2023 ABKB 488, 2023 ABKB 488

Court of King’s Bench of Alberta Citation: Re Mantle Materials Group, Ltd, 2023 ABKB 488 Date: 20230828 Docket: 2301 10358 Registry: Calgary In the Matter of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 , as Amended And in the Matter of the Notice of Intention to Make a Proposal of Mantle Materials Group, Ltd. _______________________________________________________ Reasons for Decision of the Honourable Justice Colin C.J.

Feasby _______________________________________________________ Introduction [ 1 ] Mantle Materials Group, Ltd. applied for an extension of time to make a proposal pursuant to the Bankruptcy and Insolvency Act , RSC 1985, c B-3 s 50.4(8), approval of various charges on the bankrupt estate (“Restructuring Charges”) including the priority of those charges, and approval of the payment of certain pre-filing debts to creditors whose support is required to perform environmental reclamation work that will be integral to the pending proposal.

The application was granted with a temporary proviso with respect to the priority of the Restructuring Charges over certain equipment to ensure that Travelers Capital Corp, a secured lender, was not prejudiced prior to the release of these Reasons. [ 2 ] Mantle advises that the proposal that it intends to make will not allow payment to any creditors before Mantle has satisfied its end-of-life obligations stemming from Environmental Protection Orders issued by Alberta Environment and Protected Areas (“AEPA” formerly Alberta Environment and Parks) with respect to several gravel producing properties.

Mantle submits that this is what is required by Orphan Well Association v Grant Thornton Ltd , 2019 SCC 5 (“ Redwater ”) because the environmental remediation obligation is an obligation of the company that must be satisfied prior to distributions to creditors. AEPA supports Mantle’s position. [ 3 ] Travelers asserts that it has priority with respect to security in certain equipment and Travelers’ ability to realize on its security should not be postponed until after the remediation work has been completed to AEPA’s satisfaction and subordinated to the Restructuring Charges. Travelers offers a different

interpretation of Redwater . Travelers contends that Redwater held that an end-of-life environmental obligation need only be satisfied using assets encumbered by or related to the end-of-life obligation. Travelers submits the Court should find that a creditor with security over assets unrelated to assets burdened with the environmental remediation obligation may realize on such security without delay. Background

[ 4 ] Mantle operates 14 gravel pits on public land pursuant to surface material leases issued by AEPA. Mantle also operates 10 gravel pits on private land pursuant to royalty agreements with the landowners. [ 5 ] Mantle acquired its gravel-producing assets in 2021 in the Companies’ Creditors Arrangement Act proceedings for JMB Crushing Systems Inc. and associated companies. [1] Financial liabilities of JMB were compromised and undesired assets were transferred to a residual company pursuant to a Reverse Vesting Order.

The desired assets remained in JMB and its subsidiary 2161889 Alberta Ltd, both of which then amalgamated with Mantle on May 1, 2021. [ 6 ] Following the commencement of the JMB CCAA proceedings, AEPA issued Environmental Protection Orders (“EPOs”) to JMB and 216 in respect of some of the gravel-producing properties. [ 7 ] EPOs are issued pursuant to AEPA’s authority under the Environmental Protection and Enhancement Act , RSA 2000, c E-12 s 140.

An AEPA inspector is permitted to “issue an environmental protection order regarding conservation and reclamation to an operator directing the performance of any work or the suspension of any work if in the inspector’s opinion the performance or suspension of the work is necessary in order to conserve and reclaim the land.” [ 8 ] An EPO issued by AEPA in respect of end-of-life reclamation is similar in nature to an Abandonment and Reclamation Order (“ARO”) issued by the Alberta Energy Regulator (“AER”).

Indeed, all the parties in the present case proceeded on the basis that an EPO issued by AEPA had the same legal effect and should be subject to like treatment in insolvency proceedings as an ARO issued by the AER. [ 9 ] The EPOs issued by AEPA to JMB address end-of-life reclamation steps to be taken at various gravel-producing or formerly gravel-producing assets operated by JMB on both public and private land. [ 10 ] The original Reverse Vesting Order presented to the Court in the JMB CCAA proceedings sought to absolve the directors of JMB and 216 of responsibility for the EPOs and sought to usurp AEPA’s regulatory role by putting the Court in a supervisory role with respect to the performance of reclamation work by Mantle and compliance with the EPOs.

AEPA objected to the original proposed Reverse Vesting Order. [ 11 ] As a result of AEPA’s objections, the Court approved a revised Reverse Vesting Order that provided that the order did not affect the liability of JMB, 216, or the directors of those companies for “Compliance Issues” or performing “Reclamation Obligations” in respect of the various gravel-producing properties. Mantle accordingly remained liable for the EPOs issued with respect to both the properties acquired in the amalgamation with JMB and 216 and the properties now possessed by the residual company.

