Replacing An Insolvent Operator – Court Upholds Capl 'Immediate Replacement' Right

In Bank of Montreal v Bumper Development Corporation Ltd, 2016 ABQB 363 ("Bumper"), the Alberta Court of Queen's Bench enforced the "immediate replacement" provision in the Canadian Association of Petroleum Landmen ("CAPL") 2007 Operating Procedure ("CAPL 2007") for an insolvent operator. This provision provides for immediate replacement of an operator upon the occurrence of certain specified events, including the commencement of insolvency proceedings. Notably, the Court enforced this right notwithstanding the fact that the non-operating party did not act immediately to enforce its rights and prevented conveyance of operatorship with the sale of the operator's assets. Further, the Court acknowledged it would have lifted the stay of proceedings against the insolvent operator to allow the non-operating partner to replace the insolvent operator.

The decision in Bumper addresses a number of items that may be of interest to operators, creditors, working interest and facility partners, and other industry participants:

the importance of the wording of the "stay of proceedings" (the "Stay") provisions in a receivership order and its impact on the enforcement of contractual rights such as the "immediate replacement" right contemplated in CAPL 2007; establishing that the replacement of an insolvent operator under CAPL 2007 does not constitute the "enforcement of a right or remedy" for the purposes of a receivership order; illustrating prospective problems that receivers, monitors, debtors and/or secured creditors may face when attempting to convey operatorship along with the associated assets of an insolvent operator; and discussing differences in enforcement of contractual rights between the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the "BIA") and the Companies' Creditors Arrangement Act, RSC 1985, c C-36 (the "CCAA") as it relates to replacing an insolvent operator under these respective statutes. Background

Bumper focused on a dispute between Eagle Energy Inc. ("Eagle") and Forent Energy Ltd. ("Forent") regarding the right to operatorship held by Bumper Development Corporation Ltd. ("Bumper") with respect to certain oil and gas producing wells near Twinning, Alberta (the "Wells"). The Court considered whether Eagle could enforce the "immediate replacement" provision in its operating agreement with Bumper subsequent to Bumper being placed into receivership by its primary secured creditor, the Bank of Montreal ("BMO"). BMO successfully...