Terra Energy Corp (Re), 2023 ABKB 236

Court of King’s Bench of Alberta Citation: Terra Energy Corp (Re), 2023 ABKB 236 Date: 20230421 Docket: BK01 094722 Registry: Calgary In the Matter of the Bankruptcy of Terra Energy Corp. Enercapita Energy Ltd Applicant _______________________________________________________ Judgement of the Honourable Justice B.E. Romaine _______________________________________________________ I. Introduction [ 1 ] The core issue in this application is the scope of

section 91.1 of the Mines and Minerals Act , RSA 2000, c M-17 ( MMA ), which stipulates that, upon registration of a transfer of an interest under an agreement, any obligation or liability arising under the agreement that existed before the registration of the transfer continues to run with the interest or location transferred, and the transferee and transferor become jointly responsible for sub obligation or liability. [ 2 ] The Crown interprets this provision widely with respect to the calculation of royalty arrears arising from a post-transfer audit. The applicant successor lessee of such an interest submits that

section 91.1 is limited by its plain and unambiguous language. [ 3 ] Other issues include whether the Limitations Act , RSA 2000, C L-12 or the limitations provision under

section 39.1(2) of the MMA apply to this application, the scope of the Crown’s set-off power under section 46(4) of the MMA and whether the Crown has established the existence and appropriate allocation of royalty arrears. II. Facts [ 4 ] On September 24, 2015, Enercapita Energy Ltd. acquired certain oil and gas assets from Terra Energy Corp. These assets included Crown leases. Crown rights, including royalties, were “permitted encumbrances” on the leases. Thus, Enercapita became the primary leaseholder of these leases, inheriting related leaseholder royalty responsibility. At the time, no royalty arrears associated with

the purchased assets were outstanding. [ 5 ] The Alberta Department of Energy (Alberta Energy or the Crown) approved the transfer of the leases, and they were registered in the name of Enercapita in November 2015. [ 6 ] The purchase and sale agreement between Enercapita and Terra provided that the statement of adjustments under the agreement would include adjustments to the purchase price for the 48 months following the closing date arising from Crown royalty audits or Crown royalty invoices. [ 7 ] Under the Alberta royalty regime, the Crown deducts from royalties payable to the Crown under a lease the Crown’s share of allowable capital costs, operating costs and custom processing fees incurred and paid in Alberta for compressing, gathering and processing the Crown’s royalty share.

The allowances at issue in this case relate to custom processing fee allowances or gas cost allowances. [ 8 ] Each month, the Crown’s share of gas costs allowance is deducted from the Crown royalty payable that month. Every year, these estimated amounts are adjusted from estimates to actual amounts. [ 9 ] Audits may be conducted up to five years after the year for which royalties are payable at the option of Alberta Energy.

Alberta says that it is common for audits to take place after the sale of leases and that, in that case, the purchaser as successor leaseholder is jointly liable to Alberta Energy for any royalty arrears with the vendor. [ 10 ] In March 2016, Terra entered into receivership, and was petitioned into bankruptcy in November 2016. [ 11 ] In November 2016, the trustee in bankruptcy sent a Notice of Bankruptcy and First Meeting of Creditors to known creditors of Terra, including the Crown. The Crown submitted a proof of claim as an unsecond creditor in the bankruptcy on December 16, 2016 in the amount of $1,794,047.07.

It appears from the statement attached to the claim that the Crown claim first arose in June 2016, after the transfer and registration of leases had been approved in November, 2015. [ 12 ] While Terra was in bankruptcy, Alberta Energy performed four separate audits of Terra based on Terra’s 2011 to 2014 gas cost allowance filings. [ 13 ] Section 38(6) of the MMA authorizes such audits, which routinely involve analysis of the amount of petroleum or natural gas product that was extracted and any credits claimed by the royalty payor in question.

During the audits, Alberta Energy made requests for information such as proof of allowable expenditures under

section 48 of the MMA to Terra’s offices on December 2, 2016 and to its receiver and bankruptcy trustee, Ernst & Young on December 9, 2016. [ 14 ] In the December 9, 2016 letter, Alberta Energy informed E & Y that its letter to Terra was returned undeliverable, that there were no longer any employees of Terra and that E & Y was likely the only contact left for Terra. [ 15 ] By letter of February 9, 2017, Alberta Energy informed Terra and E & Y that, as no supporting documentation had been received, Terra’s filings of allowable expenditures were amended to zero on January 25, 2017. [ 16 ] On November 3, 2017, Enercapita was copied on a letter from Alberta Energy to Terra requesting payment for gas royalty arrears associated with Terra’s royalty account in the amount of $3,205,919.18 as of the date of the letter.

The letter stated that if Terra was unable or unwilling to pay these outstanding royalties, the Crown was “entitled to pursue any recourse available to the Crown to clear these arrears”, and further that this recourse included “pursuing payment from all current leaseholders”. [ 17 ] This was the first time that Enercapita became aware there were audits conducted with respect to Terra, and the subsequent creation of the Terra arrears.

It also appears to be the first time that the royalty arrears were identified in a specific amount. [ 18 ] The letter states that failure to pay the amount would result in the issuance of default notices to the representatives of the affected leases, “including royalty and interests amounts for that lease ” (emphasis added). The letter was copied to roughly 20 current leaseholders. [ 19 ] Enercapita has not received a default notice from Alberta Energy.