Mantle negotiated a plan with AEPA for the reclamation work to be done to satisfy the EPOs. [ 12 ] Following completion of the JMB CCAA proceedings, Mantle entered a loan transaction with Travelers. Travelers loaned Mantle $1,7000,000 for the acquisition of equipment for use in its operations. Mantle granted Travelers a purchase-money security interest (PMSI) over the equipment. The security interest was registered in the Alberta Personal Property Registry.

Pursuant to an agreement between Travelers, Mantle, and Fiera Private Debt Fund V LP, which holds a general security interest in all of Mantle’s present and after acquired property, Travelers’ security interest in the equipment was designated to have first priority. As of July 21, 2023, Mantle owed Travelers just short of $1.1 million. [ 13 ] Mantle experienced operational problems and was burdened with excessive debt inherited from the JMB CCAA proceedings and incurred in the period following the acquisition of the gravel-producing properties.

Mantle’s difficulties were compounded by the significant reclamation obligations it was required to complete to satisfy the EPOs. On July 14, 2023, Mantle filed a notice of intention to make a proposal under s 50.4 of the BIA. [ 14 ] On August 15, 2023, I granted an extension of the BIA stay period and the time period to permit Mantle to make its proposal. I further approved the creation and priority ranking of various Restructuring Charges, including an Administration Charge, a Directors & Officers Charge, and an Interim Lending Facility Charge.

I was satisfied that the participation of lawyers, insolvency professionals, and directors and officers was required for the proposal to succeed. I was further satisfied that the Interim Lending Facility, which is to be primarily used to fund reclamation work, is necessary for the success of the proposal. [ 15 ] Travelers’ argued that the Restructuring Charges should not have priority over Travelers’ security interest in the equipment and that Travelers should be able to be paid out or realize on its security without delay.

Mantle, supported by AEPA, submitted that the Restructuring Charges were necessary to put the proposal into effect and that the main plank of the proposal was the completion of the reclamation work to satisfy the EPOs. Mantle is of the view that the value of the gravel pits that are still active exceeds the amount of the reclamation obligations. Mantle has also posted more than $1 million as security with AEPA which will be returned upon completion of the reclamation obligations to AEPA’s satisfaction.

Mantle submits that Travelers should not be permitted to realize on its security prior to the completion of the reclamation work because if it were allowed to do so, that would jeopardize Mantle’s ability to complete the reclamation work and thereby jeopardize its ability to make a proposal to its creditors. [ 16 ] I granted an Order to allow work on the pending proposal, including reclamation work, to get underway while preserving Travelers’ position pending these Reasons.

The Order provided, in part, as follows: The Charges shall constitute a security and charge on the Property and, with the exception of the security interests in favour of Travelers registered in the Alberta Property Registry as base registration number 21100725361 (the “ Travelers’ Security Interests ”), such Charges shall rank in priority to all other security interests, trusts, liens, charges, deemed trusts, encumbrances and claims of secured creditors, statutory or otherwise in favour of any person, including liens and trusts created by federal and provincial legislation (collectively, the “ Encumbrances ”), provided, however, that the relative priority of Charges and the Travelers’ Security Interests is subject to further order of the Court....

Redwater, Manitok, Trident, and Stare Decisis [17] Mantle and AEPA submit that three decisions dictate the outcome of this case: Redwater; Manitok Energy Inc (Re), 2022ABCA 117; and Orphan Well Association v Trident Exploration Corp, 2022 ABKB 839. These decisions, they say, stand for theprinciple that end-of-life environmental obligations must be satisfied before any creditors may recover and that the whole estate of theinsolvent entity is to be used to satisfy such end-of-life environmental obligations.

This rule leaves no room for those with security inassets unrelated to the environmental condition or damage to realize on that security until end-of-life obligations have been satisfiedusing, if necessary, the unrelated assets in which they have security. [18] Travelers submits that Mantle and AEPA are wrong that Redwater and Manitok are controlling and that instead the presentcase is one of “first instance.” Redwater and Manitok indicate that there is an exception to the rule posited by Mantle and AEPA forassets unrelated to the environmental condition or damage and that it is for this Court to give that exception shape.

