Canada: Priority Of Operator's And Possessory Liens And The Need To Register Or Prove Your Lien

Last Updated: November 13 2017
Article by Justin R. Lambert, Alexis E. Teasdale and Antonia Alisauskas

The Alberta Court of Queen's Bench recently reviewed the law regarding priority of operator's liens and emphasized the heavy evidentiary burden to be satisfied by a creditor asserting a possessory lien in Cansearch Resources Ltd v Regent Resources Ltd, 2017 ABQB 535.

Cansearch's Operator's Lien and the Bank's Security

Cansearch and Regent became partners in a jointly owned oil and gas facility in 2008. Regent was the operator pursuant to an operating agreement that incorporated the 1999 Petroleum Joint Venture Operating Procedure. The operating agreement conferred an operator's lien on Cansearch for any unpaid expenses regarding Regent's interest in the facility. Like many operators in Alberta, Cansearch never registered the operator's lien under the Personal Property Security Act, RSA 2000, c P-7 (PPSA).

In 2012, Regent obtained a mortgage from the Alberta Treasury Branches (ATB) and in exchange entered into a general security agreement with ATB that covered Regent's ownership interest in the facility. ATB registered its security agreement under the PPSA. Cansearch was already operating the facility when ATB registered its security. In 2015, Regent stopped paying its share of the facility's operating expenses and accumulated a debt of $91,000 owing to Cansearch. In December 2016, Regent was placed into receivership and in April 2017 Regent's ownership interest in the facility was sold to a third party. The Receiver holds the proceeds of sale in a trust.

Cansearch's Unregistered Operator's Lien is Subordinate to Bank Security

On August 1, 2017, Cansearch applied to the Court, asserting that its operator's lien gave it a first priority claim to the proceeds from the April 2017 sale of Regent's ownership interest in the facility, and seeking an order directing the Receiver to distribute to it those proceeds.

Cansearch's initial position was that it had an operator's lien that gave it a first priority claim as against Regent's estate. Although Cansearch conceded that its operator's lien was subject to the PPSA and subordinate to ATB's registered security interest, Campbell J. outlined the reasoning behind this conclusion.

Campbell J. held that Cansearch's operator's lien is a consensual and contractual lien, and therefore is governed by section 35 of the PPSA, which provides that the "first in time" rule applies; priority therefore depends on if and when the security interest was perfected through registration or possession of the collateral (at paras 41–42).

Since Cansearch did not register its operator's lien, the only way it could perfect its security was through possession, which in turn required evidence that the property was held as collateral. Campbell J. held that Cansearch had provided no evidence that it held the property as collateral and agreed that Cansearch's operator's lien was an unperfected security interest under section 35 of the PPSA and subordinate to ATB's security agreement (at paras 43–46).

Cansearch Fails to Establish a Possessory Lien and Remains Subordinate to Bank Security

Cansearch argued that in addition to its operator's lien, its operation of the facility gave rise to a possessory lien under the Possessory Liens Act, RSA 2000, c P-19 (PLA). Cansearch claimed entitlement to a lien based on the nexus between certain on-site equipment at the facility and its role as operator of that facility.

Campbell J. rejected Cansearch's nexus claim and found that it failed to meet its onus of proving it had a possessory lien that would entitle it to the proceeds from the sale of Regent's ownership interest in the facility in priority to other creditors (at para 71). She referred to sections 2, 5 and 6 of the PLA and found that a possessory lien "is intended to cover a specific chattel on which someone has expended a discernable amount of time, effort or money that has enhanced the specific chattel's value" (at para 53).

Ultimately, Campbell J. found that Cansearch provided insufficient evidence with respect to what specific chattel equipment its possessory lien applied, and on what ground (at paras 60–61). She noted that Cansearch had failed to recognize the important differences between a possessory lien and an operator's lien in several ways. First, possessory liens cover only chattels and Regent's ownership interest in the facility included both real and personal property. Cansearch could not claim a possessory lien over Regent's ownership interest without specifying the chattels covered by such a lien (at para 63). Cansearch also failed to provide sufficient evidence regarding, among other things: what equipment was situated at the facility at the time that Regent's debt arose, whether the debt arose from money or services expended on the equipment, and whether the equipment at the facility was a chattel or had become a fixture (at paras 64–65). Finally, Cansearch failed to provide adequate evidence in regard to the identity of the work done or money spent to enhance specific chattels (at para 68).

An Important Reminder for Operators

This case stands as yet another reminder to operators to ensure they take all of the steps required to perfect any security interest established under their operating agreement. While the operator's lien provisions of typical operating agreements look good on paper, they are ineffective to maintain the operator's priority against other secured creditors unless they are registered under the PPSA. As Campbell J. noted, it is both possible and advisable to register an operator's lien under the PPSA. Prudent operators would be well-served to do so, particularly where the other participants in their operations are facing financial difficulty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Justin R. Lambert
Alexis E. Teasdale
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions