In a recent Bennett Jones Update— Property Tax Priorities in Alberta Insolvency Proceedings: Current Uncertainty we discussed three recent decisions of the Court of Queen's Bench of Alberta that had addressed the question of the priority of municipal property taxes in insolvency proceedings. The appeal of one of those decisions, Royal Bank of Canada v Reid-Built Homes Ltd., 2018 ABQB 124 [Reid-Built], was heard by the Court of Appeal of Alberta earlier this month; the Court of Appeal reserved its decision. Another of those decisions was an Order granted by the Honourable Mr. Justice Yamauchi on June 20, 2017, in the Matter of the Receivership of Virginia Hills Oil Corp. and Dolomite Energy Inc. [Virginia Hills], where Justice Yamauchi ordered that:

"... pre-receivership linear tax claims of certain municipalities formed unsecured claims only against the debtors' property, did not constitute permitted encumbrances against that property upon the sale of the sale, and that the municipalities had no further claims or remedies as against those properties, the proceeds of sale of the same, or the purchaser."1

Certain municipalities appealed Justice Yamauchi's Order, arguing that linear property tax arrears constitute secured claims. That appeal was dismissed on February 12, 2019, as set out in the unanimous decision of Justices Bielby, Veldhuis and Strekaf in Northern Sunrise County v Virginia Hills Oil Corp., 2019 ABCA 651 [Virginia Hills CA].

The implications of the Court of Appeal's decision are considerably broader for the insolvency industry than the linear property tax appeal issue alone. The Court of Appeal also held that: (1) the fact that funds have been distributed by a receiver does not render moot an appeal of an Order authorizing the distribution;2 and (2) although there was support for the respondents' position that the municipalities' appeal was an abuse of process, the questions raised by the appeal were important for municipalities and receivers alike, and accordingly, in those exceptional circumstances, the Court of Appeal considered the merits of the municipalities' appeal.3

The Order Being Appealed

The appellants were municipalities through which a pipeline operated by the debtors, Virginia Hills Oil Corp and Dolomite Energy Inc., passed, upon which the debtors owed linear property tax arrears. The debtors were insolvent energy companies in receivership and bankruptcy. None of the appellant municipalities had advanced any claims as secured creditors in the receivership or the bankruptcy despite having been served with notice of the same, nor did they appear at the application before Justice Yamauchi on June 20, 2017, where the Order authorizing the court-appointed receiver, Alvarez & Marsal Canada Inc. (the Receiver) to distribute funds recovered by it (the Distribution Order) was granted. After the Distribution Order was granted, the Receiver distributed all recovered funds to the secured creditors of the debtors, such that no funds remained with the Receiver to pay the appellants' claims, even if it were determined that their claims ranked equal to or ahead of those of the secured creditors. One of the municipalities appealed the Distribution Order after the distributions were made, and the remaining municipalities were added as appellants by subsequent Order. As such, the municipalities' submissions at the Court of Appeal were the first time that they argued that their claims for linear property tax arrears were secured claims pursuant to section 348 of the Municipal Government Act, RSA 2000 c M-26 (MGA) and the Bankruptcy and Insolvency Act, RSC 1985 c B-3 (BIA).

The Respondents' Positions

The respondents to the appeal were the Receiver and a secured creditor of the debtors, Bank of Nova Scotia (BNS). They requested that the appeal be dismissed, as an abuse of process. They noted that: (1) the municipalities did not provide proofs of claim indicating the linear property tax arrears owed to them to be secured claims; (2) they did not attend the hearing that led to the Distribution Order, despite being given notice that the Receiver would be seeking an order declaring their claims to be unsecured; and (3) they did not seek a stay of the Distribution Order or notify the Receiver of their intention to appeal until after the Receiver distributed the funds in question. Further, as a result of the funds having been distributed, the Receiver and BNS argued that the appeal was moot. On the substantive point of the municipalities' appeal, the Receiver and BNS argued that the appeal should be dismissed because section 348(d)(i) of the MGA does not apply to linear property tax arrears, and that those claims would not have priority by virtue of sections 87 and 73(4) of the BIA.

The Appeal Was Not Moot

The Court of Appeal noted the three factors to be considered regarding mootness of the appeal were: (1) the presence of an adversarial context; (2) the concern for judicial resources; and (3) the awareness of the court's proper law-making function.4

The municipalities argued that the appeal was not moot because there was a live issue as to whether linear property tax arrears are secured claims, which is a question of public importance and precedential value, and that, the distributed funds could be traced to the secured creditors and could be recovered.5

The Court of Appeal distinguished two cases relied upon by the Receiver and BNS, respectively, with respect to whether the appeal of the Distribution Order was moot:

  1. Lucid RV Parks Inc. v Lucid Capital Fort McMurray Inc., 2012 ABCA 317 [Lucid], which involved bankruptcy proceedings of an RV Park. An Order directing all persons in receipt of certain rents pay those funds into court had been appealed. However, after the appeal was filed, the case management judge ordered the funds paid into court to be released to the trustee, who was authorized to pay the RV Park's operating expenses. That Order was not appealed, and the funds in court were released to the trustee and used to pay expenses. The Court of Appeal held that the appeal of the first Order was moot to the extent that the funds had been distributed, and noted that the second Order authorizing the distribution of the funds had not been appealed.
  2. Similarly, in Ernst & Young Inc. v Central Guaranty Trust Co., 2006 ABCA 337, 397 AR 225 [Central Guaranty], the Order authorizing distribution of funds had not been appealed.

