Claiming ownership after a vesting order?

Taber Water Disposal Inc. (Re), 2024 ABKB 680
What happens when a third party asserts an ownership interest in property conveyed pursuant to a vesting order in an insolvency proceeding?

Summary: In this case, a purchaser acquired a debtor’s 45% interest in an oilfield pursuant to an AVO under the BIA. The 55% owner refused to recognize the purchaser as joint owner, alleging that a third party (and not the debtor) had actually owned the 45% interest. The Court found that best practice is for third-party ownership claims to be decided prior to a vesting order being issued or, if that is not possible, for the disputed property to be excluded from the vesting order and a direction made for the process for the determination of the disputed claim. If an AVO is to extinguish a third-party ownership interest, it must do so in clear terms. No such language existed here. However, the 55% owner and third-party were interested persons and served with the materials throughout the proceedings. They chose not to respond to the application for the AVO. The appropriate remedy was an adverse inference that the third party did not own the disputed interest in the oilfield. Ultimately, the Court concluded that the purchaser acquired the 45% interest pursuant to the AVO.

The applicant, 2635672 Alberta Ltd (the “Purchaser”), purchased a 45% working interest in an Oilfield in southern Alberta from Taber Water Disposal Inc and Enerstar Petroleum Corp (together, the “Debtors”) pursuant to a Bankruptcy and Insolvency Act (“BIA”) proposal process supervised by the Court. After the completion of the sales and investment solicitation process, the Court granted an Approval and Vesting Order (“AVO”) vesting the Debtors’ title in the Oilfield free and clear of encumbrances in the Purchaser.

After the AVO was granted, the Purchaser went to Whitehaven Beach Capital Corp (“Whitehaven”), the operator and, together with its affiliate, Title Shot Oil Inc (“Title Shot”), 55% owner of the Oilfield, seeking to be recognized as a joint owner of the Oilfield.  Whitehaven refused to recognize the Purchaser because it believed a third party, Arrow Point Oil & Gas Limited (“Arrow Point”), was the true owner of the 45% working interest in the Oilfield claimed by the Purchaser. The Purchaser applied for a declaration of ownership. After the application was brought, Whitehaven acquired Arrow Point’s purported interest in the Oilfield in exchange for a gross overriding royalty interest.

Whitehaven argued that a vesting order may convey no better title to the assets than the seller has and that it is an abuse of process to interpret vesting orders as barring the claims of a true owner. The Purchaser argued that Arrow Point and its affiliate Global One GP Limited (“Global”) were served with materials for all court applications in the insolvency proceedings and, as such, were aware that the Court was going to grant the AVO in respect of the disputed interest in the Oilfield. The Purchaser submitted that insolvency and restructuring practice demands forthright participation of interested parties and it is not open for third parties with ownership claims to lie in the weeds.

Best practice is for third-party ownership claims to be decided prior to a vesting order being issued or, if that is not possible, for the disputed property to be excluded from the vesting order and a direction made for the process for the determination of the disputed claim. There are diverging approaches where a third-party ownership claim is made after the granting of a vesting order. The law concerning third-party ownership claims and vesting orders is not clear.  The principles from Dianor II, Quicksilver, and Golden Band are as follows:

1. The nemo dat quod non habet principle is not sacrosanct. Section 81 of the BIA is a statutory exception to nemo dat, and interests in land may be vested off in insolvency proceedings;

2. Third-party ownership claims are different than other interests in land that derive from the debtor’s title, such as mortgages and liens, and should only be vested off in exceptional circumstances;

3. Third-party ownership claims should be determined prior to a vesting order being made or disputed assets should be excluded from the vesting order and a process for determination of the claim should be ordered; and

4. Where third-party ownership claims are not determined prior to a vesting order being made, if the third party had an obligation to advance its claim in the insolvency process, such claims may be extinguished by an appropriately worded vesting order.

In this case, the wording of the AVO did not extinguish Arrow Point’s purported ownership interest in the Oilfield. Consistent with the nemo dat principle, the AVO purported only to convey the title that the Debtor had. The balance of the AVO was concerned with cleaning up that title by extinguishing claims and removing encumbrances. The nature of the listed claims extinguished by the AVO were claims that are derived from the Debtor’s title, not rival claims of ownership. It was not appropriate to interpret a capacious phrase like “or otherwise whatsoever” to include a claim to ownership. If an AVO is to extinguish a third-party ownership interest, it must do so in clear terms. Such language was absent from the AVO.

However, Arrow Point and Global were interested persons pursuant to s 4.2 of the BIA, and, accordingly, were subject to a duty of good faith. Arrow Point and Global were identified as “interested parties” on the service list and were served with materials throughout the proceedings. They chose not to, or failed to, respond to the Purchaser’s application. The appropriate remedy was an adverse inference that Arrow Point did not own the disputed interest in the Oilfield. Arrow Point’s non-participation in the insolvency proceedings was consistent with it not having a bona fide interest in the Oilfield. Even absent the adverse inference, the evidence weighed in favour of finding that Arrow Point did not have a legitimate claim to the Debtor’s interest (and now the Purchaser’s interest) in the Oilfield.

Ultimately, the Court found that the Purchaser owned a 45% working interest in the Oilfield. If Whitehaven and Title Shot failed to recognize the Purchaser’s 45% working interest in the Oilfield, the Purchaser could apply to the Court for further directions. The Court granted the Purchaser’s application.

Judge: Honourable Justice Colin Feasby

Counsel: Jack Maslen & Erick Juergens of BLG for the Applicant Purchaser, 2635672 Alberta Ltd.

Christian Popowich & Dextin Zucchi of Code Hunter Barristers for the Respondents, Whitehaven Beach Capital Corp and Title Shot Oil Inc