Its royalty account remains in good standing, and as of March 10, 2021, the account statement indicated that Alberta Energy owed Enercapita $1,265,026 in royalty overpayments. [ 20 ] Since the November 3, 2017 letter, Enercapita has engaged with Alberta Energy to attempt to resolve the matter. [ 21 ] Numerous letter and emails were exchanged with respect to the basis of Alberta Energy’s claim that Enercapita was responsible for a share of the arrears.

Enercapita attempted to respond to Alberta Energy’s requests for documentation by obtaining information from Terra’s Receiver/Trustee and elsewhere. [ 22 ] In subsequent correspondence dated March 9, 2018, the Crown provided Enercapita with a

summary page regarding Terra’s disallowed gas cost allowances. However, none of the underlying documentation and information that was requested by Enercapita from Alberta Energy representatives at a meeting on March 1, 2018 and that Enercapita required to support the calculation of the arrears was provided. [ 23 ] On March 16, 2018, counsel to Enercapita wrote to counsel to the Crown to request specific additional documentation from the Alberta Energy royalty operations branch, the audit branch, and the legal groups to support the calculation of the arrears. Alberta Energy provided only the audit notices and some other

summary information, but again, did not provide any detailed information to support the calculations underlying the claimed arrears. [ 24 ] On March 29, 2018, Alberta Energy sent some of the requested documentation to Enercapita. However, rather than providing

all requested and required information with respect to how the Crown calculated the arrears, Alberta Energy directed Enercapita to access Terra’s Petrinex account, an online system for volumetric reporting that is used in British Columbia, Alberta and Saskatchewan. However, Enercapita did not have access to Terra’s Petrinex account and notes that, even if it did, Petrinex only retains records for the post production year, and therefore, would be unhelpful.

Subsequent access to Petrinex confirmed this. [ 25 ] On April 18, 2018, Enercapita again asked Alberta Energy for the specific documentation required to verify the Terra arrears.

On April 16, 2018, Alberta Energy advised that it would address these requests internally and then reply to Enercapita. [ 26 ] Enercapita says, and Crown does not deny, that no response has ever been received by Enercapita from the Crown with respect to the requested information to substantiate the Crown’s calculation of the arrears. [ 27 ] In March 2018, Enercapita requested a refund of the balance then owing to it on its royalty account, at that time calculated to be $1,058,281.48.

In the normal course, it would have received the refund by April 30, 2018. [ 28 ] On May 14, 2018, Alberta Energy advised Enercapita that it would be pursuing a right of set-off and applying Enercapita’s credit against Terra’s outstanding arrears of $3,211,227.93. The letter stated that Enercapita’s responsibility for the arrears is $2,846,019.71. [ 29 ] After correspondence was exchanged between counsel, Alberta Energy informed Enercapita on May 32, 2018 that it was going to review its decision to set off the Terra arrears against Enercapita’s royalty account. A deadline for this decision was not provided.

At such time, Alberta Energy further advised that it would not refund the credit to Enercapita. The letter outlined Alberta Energy’s position, including its reliance on

Section 91.1 of the MMA , and on section 46(4) of the MMA with respect to the set-off. The letter also says that Alberta Energy has provided all of the detailed information it has on Terra’s arrears. [ 30 ] Upon receipt of this letter in July, 2018, Enercapita scheduled an application before the Court, but it was cancelled when the Crown advised that it wished to resolve the dispute through negotiation.

Since then, Enercapita say it has responded to “various and multiple” requests from Alberta Energy for information. [ 31 ] On June 12, 2019, approximately one year after Enercapita had provided support documents for the Terra arrears, counsel for Alberta Energy wrote a letter to counsel for Enercapita requesting certain further information before it could allow the costs claimed by Terra. In particular, the letter advised for the first time that it needed “receipts or other proof of payment” for Alberta Energy to accept a claimed cost.

It suggests that a statutory declaration from an officer of the facility in question would be sufficient. [ 32 ] From June to December, 2019, Enercapita made efforts to obtain custom processing fee invoices that the processing facility operated by AltaGas Ltd. had issued to Terra and Terra’s proof of payment of same. On December 30, 2019, counsel to Enercapita wrote to counsel to Alberta Energy enclosing correspondence from AltaGas’ controller confirming the relevant invoices AltaGas had issued to Terra were in fact netted off and paid by Terra according to AltaGas’ records.

However, despite Enercapita having supplied all the required information for Alberta Energy to confirm Terra’s gas cost allowance claims over the audit period, on January 16, 2020, counsel to Alberta Energy sent counsel to Enercapita a letter requesting details on AltaGas’ recorded payment of the Terra invoices, an explanation of what “netted off” meant, copies of the invoices (which had previously been provided by Enercapita in September 2018), a copy of the service agreement between Terra and AltaGas at the facility, and a statutory declaration from AltaGas’ CEO or CFO, confirming that Terra’s custom processing fee invoices were satisfied.

These requests went beyond what was required from Terra pursuant to the original audit requests. [ 33 ] The letter states as follows: An important step is to verify the December 18, 2019 email... between Paul Puscasu of AltaGas Ltd. (“AltaGas”) and Shawn Tomlinson of Enercapita, where Mr. Puscasu confirmed the invoices listed “were netted off and paid in our accounting system and records”. My client’s concern is that from the context of that email, they cannot be certain that Mr. Puscasu is referring to the spreadsheet that accompanied the copy of the email provided.

