Written By Kelsey Meyer, Keely Cameron, Denise Bright and Sarah Aaron

In late May, the Supreme Court of Canada (the SCC) denied an application for leave to appeal a decision of the Court of Appeal of Alberta (the ABCA), which, in turn, had denied leave to appeal of the decision of the Court of King’s Bench of Alberta (the ABKB) in Re Mantle Materials Group, Ltd, 2023 ABKB 488 (Mantle KB). The decision in Mantle KB held that the interests of secured creditors are subordinate to environmental obligations pursuant to the Environmental Protection and Enhancement Act (EPEA), thus confirming that the priority of environmental obligations determined by the SCC in Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 (Redwater) applies beyond the oil and gas industry.

Background

Mantle Materials Group, Ltd. (Mantle) had operated gravel and aggregate pits on both public and private lands in Alberta since 2021, some of which were subject to Environmental Protection Orders (EPOs) issued by Alberta Environment and Protected Areas (AEPA), the provincial regulator responsible for environmental issues. EPOs issued by AEPA in respect of end-of-life reclamation are similar in nature to Abandonment and Reclamation Orders (AROs) issued by the Alberta Energy Regulator (AER) in relation to the oil and gas industry, and they have, generally, the same legal effect in terms of requiring compliance with environmental cleanup obligations.

Mantle entered a loan transaction with Travelers Capital Corp. (Travelers) in which Travelers loaned Mantle $1.7 million for the acquisition of equipment for use in Mantle’s operations. Mantle granted Travelers a purchase-money security interest (PMSI) over the equipment, thus giving Travelers a first-priority security interest in the equipment.

Mantle experienced operational problems and was burdened with excessive debt inherited from the gravel assets and incurred in the period following the acquisition of the gravel-producing properties. Mantle’s difficulties were compounded by the significant reclamation obligations it was required to complete to satisfy the EPOs. On July 14, 2023, Mantle filed a notice of intention to make a proposal pursuant to Division 1 of Part III of the Bankruptcy and Insolvency Act, R.S.C. 1985, c B-3, as amended (the BIA). In the context of the proposal proceedings, Justice Feasby of the ABKB approved the creation and priority ranking of various restructuring charges, including an Administration Charge, a Directors and Officers Charge, and an Interim Lending Facility Charge (the Restructuring Charges).

Travelers argued that the Restructuring Charges should not have taken priority over its security interest in the equipment, and that Travelers should be able to be paid out or realize on its security without delay. Mantle, supported by AEPA, submitted that the Restructuring Charges were necessary to put the proposal into effect and that the main purpose of the proposal was to complete the reclamation work to satisfy the EPOs. Mantle submitted that Travelers should not be permitted to realize on its security prior to the completion of the reclamation work because if it were allowed to do so, that would jeopardize Mantle’s ability to complete the reclamation work and thereby jeopardize its ability to make a proposal to its creditors.

Justice Feasby granted an Order to allow work on the pending proposal, including reclamation work, to get underway while preserving Travelers’ position pending his reasons (the Feasby Order).

The Decision of The Court of King’s Bench of Alberta

Justice Feasby issued his written reasons in Mantle on August 28, 2023. He first considered the principles of vertical and horizontal stare decisis. The principle of vertical stare decisis requires that a lower court is bound to follow the ratio decidendi, or statement of law, of decisions of higher courts.

The principle of horizonal stare decisis requires that judges of the same Court pay heed to each other’s decisions. While not strictly binding, as articulated by Kasirer J. in R v Sullivan, 2022 SCC 19, a Court should only depart from horizontal stare decisis if any of the following are met:

1. the rationale of an earlier decision has been undermined by subsequent appellate decisions;
2. the earlier decision was reached per incuriam (“through carelessness” or “by inadvertence”); or
3. the earlier decision was not fully considered, (e.g., taken in exigent circumstances).

On this basis, he found that vertical stare decisis bound him to Redwater and Manitok Energy Inc (Re), 2022 ABCA 117 (Manitok), and that horizontal stare decisis bound him to Orphan Well Association v Trident Exploration Corp, 2022 ABKB 839 (Trident). Justice Feasby reviewed these cases for the statements of law, as follows:

• In Redwater, the SCC held that the Receiver of an insolvent oil and gas company had to use the funds in the estate to address the company's environmental obligations before making payments to creditors.
• In Manitok, the ABCA found all assets of an oil and gas company were to be treated as a single pool to be used to address regulatory obligations, including the sale proceeds of the valuable assets, rather than two separate pools of “valuable assets” and “assets burdened by environmental obligations”.
• In Trident, as was the case in Manitok, the ABKB concluded that because Trident Exploration Corp. had one business, which was oil and gas exploration, all assets related to the business had to be used to address those environmental obligations, despite some of those assets being “non-licensed assets such as real estate and equipment”.