Travelers, citing R vComeau, 2018 SCC 15 and R v Sullivan, 2022 SCC 19, further asserts that Trident at para 66-67 is inconsistent with Redwater andManitok and “violates the doctrine of vertical stare decisis....” Trident, Travelers argues, should not be followed because of its conflictwith Redwater and Manitok. [19] Rather than discussing a basic concept like stare decisis in Reasons, I normally just ask what the relevant cases and statutessay the law is and then apply the law to the facts of the case before me.

Travelers, however, has raised the issue of stare decisis andprovided me with some authorities, making it clear that they attach some importance to it. [20] As a judge of a court of first instance, the principle of vertical stare decisis provides that I am bound to follow the ratiodecidendi of decisions of higher courts. The inimitable Master Funduk explained: “The judicial pecking order does not permitlittle peckers to overrule big peckers. It is the other way around”: South Side Woodwork v R.C.

Contracting, (ABKB) at para 53. [21] The Court held in Comeau at para 26 “[s]ubject to extraordinary exceptions, a lower court must apply the decisions of highercourts to the facts before it.” None of the exceptions apply in the present case. The issue, as will be come clear later in these Reasons, iswhether there is a decision that is on point that must be followed or whether the reasons of the Supreme Court of Canada and the Courtof Appeal left the question open. [22] The principle of horizontal stare decisis requires that judges of the same Court pay heed to each others’ decisions.

This isparticularly important in the commercial arena where parties plan their affairs and make significant investment decisions based on thelaw that emerges from this Court. [23] Kasirer J, writing for the Court, observed in Sullivan at para 65 “Horizontal stare decisis applies to courts of coordinatejurisdiction within a province....

While not strictly binding in the same way as vertical stare decisis, decisions of the same court shouldbe followed as a matter of judicial comity, as well as for the reasons supporting stare decisis generally.” [24] Kasirer J explained in Sullivan at para 75 that a Court should only depart from horizontal stare decisis if: 1. The rationale of an earlier decision has been undermined by subsequent appellate decisions; 2. The earlier decision was reached per incuriam (“through carelessness” or “by inadvertence”); or 3.

The earlier decision was not fully considered, e.g. taken in exigent circumstances. [25] Vertical stare decisis requires me to determine the ratio decidendi of Redwater and Manitok while horizontal stare decisisdemands that I determine the ratio decidendi of Trident with respect to the question before me – whether the whole of a debtor’s estate,including unrelated assets, must be used to satisfy end-of-life environmental obligations prior to any distribution to creditors. [26] Justices Côté, Brown, and Rowe writing for themselves and Wagner CJC in dissent in R v Kirkpatrick, 2022 SCC 33 at para127 explained what the ratio decidendi of a decision is: The ratio decidendi of a decision is a statement of law, not facts, and “[q]uestions of law forming part of the ratio . . . of a decision arebinding . . . as a matter of stare decisis.” A question of law cannot, therefore, be confused with the various factual matrices from whichthat question of law might arise [citations omitted]. [27] The ratio decidendi of a case can be difficult to separate from obiter dictum, which is an expression of opinion that is notessential to a decision.

Binnie J explained in R v Henry, 2005 SCC 76 at para 52: “the submissions of the attorneys general presuppose astrict and tidy demarcation between the narrow ratio decidendi of a case, which is binding, and obiter, which they say may safely beignored.

I believe that this supposed dichotomy is an oversimplification of how the common law develops.” [28] The discussion that follows shows that the issue in the present case is not one of distinguishing between ratio decidendi andobiter dictum; rather, it is to what extent the Court is bound by what Redwater and Manitok imply or, perhaps more accurately, what theparties infer from those decisions. With Trident, the question is whether the ratio decidendi, which is clear, applies on the facts of thepresent case. [29] What does Redwater say about environmental obligations and unrelated assets?

Wagner CJC, writing for the majority,pointed out that Redwater’s environmental liabilities were not required to be satisfied with unrelated assets. He held at para 159: it is important to note that Redwater’s only substantial assets were affected by an environmental condition or damage. Accordingly, theAbandonment Orders and LMR requirements did not seek to force Redwater to fulfill end-of-life obligations with assets unrelated to theenvironmental 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]. [ 30 ] Travelers submits that Wagner CJC chose his words carefully and that the only plausible inference from those words is that unrelated assets cannot be conscripted to satisfy end-of-life environmental obligations.

Though he may have chosen his words carefully in the sense that he did not want to foreclose a scenario where assets were so unrelated to an environmental obligation that they should not be called upon to satisfy the environmental obligation, he did not provide any guidance as to what he meant by “assets unrelated” or how unrelated the assets must be to escape the reach of the regulator. [ 31 ] The Court of Appeal in Manitok addressed the question of whether a debtor’s oil and gas assets could be divided into two pools, one consisting of valuable assets and the other consisting of assets burdened by environmental obligations.