My client must be able to prove that what Paul stated is correct and verifiable. Energy is accountable to all Albertans, and must be able to substantiate a decision based on the December email in an independent review by the Auditor General. The evidence provided so far is helpful, but does not meet this burden, hence my clients request for AltaGas to provide a statutory declaration so that they could be certain the invoices in question had been paid (in this case by way of netting off). ...

If and once a statutory declaration is obtained, Energy will the apply the proven GCA claims against the royalty obligation on the Leases to reduce the $2.8 million royalty obligation on the Leases. [ 34 ] On April 1, 2020, counsel for Enercapita clarified the meaning of “netted off”, noted that it did not have a copy of the agreement between Terra and AltaGas and confirmed that the requested invoices had previously been provided.

Enercapita submitted that requiring a statutory declaration from the CEO or CFO of AltaGas that Terra had paid its AltaGas invoices was unreasonable, as Enercapita had already provided such proof from AltaGas’ controller. [ 35 ] On April 16, 2020, counsel to Alberta Energy sent counsel to Enercapita a letter thanking Enercapita for its help and cooperation, but advised that Alberta Energy required the statutory declaration from AltaGas’ CEO or CFO to confirm Terra had satisfied the AltaGas invoices before it would even consider refunding the credit.

The Alberta Energy letter advised it had requested such statutory declaration directly from AltaGas. [ 36 ] The letter also states that Energy “will continue to work towards a constructive resolution of this matter”, without the exposure of legal proceedings. [ 37 ] Over the following months, counsel to Enercapita continued to periodically follow up with Alberta Energy regarding the status of the matter. On July 29, 2020, in response to Enercapita’s inquiry, counsel to Alberta Energy confirmed it had received the required

statutory declaration from AltaGas and counsel was awaiting instructions to determine how to proceed. [ 38 ] On July 29, 2020, in response to Enercapita’s inquiry, counsel to Alberta Energy confirmed that it had received the required statutory declaration from AltaGas and was awaiting instructions. Enercapita has not received a copy of this statutory declaration. [ 39 ] It is noteworthy that, in Terra’s bankruptcy, AltaGas was an unsecured creditor of Terra for less than $7,000.

The custom processing fee invoices of AltaGas for the Terra gas cost allowance filing totalled more that $10,000,000 over the relevant period. [ 40 ] Alberta Energy witness Wayne Taljit, the Manager of Royalty Accounting in the Department of Gas Royalty Operations with Alberta Energy, confirmed on questioning that Enercapita had provided the documentation it could find to support Terra’s gas cost allowances.

He also conceded that, after April 12, 2019, Alberta Energy did not request any further information from Enercapita for the next eight months. [ 41 ] On December 17, 2020, Alberta Energy sent Enercapita a letter advising that its credit would not be refunded and that its royalty account would continue to be set-off against the Terra arrears. The letter advised that Alberta Energy would follow up with details of the total adjustment resulting from the cost allowance and credit balance set-off. No details of Alberta Energy’s adjustments or calculations have been provided. [ 42 ] In

summary, since early 2018, Enercapita has requested that Alberta Energy support its calculation of the Terra arrears but has not received a full response.

In accordance with Enercapita’s detailed internal review of the materials it has gathered from Alberta Energy, E & Y, AltaGas and elsewhere, which it has provided to Alberta Energy, Enercapita estimates that the Terra arrears are under $100,000. [ 43 ] It is an undisputed fact that Enercapita did not acquire the assets of Terra that led to the vast majority of Terra’s gas cost allowance claims, and subsequently the Terra arrears. [ 44 ] Enercapita filed a new application regarding its liability for outstanding royalty arrears owed by Terra to the government of Alberta on March 30, 2021. [ 45 ] The Application seeks:

i) a declaration that Alberta Energy does not have statutory authority to claim any gas royalty arrears that may be owing from Terra against Enercapita; ii) a declaration that Alberta Energy does not have the right to set off any amounts that may be owing on the Terra account against amounts Alberta Energy owes to Enercapita pursuant to its royalty account: or otherwise; and iii) directing that Alberta Energy refund all amounts owing to Enercapita under its Royalty Account. III.

Position of the Parties [ 46 ] Enercapita says that Alberta Energy has not provided Enercapita with the requisite information to support its calculations of the Terra arrears and that Alberta Energy has ignored its requests. [ 47 ] Enercapita also submits that, even if the arrears exist, which Enercapita says does not appear to be the case from its calculations, the Crown has improperly allocated a disproportionate amount of these arrears to Enercapita.

Enercapita submits that the reason for the Crown’s unjust allocation of the arrears relates to the fact that many of Terra’s wells have been assigned to the Orphan Well Associations and Enercapita is the only existing lessee from which Alberta Energy can seek reimbursement. [ 48 ] Enercapita submits that Alberta Energy does not have the statutory authority to claim a prior leaseholder’s gas royalty arrears against a current leaseholder where those arrears did not exist prior to the transfer and registration of the associated leases.

Further, the Crown cannot set-off the debts of Terra against amounts it owes Enercapita, a completely separate, unrelated entity in good standing with the Crown. [ 49 ] Enercapita submits that a plain reading of the MMA , along with legal and equitable considerations, make it clear that Alberta Energy is not permitted to assert claims for the unproven Terra arrears (which the Crown created following Terra’s bankruptcy by merely zeroing out all claimed deductions) against Enercapita. Enercapita submits that Alberta Energy’s attempt to recover the alleged Terra arrears from Enercapita pursuant to

Section 91.1 of the MMA is improper and opportunistic. [ 50 ] Alberta Energy agrees with the facts as described, except that it disputes that, at the time Enercapita purchased the assets from Terra, no royalty arrears existed, and that Alberta Energy subsequently “created” the arrears.