Justice Feasby held that none of the exceptions to horizontal stare decisis applied to Trident, as the Court in Trident was consistent with Redwater and Manitok, though the application of the law broke new ground. Justice Feasby found that there was no sensible distinction between the equipment and real estate in Trident and the equipment in the present case. However, he did note that he was not commenting on how, in theory, a line could be drawn between related and unrelated assets, or even if a line should be drawn. Citing the ABCA in Manitok, this question “[could] be left for another day.” Ultimately, Justice Feasby held that the Restructuring Charges had priority over Travelers’ security interest in the equipment.

First Leave to Appeal to The Court of Appeal of Alberta

Travelers applied to the ABCA for a declaration that leave was not required to appeal the Feasby Order pursuant to s. 193(c) of the BIA, or alternatively, applied for permission to appeal the same order. Mantle, with the support of APEA, opposed the application.

In Mantle Materials Group, Ltd v Travelers Capital Corp, 2023 ABCA 302, Justice de Wit held that leave to appeal was required. Citing Manitok Energy Inc (Re), 2022 ABCA 260, an appeal under s. 193(c) of the BIA is not available where the order is procedural in nature (i.e., where the order does not result in a gain or loss to an interested party). As Travelers did not provide evidence of the value of the equipment at issue or that its recovery is in jeopardy, Justice de Wit held that the order was procedural in nature, and thus s. 193(c) did not apply to give Travelers a right to appeal.

Justice de Wit then considered the test for leave to appeal pursuant to s. 193(e) of the BIA, as articulated in Athabasca Workforce Solutions Inc v Greenfire Oil & Gas Ltd, 2021 ABCA 66 (at paras 17-18):

1. whether the point on appeal is of significance to the practice;
2. whether the point raised is of significance to the action itself;
3. whether the appeal is prima facie meritorious or frivolous; and
4. whether the appeal will unduly hinder the progress of the action.

Justice de Wit found that the test essentially requires that the proposed appeal be on a point of significance for which there is at least an arguable case. Citing Redwater and Manitok, Justice de Wit found that this was where the application failed, and dismissed the application for leave to appeal.

Second Leave to Appeal to The Court of Appeal of Alberta

In a subsequent leave to appeal to the ABCA, Travelers sought permission to appeal Justice de Wit’s decision that it did not have an appeal as of right pursuant to section 193(c) of the BIA.

In Mantle Materials Group, Ltd v Travelers Capital Corp, 2023 ABCA 339, Justice de Wit outlined, as articulated in Settlement Lenders Inc v Blicharz, 2016 ABCA 109 at para 1, that permission to appeal a decision of a single justice can be granted if the applicant establishes that there is “(a) a question of general importance; (b) a possible error of law; (c) an unreasonable exercise of discretion; or (d) a misapprehension of important facts.” The fundamental hurdle is to show it is in the interests of justice to have a panel review of the single judge’s decision.

Travelers asserted that Justice de Wit erred in applying earlier decisions which held that s. 193(c) of the BIA is not simply satisfied where the value of the subject property exceeds $10,000; the section does not apply to procedural orders; and the section does not apply to orders where loss is speculative.

Justice de Wit disagreed, finding that the Feasby Order was properly characterized as a procedural order, the loss of more than $10,000 was speculative, and Travelers failed to provide evidence from which loss could be calculated. He confirmed that s. 193(c) of the BIA performs a gatekeeping function, and permitting appeals as of right based on speculative loss would undermine that function and the general purpose of the BIA.

Justice de Wit denied the leave to appeal, holding that Travelers had not persuaded him of a possible error of law or misapprehension of the facts, such that it could not show that the proposed appeal would (1) involve a question of general importance; (2) have a reasonable chance of success; or (3) be in the interests of justice.

Leave to Appeal to The Supreme Court of Canada

On December 20, 2023, Travelers filed an application for leave to appeal the ABCA decisions to the SCC. On May 30, 2024, the SCC dismissed the application for leave to appeal.  As is the practice of the SCC, no reasons were given for the decision.

Future Implications and Risks

Three major implications result from the Mantle decisions. First, Redwater is being applied to environmental obligations outside of the oil and gas industry. Second, depending on how a debtor's business is characterized, all of its assets may be required to be used to satisfy environmental and regulatory obligations. Third, Alberta Courts have declined to consider the question of whether a line could be drawn between related and unrelated assets or even if a line should be drawn, continuing to leave a gap in the application of Redwater and the subsequent related Alberta cases.

Bennett Jones LLP has extensive and market-leading experience in insolvency, restructuring, finance, lending, and environmental regulation matters. If you have any questions about the effect of these decisions on your business, please contact the authors.

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