mansfield, 2011ONSC 5008 (subordination point not addressed on appeal (2013 ONSC 494 at para 304); SCC leave denied 2014 CanLII Docs 2662) orhis reference in Re Nortel Networks Corporation et al, 2014 ONSC 6973 to a UK decision finding a “commercial intent” forsubordination in a circumscribed way. [47] See as well the “commercial reality” discussions of Foisy JA and Harradence JA in Chiips Inc v Skyview Hotel Limited, 1994ABCA 243 (paras 28 and 56, respectively).

And the observations of Newbury JA as to the “commercially sensible” understanding of asubordination arrangement in 674921 BC Ltd v New Solutions Financial Corp, 2006 BCCA 49 at para 41 (SCC leave denied ), as well as the “no commercial sense” x-ray of a purported subordination by Horner J. in Accel Canada Holdings Ltd(Re), 2020 ABQB 182 at para 57, plus the same kind of “does not make commercial sense” analysis of Wilson J. in Engel Canada Inc v TCE Capital Corp, (2002) (ON SC), 34 CBR (4th) 169 at para 53. [48] In the end, Bond offered no “commercial reality”, or other, counter-interpretation of the “all obligations” scope of the secondIC agreement. [49] In any case, I do not see any “commercial unreality” here: with the two lending caps in place, I cannot see any “commercialunreality” in Bond agreeing to defer to ATB in an “all obligations” sense via the second IC agreement. [50] As well, Bond did not argue that the “deferral to all obligations” language was added by mistake or otherwise did not reflectthe parties’ (objectively gauged) intentions.

Conclusion on scope of deferral [51] For these reasons, I do not accept Bond’s position, and in turn accept ATB’s position, on the scope of the deferral in thesecond IC agreement. [52] By that agreement, Bond plainly agreed to take a back seat to both ATB’s operating-line claims and any other ATB claimsagainst DLM, including (by definition) its equipment-line claims. [53] I note here the receiver’s similar conclusion, outlined in its brief, anchored largely in the “all obligations” language of thesecond IC agreement.

Alternative priority analysis [54] ATB says that, in any case, if the second IC agreement did not backseat Bond in respect of the general-equipment recoveries,ATB nonetheless has per-PPSA priority to those proceeds. (By general equipment, I mean equipment not specifically subject to ATB’svarious equipment-financing security agreements.) [55] Here ATB acknowledges Bond’s pre-existing and pre-registered GSA but claims priority via serial-number registrationsagainst the general equipment, which Bond did not do. [56] Bond acknowledges ATB’s per-serial-number registrations but asserts priority as a “permitted encumbrance” under ATB’sGSA. [57] ATB is right: Bond as a “permitted encumbrance” only means that ATB recognized Bond’s pre-existing and pre-registeredsecurity for whatever it is worth.

That acknowledgment did not, on its own, constitute some kind of subordination by ATB to Bond. [58] With Bond not taking the extra step of registering its GSA security against this general (albeit serial-number) equipment, andwith nothing in the IC agreements barring ATB from taking that step with its own GSA, ATB ends up in first place, per the PPSA, onthese assets i.e. even with it having acknowledged Bond as a “permitted encumbrance.” Conclusion on priority to the general-equipment proceeds [59] Whether via the second IC agreement or the PPSA, ATB ends up with priority to the approximately $1 million in general-equipment proceeds. [60] ATB is accordingly able to apply those proceeds to either or both of its financing (operating line and equipment) claims.

D. Payment reversal [61] Bond raised a second issue, claiming that ATB had no right to pull back a late September 2018 DLM payment ofapproximately $113,000 deposited into Bond’s bank account.