It asserts that the royalties making up the Terra arrears were “always in existence”. [ 51 ] While the books and records of Terra and, indeed, the records of Alberta Energy prior to its audits, may have reflected no outstanding royalties for the leases in question in this matter, Alberta Energy submits that, nonetheless, the royalties existed and were owing to Alberta Energy at the time of Enercapita’s acquisition, as subsequently discovered through the audit process.

In other words, those royalties were always in existence, they simply had not yet been recorded. [ 52 ] Each time Alberta Energy did not receive a response to an audit request, it issued a notice of determination, reversing all of the claimed gas cost allowance credits of Terra and in turn, recording arrears where none had previously been recorded. All but one of the notices of determination were issued prior to the Trustee’s discharge and while the bankruptcy stay of proceeding was in place. [ 53 ] Mr.

Taljit confirmed in questioning that the Terra arrears had not “crystallized” until after the date the lease transfer had been

registered in November, 2015. These arrears resulted from the reversal by Alberta Energy of allowable costs claimed by Terra after the date the transfer of leases was registered. IV. Analysis A. Is any part of the application barred by the Limitations Act ? [ 54 ] Alberta Energy submits that Enercapita’s application is barred for having been brought outside the two year discoverability limitation period in

section 3 of the Limitations Act . [ 55 ] Enercapita, however, submits that pursuant to

section 39.1(2) of the MMA , the Limitations Act does not apply to this application and that the

section instead sets a limitation period of three years after the “calculation period” for a claim.

Section 39.1(2) reads as follows:

(2) The Limitations Act does not apply to a claim (

a) in respect of a prescribed matter referred to in section 38(2) or in respect of an overpayment of a prescribed matter ; (

b) in respect of an amount payable to the Crown under

section 55 or in respect of an overpayment of that amount; (

c) by the Crown to establish or confirm the Crown’s ownership of any mines or minerals; (

d) by the Crown for an accounting in relation to any benefit derived by someone other than the Crown from any mines or minerals the Crown’s ownership of which is established or confirmed in relation to a claim under clause (c)

(3) No proceedings may be commenced by the Crown or any other person for a remedial order in respect of a claim for an amount or an overpayment of an amount referred to in subsection (2)(

a) more than 3 years after the end of the calculation period for that amount. (emphasis added) [ 56 ] As noted by Enercapita, the Alberta Natural Gas Royalty Guidelines (2009) and the Mines and Minerals Regulation, which provide forms for requests for refunds from capital accounts are silent on any mandatory timeframes for submitting such requests. [ 57 ] Under

section 38, the Minister may examine any record submitted by a reporting person in respect of a “prescribed matter”, which is defined to include an amount, item or matter prescribed by the regulations. Alberta Energy submits without authority that this application does not involve a prescribed matter, but it is clear from the Act and the regulations that a claim for overpayment of royalties, and a claim with respect to the recalculation of allowable gas cost allowances are both matters “prescribed by the regulations”: for example, sections 1(1)(y), 5(1)(

m) and (o), 34 (1), 36(2)(

f) and 36(4)(c) . The “calculation period” set out in

section 39.1(3) is defined to include any extension of time periods permitted by the MMA to calculate, recalculate or make additional calculations in respect of a prescribed matter. Again, it is clear form the correspondence that Alberta Energy extended time periods with respect to their claim and Enercapita’s claim on several occasions. [ 58 ] Mr.

Taljit confirmed on questioning that Alberta Energy provided Enercapita with the opportunity to gather and submit records to substantiate Terra’s gas cost allowance filing, that Enercapita did provide such records, that Alberta Energy conducted a review, and that it was not until December 17, 2020 that Alberta Energy notified Enercapita that it had completed its review of the issues and made a decision. [ 59 ] The December 17, 2020 letter states that: The department has reviewed the circumstances in this matter and information and documentation subsequently provided by Enercapita, AltaGas Ltd., and EY.

The department allowed an extension (under section 8(1)(

g) of the Act) for its Compliance and Assurance form (now Energy Audit), to review information provided in support of Terra’s GCA claims. As a result, the department will process $235,361 in costs, which is expected to reduce the Arrears slightly. The department appreciates Enercapita’s efforts in gathering and providing all the information they could with respect to Terra’s GCA claims, and will follow up with details on the total adjustment to the arrears resulting from the cost allowance and credit balance set-off.

