Canada: Limits Of Relief For Lessors Under The Surface Rights Act When An Operator Has Been Assigned Into Bankruptcy

This Fall the Alberta Surface Rights Board (the "Board") Panel issued its decision in Lemke v Petroglobe Inc, 2015 ABSRB 740. The Panel decided that it did not have authority to proceed with a claim by a landowner for unpaid compensation that had accrued before the date that the operator was assigned into bankruptcy. The Panel held that the landowners' claim for unpaid compensation was a "claim provable in bankruptcy" and therefore the Board was prevented from exercising its powers due to the provisions of the Bankruptcy and Insolvency Act ("BIA") which provides for a stay of proceedings upon a bankruptcy. While the Board was sympathetic to the landowners, it was bound by the BIA and it was compelled to accede to the stay of proceedings.

Background

Doug Lemke and Marg Lemke (the "Applicants") and Petroglobe Inc. (the "Operator") were parties to a surface lease. When the Operator failed to make a payment in annual compensation owing under that surface lease agreement, the Applicants brought an application under section 36 of the Surface Rights Act RSA 2000 c S-24 (the "Act") to obtain payment from the Province for overdue annual compensation owing to them.

Section 36 of the Act provides a process for a lessor under a surface lease to pursue recovery of unpaid compensation under a surface lease. Subject to certain conditions being met, if the operator fails to pay compensation, the Board may direct that the Minister responsible for the Act (the Province) pay the lessor the amount of money to which the lessor is entitled. Section 36 also provides that orders for suspension and termination must occur before the Board may consider directing payment by the Province.

Prior to the application being received by the Board, the Operator had made an assignment into bankruptcy on October 17, 2013. In Decision 2014/0401 the Board determined that it was precluded from proceeding with the section 36 application while the Operator was in bankruptcy proceedings. The Panel then conducted a review and considered whether to confirm, rescind or amend Decision 2014/0401.

The issue facing the Panel was whether the process set out in section 36 can proceed when the operator makes an assignment into bankruptcy under the Bankruptcy and Insolvency Act which brings into force a stay of proceedings under section 69.3 of the BIA.

Decision

The Panel first reviewed section 36 of the Act and section 69.3 of the BIA. Section 69.3 provides that a stay of proceedings becomes operative upon a bankruptcy such that no creditor has any remedy against a debtor or the debtor's property or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy. The Board noted that under section 36, upon the Province making a payment to a lessor, the amount paid and associated expenses becomes a debt owing to the Province by the operator and may be entered as a judgment.

Based on a plain reading of section 69.3 of the BIA, the Panel determined that an application under section 36 of the Act was a proceeding. The Panel then considered whether an application under section 36 was a "claim provable in bankruptcy". The Applicants had argued that in order to be caught by the say under section 69.3 of the BIA, the claim must be against the debtor and an application under section 36 of the Act was not against the debtor but rather against the Province. The Panel disagreed and held that it was the intention of the legislators for applicants to proceed against the debtors. In this case, the unpaid compensation became payable under the surface lease before there was an assignment into bankruptcy on October 17, 2013. Therefore, this was a "claim provable in bankruptcy". The Panel noted that the facts in this case were distinct from two recent decisions of the Board, Portas v PetroGlobe Inc., 2015 ABSRB 708 and Rodin v PetroGlobe Inc, 2015 ABSRB 727 and in which the Board determined it had authority to terminate the operator's rights under the surface leases based on unpaid compensation that accrued after the assignment into bankruptcy.

The Applicants also submitted that since the Board was not the creditor, it was prohibited from taking steps under section 36 such as terminating the surface lease. The Panel decided that an application under section 36 of the Act is a proceeding by a lessor, who is the creditor, to recover unpaid compensation which became due before the bankruptcy and is, therefore, prohibited by the stay under section 69.3 of the BIA.

In addition, the Applicants argued that section 36 resulted in the Province becoming a guarantor or surety for the payment of compensation under the surface lease and was therefore exempt from the stay under section 69.3 of the BIA. The Panel accepted that the bankruptcy of a debtor does not result in a stay of proceedings by the creditor against a guarantor. However the Panel was not persuaded that all of the provisions of section 36 provide a guarantee. The Panel considered that discretionary remedies were far different from those arising from a guarantee or surety.

In conclusion on the issue of the stay of proceedings, the Panel found that the stay of proceedings under section 69.3 of the BIA applied to the Applicants' application under section 36 of the Act such that the Board would not be able to exercise its powers under section 36 of the Act and the exercise of those powers was a necessary step before the Board could consider directing the Province to pay the Applicants.

The Panel also considered the issue of statutory paramountcy. In particular, the Panel considered section 36(5) of the Act which allows the Board to suspend or terminate a surface lease if the operator fails to pay compensation to a landowner. The Panel found that the operation of section 36(5) was in operational conflict with the BIA as it prevented a debtor's opportunity to generate income and would make rehabilitation of the bankrupt operator less likely. Therefore, the Panel held that the BIA as the federal statute prevailed under the doctrine of paramountcy which resulted in the stay under section 69.3 of the BIA prohibiting the Board from exercising its powers under section 36(5) of the Act. The Panel stated that while it was sympathetic to landowners, the Panel was bound to consider the current legislation and the Panel was compelled to accede to the stay of proceedings.

Implications

While section 36 of the Act provides a process for a landowner or lessor under a surface lease to pursue recovery of unpaid compensation under a surface lease from the Province, if an operator has made an assignment into bankruptcy, the landowner or lessor is prevented from recovering unpaid compensation that accrued prior to the bankruptcy from both the operator as well as the Province. This seems to be an unfortunate result for lessors that was likely not intended by the legislature. We also note that in Rodin v PetroGlobe Inc, 2015 ABSRB 737, the Board considered whether the lessor could recover unpaid compensation from the Province for compensation for 2014 that became due after the operator's assignment into bankruptcy. The Board concluded that the compensation constituted debts accruing after the effective date of bankruptcy and was therefore not a claim provable in bankruptcy. However, we note that in Rodin the operator's rights had already been terminated for unpaid compensation for 2013.

Therefore, while not completely clear, it appears that the key issue in determining whether a landowner or lessor is able to claim compensation is whether the Board has terminated the operator's rights under the surface leases. If the Board has terminated the operator's rights, landowners can seek compensation under section 36. However, the Board cannot terminate an operator's rights for unpaid compensation that has accrued prior to bankruptcy.

As the current economic climate and low commodity price environment continues, we expect there will be ongoing issues arising where the interplay between bankruptcy and insolvency legislation and the oil and gas industry becomes prevalent. For example, a decision is expected to be rendered soon dealing with the interaction between the Alberta Energy Regulator, the Orphan Well Fund, receiver-managers and bankruptcy trustees in Red Water Energy Corp.

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