[ 62 ] ATB argues that the payment was made by mistake, when DLM was in default and thus not authorized to pay Bond, and that its reversal of the payment was justified. [ 63 ] ATB is right, for these reasons: • a “Payment Blockage Event”, per both IC agreements, occurred on or about September 28, 2018, as described in ATB’s October 25, 2018 letter to DLM and copied to Bond; • per both IC agreements, the occurrence of that event eclipsed Bond’s right to the end of September / start of October payment from DLM; • the fact DLM obtained ATB permission to make certain regarded-by-DLM-as-particularly-critical payments at that time (i.e. to go even further out of margin) does not assist Bond: it was ATB’s choice to provide selected out-of-margin financing.

ATB’s decision to make selected additional advances does not constitute a waiver, in Bond’s favour, of DLM’s default here; • while Bond asserts a notice-to-it-of-DLM-default precondition to ATB blocking or recovering off-side payments, neither IC agreement created any such precondition.

Once an Event of Default had occurred (and thus a “Payment Blockage Event”), a red light was triggered on further payments to Bond, whether or not advance notice was provided to Bond; • any notice-to-Bond condition here was limited to that described under para 18 of both IC agreements i.e. notice within three business days of default, which (with September 28, 2018 a Friday) would have meant notice by Wednesday, October 3 rd .

In other words, ATB was entitled, once DLM had defaulted by or on September 28, to shut down further payments to Bond immediately, with notice to Bond afterwards; • as it turned out, ATB did not provide the required post-default notice to Bond until October 25, 2018 i.e. about three weeks’ late.

But that is effectively immaterial, since the payment was made in error, when Bond was not entitled to it, and ATB was entitled to act (reversing the payment) immediately i.e. notice here was a formality; • in any case, per both IC agreements (para 3), Bond would have been obliged to hold the payment in trust for, and then return it to, ATB, with the payment arriving in Bond’s account during a red-light (default by DLM) phase; and • on the late-notice aspect, both IC agreements provide that such notice would not avail Bond.

Its obligation to hold and then repay any received-during-red-light-phase payment was not undercut by any behind-schedule notice by ATB (paras 26(

e) and (

f) of the equipment IC agreement and paras 27(

e) and (

f) of the operating-line IC agreement). [ 64 ] ATB’s evidence (summarized at paras 24 and 25 of its brief) explains how the disputed payment was initially made to Bond and how and why ATB reversed it. The key here is that the payment was made in error, when Bond was not entitled to it, per the IC agreements. [ 65 ] ATB was entitled to reverse the payment, and doing so did not breach any of the Bond-ATB agreements or constitute lack of good-faith dealing by ATB.

E. $200,000 advance [ 66 ] The parties both addressed a third ($200,000 advance) issue in their briefs, but at the application Bond confirmed that the current-asset recoveries were insufficient to give any practical meaning to this aspect of their dispute. F. Conclusion [ 67 ] For the reasons outlined above, ATB prevails on the priority and payment-reversal issues. [ 68 ] ATB is entitled to its costs of the application. [ 69 ] I thank all the counsel for their helpful briefs and submissions. Heard on the 22 nd day of April, 2021. Dated at the City of Edmonton, Alberta this 12 th day of May, 2021.

M. J. Lema J.C.Q.B.A. Appearances: Pantelis Kyriakakis and Nathan Stewart McCarthy Tetrault LLP for ATB Financial Darren R. Bieganek, QC Duncan Craig LLP for Bond Mezzanine Capital III Limited Partnership Dana M. Nowak and Catrina Webster MLT Aikins LLP for Ernst & Young Inc (Receiver) _______________________________________________________ Corrigendum of the Reasons for Judgment of The Honourable Mr. Justice M. J. Lema _______________________________________________________ In paragraph 2, addition of word “largely.” In paragraph 25, change colon to period.

In Appearances, correction to “Ernst & Young.” _______________________________________________________ Corrigendum of the Reasons for Judgment of

The Honourable Mr. Justice M. J. Lema _______________________________________________________ In Appearances, correction to “Pantelis” Kyriakakis. In Appearances, removed reference to Sean Collins (who did not appear on the application).