Thus, the applicable three year time period under the MMA for the refund request and the determination of the set off issue did not begin to commence until December 17, 2020. Enercapita’s application was filed on March 30, 2021. B. Is Alberta Energy entitled to collect the Terra arrears from the current leaseholders, including Enercapita? [ 60 ] Alberta Energy relies on

section 91.1 of the MMA with respect to its submissions on this issue. The

section reads as follows: 91.1(1) Where a transfer is registered under

section 91 with respect to the whole of an agreement, a specified undivided interest in an agreement or a part of the location contained in an agreement, (

a) any obligation or liability arising under the agreement that existed before the transfer was registered continues, on and after the registration of the transfer, to run with the agreement, interest or part of the location transferred ; and

(

b) the transferee and the transferor and any other person recorded with the Department as a lessee of the agreement prior to thetransfer are jointly responsible for any obligation or liability referred in clause (a). (emphasis added) [61] There are two provisions of

section 91.1 that are important to its

interpretation. The first is that the obligation or liabilityreferred to in subsection (

a) that continues to run with the interest and makes the transferee “jointly responsible for any the obligation orliability” is the obligation arising in this case, the purchase and sale agreement entered into by Terra and Enercapita. That agreementrelates only to the specific assets transferred to Enercapita. [62]

Section 91.1 does not make Enercapita jointly liable for all of Terra’s obligations or liabilities: at most, Enercapita is liable forthose liabilities arising under the purchase and sale agreement relating to the assets transferred. [63] The second issue important to the scope of

section 91.1 is whether the Terra arrears with respect to the transferred assets“existed” before the transfer of leases was registered. [64] If there were no arrears of royalty amounts in existence and owing to the Crown by Terra on the specific interests or locationstransferred by the agreement prior to the transfer registration date,

section 91.1 of the MMA would not apply to allow Alberta Energy tofind Enercapita jointly responsible for the Terra arrears. [65] The Terra arrears relate to the reversal of certain gas cost allowance claims of Terra by the Crown, which occurred after auditsin 2016 and 2017 for the Terra production years of 2011 to 2014. [66] Enercapita notes and Alberta Energy concedes that the transfer of the leases was registered by the Minister of Energy onNovember 6, 2015, and that, at that time, there were no arrears or outstanding royalty interest amounts evidenced either in the records ofTerra or in the records of Alberta Energy.

Enercapita relied on Terra’s representation in the purchase and sale agreement that no royaltyamounts were owing to Alberta Energy, which was true at the time. [67] The proof of claim filed by Alberta Energy in the Terra bankruptcy shows that the Terra arrears came into existence in andaround June 2016, after the Crown audited certain 2011 custom processing fee claims of Terra in May 2016. The rest of the arrears,which were not claimed in the bankruptcy, come from gas cost allowance reversals in 2017. [68] I find that Enercapita is not responsible for the Terra arrears pursuant to

section 91.1 of the MMA or otherwise because: (a)section 91.1 of the MMA does not contemplate Enercapita being responsible for the Terra arrears that came into existence after theregistration of the transfer of the leases; and (

b) the

interpretation of

section 91.1 posited by Alberta Energy is inequitable and contrary tocommercial realities and practicalities. [69] This

interpretation of

section 91.1 arises from the plain meaning of the words of the section, the modern approach to statutoryinterpretation set out by the Supreme Court in Rizzo & Rizzo Shoes Ltd. (Re), (SCC), [1998] 1 SCR 27 at para 21: Today there is only one principle or approach, namely, the words of

an Act are to be read in their entire context and in their grammaticaland ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. [70] Alberta Energy submits that the Terra arrears were “in existence and were owing to Alberta Energy at the time the leases weretransferred”, that they were “subsequently discovered through to audit process”, and that they were “always in existence, they simply hadnot been recorded”.

Alberta Energy incorrectly asserts that an Enercapita witness admitted the accuracy of this. [71] While an obligation to pay Crown royalties may arise upon extraction of the mineral in question, that obligation is to payroyalties net of the Crown’s share of allowable expenses of production. The Crown’s position that the obligation to pay royalties alwaysexisted and just had to be properly identified fails to take into account that the amount of the obligation or liability depends

a) upon thegross amount of royalties, and

b) allowable deductions that ensure that the Crown pays the costs of production of its royalty share. In theexisting system, that obligation is identified by producers’ filings with respect to production and allowable deductions that appear tostand unchallenged unless the Crown decides to conduct an audit. The “obligation or liability” that must exist before

section 91.1 appliesis not merely the gas royalties that may be payable to the Crown, but such royalties net of allowable deductions. [72] This

interpretation of

section 91.1 is not inconsistent with the object of the MMA, to see that Albertans benefit from resourceextraction in the form of royalties paid to the provincial Crown, net of the Crown’s share of allowable expenses. This object can beattained by ensuring that claims for cost allowances that would reduce the Crown’s royalty share of gas and gas products are reviewedand/or audited before the Crown consents to a transfer. [73] While legislation is to construed as remedial and given the fair, large and liberal construction and

interpretation that bestanswers the attainment of its objects,

section 91.1 cannot be interpreted to extended beyond its plain meaning and inherent limitations. [74] As noted previously, Mr. Taljit characterized the arrears as “crystallizing” on a date after the transfer was approved. In a June22, 2018 letter to Enercapita counsel from Alberta Energy counsel, Alberta Energy counsel referred to the arrears as “a contingentliability attached to the Leases under

section 38 of the MMA”. I agree that, at the time of the registration of the transfers, a contingentliability attached to the leases transferred. [75] While Alberta Energy suggests that the cases cited by Enercapita with respect to a “contingent liability” are distinguishable ontheir facts, the references to the nature of a contingent liability in these cases do not depend on the factual context: (

a) in Stewart v Stewart, (BC SC), [1993] BCJ No. 2123 at 8, (BCSC), the Court refers to a contingent liability asone “that will only crystalize, sometime in the future”; (

b) in Mandel v R (1978), (FCA), [1979] 1 FC 560 at para 17, the issue was whether the appellant’s liability topay a portion of a purchase price was a “real” or a “contingent liability”. The Court determined that the liability to pay in question did not

arise merely on the expiration of a period of time or on the happening of an event that was certain or even likely to occur. The obligationwas thus contingent on the happening of an uncertain event. The Court quoted Winter v Inland Revenue Commissioners, [1963] AC235 at pages 547 to 549: No doubt the words “liability” and “contingent liability” are more often used in connection with obligations arising from contract thanwith statutory obligations. But I cannot doubt that if a statue says that a person who has done something must pay tax, that tax is a“liability” of that person.

