Replacement Of Insolvent Operators: Bank Of Montreal v. Bumper Development Corporation

When will the replacement of operator provisions in the 2007 CAPL Operating Procedure ("Paragraph 2.02") be enforced against a party in receivership in the context of a court approved sale of the underlying oil and gas properties? This question was recently considered by Justice Macleod in Bank of Montreal v. Bumper Development Corporation Ltd., 2016 ABQB 363 (CanLII).

In this case, what was specifically at issue was whether Eagle Energy Inc. ("Eagle") could rely on Paragraph 2.02 to take over operatorship from Bumper Development Corporation Ltd. ("Bumper") (the party in receivership). Bumper had been placed in receivership by Bank of Montreal, which applied for and was granted a receivership order pursuant to s. 243 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3. As is common in most receivership orders, upon the appointment of the Receiver (Alvarez & Marsal Canada Inc.), Justice Macleod also ordered that there be a stay of proceedings.

At the time the receivership order was granted, Eagle and Bumper were parties to a Joint Operating Agreement ("JOA") that pertained to several wells and was governed by the 2007 CAPL Operating Procedure which reads in part at Paragraph 2.02:

2.02 Replacement of Operator

Immediate Replacement - The Parties acknowledge that the Operator's ability to fulfill its duties and obligations for the Parties' benefit is largely dependent on its ongoing financial viability and that the operator may not seek relief at law, in equity or under the Regulations to prevent its replacement in accordance with this Subclause. The Operator will be replaced immediately after service of notice from Non-Operator to the other Parties to such effect if: the Operator becomes bankrupt or insolvent, commits or suffers any act of bankruptcy or insolvency, is placed in receivership or seeks debtor relief protection under applicable legislation (including the Bankruptcy and Insolvency Act (Canada) and the Companies' Creditors Arrangement Act (Canada)), and it will be deemed to be insolvent for this purpose if it is unable to pay its debts as they fall due in the usual course of business or if it does not have sufficient assets to satisfy its cumulative liabilities in full... Upon learning of the receivership, Eagle notified the Receiver of its intention to take over operatorship. The Receiver responded that, because of the stay of proceedings, Eagle could not terminate Bumper's operatorship and, as a result, Bumper remained as...