The Court viewed the situation in Manitok to be the same as in Redwater where the proceeds of the sale of valuable oil and gas assets “had to be used by Redwater’s trustee to satisfy abandonment and reclamation obligations before any distribution to secured creditors” (para 31). The Court went on at para 31 to explain how it interpreted Redwater : The point is that the outcome of Redwater demonstrates that the Supreme Court of Canada did not treat Redwater’s assets as falling into different pools.

All of the oil and gas assets were treated collectively as being contaminated, and they all had to answer for the abandonment and reclamation obligations attached to the disclaimed assets. None of the other oil and gas assets were ‘assets unrelated’ to the other oil and gas assets. Manitok is in exactly the same position.

The ‘substantial assets’ of Manitok are the same as the ‘substantial assets’ of Redwater. [ 32 ] Though the Court of Appeal adverted in Manitok to the question of whether in theory unrelated assets could not be called upon to satisfy environmental obligations it deferred the question because it did not have to be decided given the Court’s conclusion that all of Manitok’s substantial assets were related to the environmental obligations.

The Court held at para 36: Redwater confirms that the proceeds of the sale of those assets must be applied first towards the satisfaction of abandonment and reclamation obligations. To the extent that there is any issue about it, the status of assets completely unrelated to the oil and gas business can be left for another day [emphasis added]. [ 33 ] Mantle and AEPA argue that Wagner CJC’s words in para 159 must be viewed in the context of the whole ruling in Redwater .

Wagner CJC held that environmental obligations are a corporate or estate obligation that must be satisfied before any creditor claims (para 98; see also, Manitok at para 17, 30, & 35).

According to Mantle and AEPA, the logic of this ruling leaves no room for the exception for assets unrelated to the environmental condition or damage asserted by Travelers. [ 34 ] The reference to “assets unrelated” in Redwater unaccompanied by any explanation followed by the Court of Appeal’s statement in Manitok that it was leaving the issue for “another day” indicates that there is no ratio decidendi in those cases that binds me in the present case.

As I will explain below, the facts of the present case do not require me to decide whether Travelers is correct that some category of assets unrelated to the environmental condition or damage in issue may not be used to satisfy environmental regulatory obligations or Mantle and AEPA are correct that all the assets that comprise the estate of a debtor must be used to address environmental regulatory obligations before creditor claims are paid. [ 35 ] That Redwater and Manitok’s substantial assets were all oil and gas assets was not surprising.

Many oil and gas companies do not own much in the way of assets other than oil and gas rights and the equipment required to produce oil and gas from those interests in land such as compressors, pumpjacks, and tanks. And even this kind of equipment may be leased instead of owned. Jack R Maslen & Tiffany Bennett, “Going Green? New

Interpretations of Redwater from Canada’s Natural Resource Sectors” in in Jill Corrani Nadeau & D. Blair Nixon, eds., Annual Review of Insolvency Law , (Toronto: Thomson Reuters, 2022) 105 concluded at 119, “based on Manitok , assets or proceeds that relate in any way to the debtor’s oil and gas business will be used to satisfy non-monetary end-of-life obligations.

For most oil and gas producers, this likely means all of their property.” A question to be considered later in these Reasons is whether Mantle, a gravel company, is any different than oil and gas companies like Redwater and Manitok. [ 36 ] Whether assets of an oil and gas company other than oil and gas rights are unrelated assets was tested in Trident .

Justice Neufeld in Trident was required to consider whether a receiver was required to allocate proceeds of the sale of assets, including “non- licensed assets such as real estate and equipment” (para 80) to satisfy environmental obligations in priority to municipal tax claims. Neufeld J took a pragmatic approach, refusing to get engaged in a debate over how to draw a line between related and unrelated assets of an oil and gas company. He concluded that because Trident had one business, oil and gas exploration and production, that all assets were related to the environmental obligation.

He wrote at para 67: I also find that the assets subject to the AER super priority are not limited to licenced oil and gas wells, pipelines and production facilities. Trident had certain real estate assets that were used for office or equipment storage and the like. However, Trident had only one business: exploration and production of oil and gas. It makes no sense to differentiate real estate assets from other assets used in that business, just as it made no sense in Manitok to carve out economic licensed assets from uneconomic ones.

In either case, the result would be to undermine the policy purposes upon which the super priority principle is based. [ 37 ] Neufeld J’s statement of the law in Trident is consistent with Redwater and Manitok though his application of the law breaks new ground.