If the amount of tax has been ascertained and it is immediately payable it is clearly a liability; if it is onlypayable on a certain future date it must be a liability which has “not matured at the date of ‘death’” within the meaning of section 50(1).If it is not yet certain whether or when tax will be payable, or how much will be payable, why should it not be a contingent liabilityunder the same section. ...

A conditional obligation, or an obligation granted under a condition, the existence of which is uncertain, has no obligatory force till thecondition be purified; because it is in that event only that the party declared his intention to be bound, and consequently no proper debtarises against him till it actually exists; so that the condition of an uncertain event suspends not only the execution of the obligation, butthe obligation itself. (emphasis added).. (

c) in Samuel F Investments Ltd v Minister of National Revenue (1988), 88 DTC 1106 at 1108-1109, the Court also referred to theWinter case referencing Lord Reid as follows at page 251: The essence of a contingent liability must surely be that it may never become an existing legal liability because the event on which itdepends may never happen. (emphasis added) (

d) In Canada v McLarty, 2008 SCC 56 at para 17, the Court referred to the “well-accepted test for a contingent liability” in Winteras follows: I should define a contingency as an event which may or may not occur and a contingent liability as a liability which depends for itsexistence upon an event which may or may not happen.

Later, the Court stated that “[t]he test is simply whether a legal obligation comes into existence at a point in time or whether it will notcome into existence until the occurrence of an event which may never occur.” [76] The Terra arrears did not exist at the time the leases were registered. A contingent liability may have attached to the leases,given the Minister’s ability to conduct an audit of any record under section 38(2) of the MMA, but this ability to conduct an auditdepends on the discretion of the Minister, and therefore, may or may not occur. [77] Alberta Energy submits that interpreting

section 91.1 in this manner has the potential to “create mischief and invite abuse thatis inimitable to the objects of the Act”. It gives the example of a transferor that has made unfounded credit claims against its royaltyobligations over the year that then transfers all of its assets to a related entity for the purpose of frustrating Alberta Energy’s recovery ofroyalties. There is no evidence that this type of abuse was present in this case.

The remedy for such abuse is for Alberta Energy toconduct a more thorough review of the royalty account before approving a transfer, or for the legislation to be amended, not to expandthe meaning of the plain words of the provision. Holding a third party liable for the obligations of another is a statutory exception toestablished legal principles, and as such, should be strictly construed.

In Barrette v Crabtree Estate, (SCC), [1993] 1SCR 1027 at para 33, in a case involving a provision in the Canadian Business Corporations Act (Canada) that, in certain circumstances,made directors personally liable for a corporation’s debts to its employees, L’Heureux-Dube J. explained: ... While its purpose is to ensure that certain sums, including wages, are paid to employees in the event the corporation becomes bankruptor insolvent, s. 114(1) C.B.C.A. constitutes a major exception to the fundamental principles of company law applicable to directors’liability.

As we have seen, it also overrides the more general law principles that no one is liable for the debts of another. [emphasisadded] [78] An exception to a general law principle should not construed more widely than is necessary to fulfill the values that support it:Air Canada v British Columbia, (SCC), [1989] 1 SCR 1161 at para 78. [79] Alberta Energy submits that it is not inequitable to enforce

section 91.1 in accordance with Alberta Energy’s

interpretationbecause the object of the MMA is to see that all Albertans benefit through the recovery of Crown royalties by Alberta Energy. However,it is not necessary to give an over-expansive reading to

section 91.1 in order to achieve that goal: it is only necessary that Alberta Energyperforms its oversight role at the time of a requested transfer. [80] Alberta Energy also submits that Enercapita could have protected itself by greater due diligence, by independentlyscrutinizing whether Terra’s royalty obligations were up to date rather than relying on contractual representations. It is important to notethat Enercapita was only purchasing some, and not all of Terra’s assets, and would have no reason or right to check on the status ofroyalty accounts with respect to assets it was not purchasing.

This was a purchase of specific assets. There was no reason for Enercapitato demand the books and records of Terra with respect to all of its assets.

Even if it had, there would be no guarantee that a subsequentaudit would not disagree with the Terra claims for allowable expenses. [81] The fact that the purchase and sale agreement provided adjustments to the purchase price in the 48 months following theclosing date arising from Crown royalty audits or Crown royalty invoices relating to the assets does not corroborate Alberta Energy’sinterpretation, as this relates to an adjustment of the purchase price between Terra and Enercapita. [82] In this case, the Receiver did not have the records necessary to comply with Alberta Energy’s audit requests, since it was onlyappointed Receiver over Terra’s BC assets and became Trustee in Bankruptcy of the entire estate only after the Alberta assets had beentransferred to the OWA.