By contrast, in Virginia Hills, the Distribution Order itself has been appealed.

The Court of Appeal relied upon the decision of the British Columbia Court of Appeal in Bank of Montreal v Peri Formwork Systems Inc., 2012 BCCA 252 [Peri Formwork] at para 35, where that court recognized in obiter that funds paid out by a receiver to a bank "could, if it became necessary, be traced into the Bank's hands or the Bank could be declared a constructive trustee of the funds, assuming the conditions for such remedies are met". On that basis, the Alberta Court of Appeal held that the fact that monies were paid to secured creditors pursuant to the Distribution Order (which the municipalities had not applied to stay) did not preclude it from being reviewed on appeal. The Court of Appeal held that "There may be circumstances where recovery of monies distributed by a Receiver pursuant to a court order may not be appropriate or practicable. However, there is nothing on this record that would indicate that is the case here." As such, the distribution of the funds did not render the appeal moot.

Abuse of Process

The Court of Appeal found that there was support for the respondents' position that the appeal was an abuse of process:

Taking a position on appeal that is contrary to the proof of claim filed without participating in the hearing can be extremely problematic in the insolvency context where certainty, speed and efficiency are necessary to maximize recovery for everyone. We are concerned with the municipalities' failure to file proofs of claims in the receivership/bankruptcy proceeding indicating they were taking the position they had a secured claim. We are also troubled by their failure to attend or advance a position at the hearing opposing the Receiver's position, of which they had clear notice. The explanation for their failure to take these steps is unsatisfactory.

The Court of Appeal noted its earlier decision in Boyd v JBS Foods Canada Inc., 2015 ABCA 120, where the Court of Appeal found no support for a rule that parties' quiescence in the court of first instance bars an appeal, although in that case the issue raised on appeal had been advanced below by another party. The Court of Appeal also noted that costs consequences could follow. However, where the Court of Appeal was persuaded that the questions raised by the appeal were important for municipalities and receivers alike, it decided, in those exceptional circumstances, to consider the merits of the municipalities' appeal.

The Substantive Issue: Linear Property Tax Arrears Are Unsecured Claims

As is set out in our earlier Bennett Jones Update on this matter, section 348 of the MGA grants municipalities the statutory authority to recovery municipal taxes, and pursuant to subsection 348(d)(i), the MGA creates a special lien "on land and any improvements to the land" in favour of taxes due to a municipality. The municipalities argued that this provision applied to linear property taxes, whereas the Receiver argued, inter alia, that subsection 348(d)(i) was too ambiguous to create a statutory lien in respect of linear property taxes because it is unclear whose or what land was caught by the special lien. The Court of Appeal noted that linear property taxes are imposed on an operator, not on the owner of linear property, and not on the owner of the land on which the linear property is situated, and that the operator and owner of linear property may not necessarily be the same party. Further, the Court of Appeal considered the context of the MGA taxation scheme as a whole, noting that different remedies were provided under Division 8 of the MGA, which is headed "Recovery of Taxes Related to Land", as compared to Division 9, which was headed "Recovery of Taxes not Related to Land". The Court of Appeal held that when subsection 348(d)(i) was read in its grammatical and ordinary sense and in harmony with the scheme of the MGA, its reference to "property tax" does not include linear property tax arrears, and that the provision, therefore, did not create a special lien "on land and any improvements to land" with respect to those arrears. As such, the Court of Appeal determined that linear property tax arrears did not constitute secured claims, and the appeal was dismissed.

The Court of Appeal's decision clarifies the priority of linear property taxes, and that where a distribution order has been appealed, the distribution of funds in accordance with such an order does not render the appeal moot.

This article is the second in a series; we will address the Court of Appeal's decision in Reid-Built once it is issued.


1 Court of Queen's Bench of Alberta Court File No. 1701-02184: The Bank of Nova Scotia and Alberta Treasury Branches v Virginia Hills Oil Corp and Dolomite Energy Inc. Order of the Honourable Mr. Justice K.D. Yamauchi June 20, 2017, para 3.

Northern Sunrise County v Virginia Hills Oil Corp, 2019 ABCA 61, para 23 [Virginia Hills CA]

Ibid, para 32

Ibid, para 18, citing Borowsky v Canada (Attorney General), [1989] 1 SCR 342 at para 31-42; Graff v Alberta (Energy and Utilities Board) 2007 ABCA 363 at para 4.

Ibid, para 19

Ibid, para 22

Ibid, para 31

Ibid, para 39

Ibid, para 46

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.