Whereas in Redwater and Manitok , it was held that all oil and gas assets should be treated as related to environmental obligations that attached only to some of the oil and gas assets, Trident extended this principle to other assets used in an oil and gas business even if they were not directly involved in oil and gas production (e.g. the real estate used to store equipment). [ 38 ] None of the exceptions to the principle of horizontal stare decisis apply to Trident . The decision was fully considered, carefully reasoned, and has not been undermined by appellate authority.

That means that the question in the present case is whether Mantle’s equipment subject to the Travelers security interest is analogous to the equipment and real estate in Trident . [ 39 ] Warren Miller, Vice President of Structured Finance and Capital Markets at Travelers, deposed that it was his understanding that Mantle sought financing from Travelers so that it could “purchas[e] the equipment necessary to operate its business (instead of renting it).” Mr. Miller’s Affidavit attached as part of an exhibit a Notice of Intention to Enforce Security which listed all Mantle’s

equipment that Travelers had financed. The descriptions include the following: Jaw Crushing Plant, Cone Crushing Plant, Screen Plant, Aggregate Feeder, Aggregate Surge Bin, Material Washer, Conveyor, Truck Scale, Articulated Dump Truck, Tracked Excavator, and the like. The equipment in which Travelers has a security interest appears to be part to Mantle’s gravel production business. [ 40 ] In my view, no sensible distinction can be made between the equipment and real estate in Trident and the equipment in the present case.

The equipment over which Travelers has a security interest is as much a part of Mantle’s gravel business as the equipment and real estate in Trident was a part of Trident’s oil and gas business. Based on this factual finding, I am bound by the principle of horizontal stare decisis to follow Trident . In finding that the equipment in the present case is part of Mantle’s gravel business, I make no comment on how in theory a line should be drawn between related and unrelated assets or even if a line should be drawn.

As the Court of Appeal said in Manitok , that “can be left for another day.” [ 41 ] Travelers advanced policy arguments as to why it should not have to wait to realize upon its security until after Mantle completes the reclamation work required by the EPOs. Mantle and AEPA responded with policy arguments supporting the deferral of realization of all secured creditors, including Travelers, until after the satisfactory completion of the reclamation work.

Given my conclusion that the equipment subject to the Travelers security interest is related to the assets to which Mantle’s environmental obligations pertain in the sense that the equipment is used in gravel production, it is not necessary to explore these policy arguments. [ 42 ] Though I decline to debate the wisdom of the policy of effectively subordinating secured creditors to environmental obligations in these Reasons, it is noteworthy that the evidential record shows that Travelers conducted due diligence prior to entering the financing arrangement with Mantle.

Among the materials available to Travelers as part of that due diligence process were documents indicating the existence of Mantle’s environmental reclamation obligations and the security posted by Mantle with AEPA. Prior to entering the financing arrangement, Travelers had the opportunity to assess the risk of doing business with Mantle, make an informed decision whether to do business with Mantle, and to negotiate a cost of borrowing that reflected the risk inherent in Mantle’s business.

Conclusion [ 43 ] The Travelers security interest in the equipment must be subordinated to the Restructuring Charges because the Restructuring Charges are necessary to the completion of the environmental remediation work that is an important part of the pending proposal.

Travelers cannot realize on its security until the environmental reclamation work is completed to AEPA’s satisfaction and the only way that such work can be done is with the support of the officers and directors of Mantle, lawyers and insolvency professionals, and the interim lender who are all protected by the Restructuring Charges. [ 44 ] Paragraph 10 of the Order dated August 15, 2023 shall be amended to provide that the Restructuring Charges have priority over the Travelers security interest in the equipment identified in the Travelers security registration. Heard on the 15 th day of August, 2023.

Dated at the City of Calgary, Alberta this 28 th day of August, 2023. Colin C.J. Feasby J.C.K.B.A. Appearances: Tom Cumming & Stephen Kroeger, Gowling WLG for Mantle Materials Group, Ltd. Alexis Teasdale & Joel Schachter, Lawson Lundell LLP for Travelers Capital Corp Pantelis Kyriakakis, McCarthy Tétrault LLP for the Proposal Trustee, FTI Consulting Canada Inc.

Doug Nishimura, Field LLP, for Alberta Environment and Protected Areas Darren Bieganek, Duncan Craig LLP for 945441 Alberta Ltd [1] For a discussion of the restructuring of JMB and the use of a reverse vesting order in that case, see Candace Formosa, “Dampening the Effect of Redwater Through a Reverse Vesting Order,” in Jill Corrani & D. Blair Nixon, eds., Annual Review of Insolvency Law, (Toronto: Thomson Reuters, 2021) 697.