Receivers generally do not have the necessary resources or funds to comply with any such audit requests, and to

do so may improperly direct funds away from the bankrupt’s estate and the benefit of creditors in response to audits associated with anunsecured creditor’s contingent claim that may have no value. [83] To permit Alberta Energy to ignore the temporal component of

section 91.1 of the MMA and collect royalties from aninnocent purchaser would increase the risk in oil and gas transactions, and place unwarranted strain on the industry. [84] It is noteworthy that Terra may have paid or incurred costs of production with respect to the Crown’s share of royalties, butthat, given the events of its insolvency, sufficient documentation may no longer exist to substantiate these costs to the absolute certaintythat the Crown requires. If so, the result is a windfall to the Crown, which cannot be the objective of the legislative scheme. C. Is Alberta Energy entitled to set-off the Terra arrears? [85] If I am incorrect in the

interpretation of

section 91.1 of the MMA, it would be necessary to consider whether Alberta Energyis entitled to set-off the Terra arrears it says are owed by Enercapita against Enercapita’s credit in its royalty account. [86] Section 46(4) of the MMA provides that: 46(4) Where any amount is owing by any person to the Crown in right of Alberta or a Provincial agency as defined in the FinancialAdministration Act, whether under this Act or otherwise, the Minister may recover that amount by way of set-off against any amountowing to that person by the Crown in right of Alberta in respect of an agreement or pursuant to this Act or any other enactment under theadministration of the Minister. (emphasis added) [87] Enercapita submits that set-off is not permitted in these circumstances because legal or statutory set-off requires

a) that bothobligations must be debts; and

b) both debts must be mutual cross obligations. “Mutual debts” mean “debts due from either party to theother for liquidated sums or money demands which can be ascertained with certainty”: Telford v Holt, (SCC), [1987] 2SCR 193 at paras 25-26. Enercapita submits that it does not owe a debt to the Crown as the amount of the arrears have not been provenby Alberta Energy. [88] Enercapita submits that the alleged Terra arrears are a disputed, unproven amount allegedly owing by Terra to AlbertaEnergy.

It notes that Enercapita itself has not been noted in default for the arrears and that they do not appear as a debt in the Enercapitaroyalty account. [89] Alberta Energy takes the position, without support of authority, that the term “set-off” in section 46(4) is unrelated to legalset-off, and is, instead, a “government self-help remedy... that requires no litigation for its exercise”. Had that been the case, Section46(4) could have provided that the right of set-off could be exercised without recourse to a court. Alberta Energy does not claimequitable set-off. [90] If I am incorrect and

section 91.1 of the MMA makes Enercapita liable for a portion of the Terra arrears, section 46(4) mayapply to allow Alberta Energy to set-off those arrears, or a portion of them against the Enercapita royalty account if the arrears have beenproven as a debt of Enercapita by Alberta Energy. D. Has Alberta Energy proven the existence of a debt from Terra? [91] Enercapita submits that Alberta Energy should be required to justify its calculation of the Terra arrears and the allocation of aportion of the arrears to Enercapita.

Enercapita submits that the arrears are improperly calculated, and that, despite repeated requests fromEnercapita, Alberta Energy has refused or been unable to provide the necessary information to support their calculations. [92] Enercapita also submits that, if the arrears exist and have been properly calculated, it should only be liable for arrears that arerelated to the assets Enercapita acquired from Terra. [93] It is undisputed that gas cost allowance credits are earned at a facility level, and that each such facility has a unique facilityeffective royalty rate that is used to determine a royalty client’s Crown share of the gas cost at that facility.

Enercapita submits, and theCrown does not dispute, that the majority of the alleged arrears arose from Alberta Energy reversing processing claims at the AltaGasfacility.

The Terra wells that eventually were assigned to the Orphan Well Association were processed at this facility. [94] Enercapita submits that it is far simpler and more equitable to allocate any alleged Terra arrears created from the reversal ofcustom processing fee claims at the AltaGas Facility to the wells that utilized that facility, and that Alberta Energy simply does not wantto apply this allocation method because it knows it cannot collect any Terra arrears from the OWA. [95] It also submits that the Crown is overburdening Enercapita with its allocation of the Terra arrears because Enercapita is theonly solvent party that it can pursue, and that the allocation is not based on any other logical accounting grounds. [96] It is undisputed that Enercapita is being allocated approximately 90% of the alleged Terra arrears, despite the fact thatapproximately 75% of the cost adjustments are attributable to the Crown reversing custom processing fee claims at the AltaGas Facility,which are attributable to wells Enercapita did not acquire. [97] Alberta Energy’s response is that it has allocated gas cost allowance adjustments across the leases weighted on production.The proration is based on the principle of allocating the adjustments across the leases weighted on the production of the given streamlinked to the agreement.

Costs are given at the facility level, but ultimately Alberta Energy submits that, the benefit is at the corporatelevel, since the resulting deduction is simply a credit against total gross royalty, irrespective of the specific facility where the volumeswere processed. However, the amount of the deduction (via Facility Effective Royalty Rate) is governed by the ratio of Crown to

corporate volumes. This supports the conclusion that the processing of specific values is driven by the facility throughput. The entire monthly (or annual gas cost allowance) is applied globally to reduce the net royalty payable for all of the streams/agreements. Alberta Energy does not provide any statutory authority for this process. [ 98 ] However,

section 91.1(

a) of the MMA provides that the obligation “arising under the agreement”, being the purchase and sale agreement between Terra and Enercapita, “continues... to run with the agreement, interest or part of the location transferred.” Thus, the obligation set out under

section 91.1(

a) arising from the transfer only runs with the interest or location transferred. There is no support under

section 91.1(

a) for the approach taken by Alberta Energy in allocating the Terra arrears to Enercapita. [ 99 ] Alberta Energy’s representative, Mr. Taljit, said in his affidavit evidence that up until the end of 2020, Alberta Energy, largely through its Legal Service Branch, worked primarily with Enercapita, but also on its own initiative, to find documentation that would substantiate Terra’s gas cost allowance claims for 2011-2015, to reduce Terra’s royalty arrears and therefore to reduce Enercapita’s statutory liability on those arrears. Those efforts led only to a nominal change in royalty owing.

