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Manitok Energy Inc (Re), 2022 ABCA 117

Do builders’ liens take priority over abandonment and reclamation obligations?

Manitok Energy Inc. was an oil and gas company that became insolvent. The respondent, Prentice Creek Contracting, provided equipment and services to Manitok related to the reclamation and cleanup of certain oil and gas well sites. The respondent, Riverside Fuels, provided fuel and lubricants to Manitok. When they were unpaid, both filed builders’ liens prior to Manitok’s bankruptcy on February 20, 2018

After an oil and gas well has been fully exploited, the licensee operating it must “abandon” the well, by sealing it off in an environmentally safe way. It must then “reclaim” the surface of the land. These “end of life” obligations, which are mandated by regulation, are inherent in oil and gas properties, and can be very financially onerous and beyond the means of insolvent corporations.

Like many insolvent oil and gas companies, Manitok had some assets that had remaining value, but it also had a number of assets that had no remaining net value because they were burdened with inherent and inchoate abandonment and reclamation obligations. Manitok’s Receiver identified some of the valuable assets and arranged for their sale. The sale was approved by the court. The Sale and Vesting Order stipulated particular holdbacks to cover the amounts of the two builders’ liens and certain unpaid property taxes.

After the various sales negotiated by the Receiver, the Manitok estate still owned a number of oil and gas assets with aggregate assumed abandonment and reclamation obligations of about $44.5 million, far in excess of the assets in the estate. The Receiver intended to “disclaim” those assets, that is, “abandon, dispose of or otherwise release” the bankrupt estate’s interest in these properties. The Alberta Energy Regulator and the Orphan Well Association argued that abandonment and reclamation obligations must be satisfied first. The two builders’ lien holders claimed to have a secured position that must be satisfied in priority to other claims.

The chambers judge ruled in favour of the builders’ lien claimants, distinguishing the Supreme Court’s decision in Redwater on the basis that, among other things, the proceeds of sale were no longer part of the Manitok estate. The chambers judge concluded that the builders’ lien claimants were entitled to be paid out of the proceeds of the sale in priority to other claims.

The Court of Appeal disagreed. The Court noted that the proceeds resulting from the sale of the assets were part of the Manitok estate, even though they were held “in an interest-bearing trust account”. Under the Sale and Vesting Order, they were specifically to stand in place of the physical assets that had been sold, without affecting in any way the priorities and claims of various claimants.

The builders’ lien claimants overstated the effect of the “trust” created by the Sale and Vesting Order. The assets of an insolvent corporation belong to the estate of that corporation. Those assets are under the control of the receiver or trustee. The receiver or trustee has no beneficial interest in those assets and would keep them segregated, and in that sense, it is not inaccurate to say the assets are held “in trust” or “in an interest-bearing trust account”. But the “trust” is only to hold the assets for the stakeholders in the insolvency, in the same priority as their interests may appear. The “trust” does not create any new or enhanced rights in any stakeholder, even if recited in a court order, and even if the assets are sub-segregated into smaller pools of assets. A court cannot by such a “trust order” reorder the priorities in an insolvency.

The Receiver was required to hold the sale proceeds “in an interest-bearing trust account” for the bankrupt estate and its stakeholders, because the Receiver had no beneficial interest in them. The Order, however, did not create any new rights or trust beneficiaries or vary the entitlement of any stakeholder; it essentially provided that the funds were to be held in escrow pending a determination of entitlement. The Order specifically stated that the funds were deemed to replace the sold real estate, and the claims of all stakeholders would be unaffected.

The quantum of the two builders’ lien claims was relevant to setting the quantum of the holdback, but the Order neither enhanced nor diminished the substantive priority rights of the builders’ lien claimants to the holdback funds. There was no new “trust” created in favour of the builders’ lien claimants in the holdbacks by placing them “in an interest bearing trust account”, other than the requirement that the funds be held in escrow until the court could rule on entitlement.

Accordingly, the appeal was allowed, and the chambers decision was set aside. The Court ruled that the end of life obligations must be satisfied by the Receiver from Manitok’s estate in preference to the builders’ lien claims.

Judges: The Honourable Justice Frans Slatter, the Honourable Justice Ritu Khullar and the Honourable Justice Jolaine Antonio

CounselHoward A. Gorman, Q.C.Aaron Stephenson and Meghan Parker of Norton Rose for A&M as Receiver; Glynn L. Walters of Atlalaw for Prentice Creek Contracting Ltd.; Garrett Hamilton of Hamilton Baldwin Law for Riverside Fuels Ltd.; Gregory Plester of Brownlee for Stettler County and Woodlands County; Maria Lavelle for AER; and Robyn Gurofsky and Jessica Cameron of BLG for OWA

Fullcase: https://mcusercontent.com/a3e2039936cbf8a31bda45ab3/files/f3e936f4-eb85-e85c-e977-7bfc9eaf413b/2022abca117.pdf

By Matilda Lici