He states that was Alberta Energy’s “standard protocol” to apply Enercapita’s credit to set-off against the Terra arrears. [ 100 ] However, on questioning, Mr. Taljit conceded that in August 2018, Enercapita delivered documents to Alberta Energy in an effort to substantiate the Terra gas cost allowance filings, and that during the following eight months, counsel to Enercapita regularly followed up with Alberta Energy to check on the status of Alberta Energy’s review of the documents and asking if any further information was required. As confirmed by Mr.

Taljit, Alberta Energy did not request any further information from Enercapita over this period. [ 101 ] The documentation provided by Enercapita was organized in a manner to respond to each of the specific audit requests, and included calculation summaries, invoices, joint interest billings and other information to substantiate the Terra claims.

However, Alberta Energy took the position in a letter to counsel to Enercapita in June 2019, approximately a year after Enercapita had provided supporting documents, that the claims were unsubstantiated because “there was no proof of payment even though invoices were provided” with respect to the invoices from AltaGas. [ 102 ] As noted previously, in a letter to Alberta Energy dated December, 2019, Enercapita provided an email from AltaGas’s controller confirming that all of the AltaGas invoices were “netted off and paid”.

In April 2020, Alberta Energy advised that it needed to verify what AltaGas’ controller stated was correct, and that therefore Alberta Energy had contacted AltaGas directly asking for a statutory declaration verifying payment or netting off of the AltaGas invoices. [ 103 ] It is noteworthy that in the original audit requests of Terra, Alberta Energy only required that Terra provide the date of payment of custom processing claims. [ 104 ] In an email from counsel to Alberta Energy in July 2020, Alberta Energy confirmed that it had received the statutory declaration from AltaGas. [ 105 ] No further request was received from Alberta Energy prior to its final decision.

In a December 2020 letter, Alberta Energy advised it would provide Enercapita with details on its findings and calculations with respect to the Terra arrears, but no such follow up has been provided. As noted, Alberta Energy advised Enercapita in its December, 2020 letter of its “final” decision. [ 106 ] Alberta Energy submits that it is not required to justify the disallowance of unsubstantiated gas cost allowance claims. It says that gas royalty calculations were an estimated gas cost allowance, requiring a true-up by the facility cost center operator by April of the subsequent year.

Where supporting returns on documents are not provided, Alberta Energy disallows the has cost allowance. The problem is that supporting returns and documents have been provided in this case by Enercapita, substantiated, apparently, by a statutory declaration from the facility operator. Alberta Energy does not argue any statutory support for the approach Alberta Energy has taken to the calculation and claims of arrears against Enercapita other than

section 91.1. In the circumstances, there is no explanation as to why the information provided by Enercapita to Alberta Energy with respect to the Terra arears is not acceptable, and why Enercapita should be allocated the vast majority of arrears that arise from assets it did not purchase. [ 107 ] As Enercapita points out,

section 19.5 of the Natural Gas Royalties Regulations referred only to costs and allowances that are “incurred”, not paid, but in any event, it appears that there is evidence from AltaGas that the Alta Gas invoices were either netted out or paid. [ 108 ] I find, therefore, that, even if I am incorrect with respect to the scope of

section 91.1, Alberta Energy has not proved on a balance of probabilities that Enercapita owes it any amount with respect to the alleged Terra arrears. [ 109 ] It is understandable that, given the dire situation in Alberta with respect to orphan well recovery costs, Alberta Energy may be frustrated by its inability to collect royalty arrears, to the extent that they exist, from a now insolvent, and in fact non-existent entity. However, Alberta Energy can only collect arrears in accordance with its legislated authority.

Alberta Energy in effect created these arrears after registering the transfer by zeroing out Terra’s claims for gas cost allowance because it did not receive information from a company that it knew was in receivership and bankruptcy and therefore did not have the employees who could respond to its questions. It now seeks to recover the majority of those arrears from a transferee that had no knowledge of the audits and on the basis of wells that Enercapita did not acquire. Despite the difficulty in doing so, Enercapita apparently provided Alberta Energy with substantial information on the cost allocation claims.

Enercapita is entitled to adequate information to evaluate the alleged debt. V. Conclusion [ 110 ] In conclusion (

a) Enercapita is entitled to a declaration that Alberta Energy does not have statutory authority to claim any gas royalty arrears

that may be owing from Terra against Enercapita; (

b) Enercapita is entitled to a declaration that Alberta Energy does not have the right to set-off any amounts that may be owing arising from the Terra audits against amounts Alberta Energy owed to Enercapita pursuant to its royalty account or otherwise; and (

c) Alberta Energy is directed to refund all amounts owing to Enercapita under its royalty account. If the parties are unable to agree on costs, they may make written submissions. Dated at the City of Calgary, Alberta this 21 st day of April, 2023 . Justice B.E. Romaine J.C.K.B.A. Appearances: M. O'Brien and James Reid for the Applicant D. Nishimura for the Respondent