National Bank of Canada et al. v. Merit Energy Ltd. et al., (2001) 294 A.R. 15 (QB)

• Judge: LoVecchio, J.
• Court: Court of Queen''s Bench of Alberta (Canada)
• Case Date: Monday April 30, 2001
• Citations: (2001), 294 A.R. 15 (QB);2001 ABQB 583

Nat. Bk. v. Merit Energy Ltd. (2001), 294 A.R. 15 (QB)

MLB headnote and full text

Temp. Cite: [2001] A.R. TBEd. JL.072

National Bank of Canada, Bank One, NA and Bank One, Canada (plaintiffs) v. Merit Energy Ltd. (defendant)

And In The Matter Of the Bankruptcy of Merit Energy Ltd.

(Action No. 0001-04994; Bankruptcy No. 073154; 2001 ABQB 583)

Indexed As: National Bank of Canada et al. v. Merit Energy Ltd. et al.

Alberta Court of Queen's Bench

Judicial District of Calgary

LoVecchio, J.

July 3, 2001.

Summary:

Merit Energy Ltd. was placed in receivership. The trustee sought a determination as to the right of three groups (the flow-through shareholders, the underwriters, and the directors and officers) to be recognized as ordinary creditors of Merit and to be included in the distribution of its assets. A similar claim by PricewaterhouseCoopers (PWC), Merit's auditor at the material times, was not addressed by the Trustee's application, but PWC participated and made submissions similar to those of the underwriters, directors and officers.

The Alberta Court of Queen's Bench held that: (1) the claims of the flow-through shareholders were subordinate to the claims of Merit's unsecured creditors as they were in substance shareholder claims for the return of an equity investment; and (2) the claims of the underwriters, the directors and officers, and PWC were not subordinate to the claims of Merit's unsecured creditors as they were in substance creditors' claims which were not too contingent to constitute provable claims.

Bankruptcy - Topic 3603

Creditors - General - What constitutes a creditor - Merit Energy Ltd. was placed in receivership - The trustee sought a determination as to the right of three groups (the flow-through shareholders, the underwriters, and the directors and officers) to be recognized as ordinary creditors of Merit and to be included in the distribution of its assets - A similar claim was advanced by Merit's auditor at the material times (PWC) - The Alberta Court of Queen's Bench held that: (1) the claims of the flow-through shareholders were subordinate to the claims of Merit's unsecured creditors as they were in substance shareholder claims for the return of an equity investment; and (2) the claims of the underwriters, the directors and officers, and PWC were not subordinate to the claims of Merit's unsecured creditors as they were in substance creditors' claims which were not too contingent to constitute provable claims.

Bankruptcy - Topic 3603

Creditors - General - What constitutes a creditor - [See Bankruptcy - Topic 6041 ].

Bankruptcy - Topic 3626

Creditors - General - Claims - General - What constitutes a provable claim - Merit Energy Ltd. was placed in receivership - The trustee sought a determination as to the right of three groups (the flow-through shareholders, the underwriters, and the directors and officers) to be recognized as ordinary creditors of Merit - The shareholders had launched actions against the underwriters and the directors and officers - The claims of the underwriters and the directors and officers were based on indemnity agreements signed with Merit - An argument advanced by the trustee was that these claims were too contingent to constitute a provable claim - The trustee submitted that there was no evidence as to the potential success of the shareholders' claims against the other two groups, nor was it possible to determine if any potential liability would qualify for indemnification from Merit - The Alberta Court of Queen's Bench held that the claims were provable - See paragraphs 73 to 78.

Bankruptcy - Topic 3641

Creditors - General - Priorities - General - [See first Bankruptcy - Topic 3603 ].

Bankruptcy - Topic 6041

Dividends - Entitlement - General - Merit Energy Ltd. was placed in receivership - The trustee sought a determination as to the right of three groups (the flow-through shareholders, the underwriters, and the directors and officers) to be recognized as ordinary creditors of Merit and to be included in the distribution of its assets - The flow-through shareholders argued that they could participate as creditors because the declared but unpaid dividends of Merit should be considered as enforceable debts -The Alberta Court of Queen's Bench rejected the argument - The flow-through shareholders' claims, regardless of the basis chosen to support them, were in substance claims for the return of their equity investment and accordingly could not rank with Merit's unsecured creditors -See paragraphs 36, 37 and 53 to 55.

Company Law - Topic 2165

Shareholders - Shareholders' rights - Respecting company property - [See first Bankruptcy - Topic 3603 ].

Cases Noticed:

Blue Range Resource Corp., Re (2000), 259 A.R. 30; 15 C.B.R.(4th) 169 (Q.B.), consd. [para. 7, footnote 2].

Canada Deposit Insurance Corp. v. Canadian Commercial Bank (No. 3) (1992), 143 N.R. 321; 131 A.R. 321; 25 W.A.C. 321; 97 D.L.R.(4th) 385 (S.C.C.), refd to. [para. 27, footnote 5].

Royal Bank of Canada et al. v. Central Capital Corp. (1996), 88 O.A.C. 161; 27 O.R.(3d) 494 (C.A.), refd to. [para. 36, footnote 6].

Central Capital Corp., Re - see Royal Bank of Canada et al. v. Central Capital Corp.

G.M.D. Vending Co. (Bankrupt), Re (1994), 45 B.C.A.C. 231; 72 W.A.C. 231; 94 B.C.L.R.(2d) 130 (C.A.), refd to. [para. 37, footnote 7].

Ontario Securities Commission v. Consortium Construction Inc. (1993), 1 C.C.L.S. 117 (Ont. Gen. Div.), refd to. [para. 38, footnote 8].

Gardner v. Newton (1916), 29 D.L.R. 276 (Man. K.B.), refd to. [para. 41, footnote 10].

Confederation Treasury Services Ltd. (Bankrupt), Re (1997), 96 O.A.C. 75; 43 C.B.R.(3d) 4 (C.A.), refd to. [para. 41, footnote 11].

Claude Resources Inc. (Bankrupt), Re (1993), 115 Sask.R. 35; 22 C.B.R.(3d) 56 (Q.B. Bktcy.), refd to. [para. 41, footnote 12].

Claude Resources Inc. (Trustee of) v. Dutton - see Claude Resources Inc. (Bankrupt), Re.

Canadian Triton International Ltd. (Bankrupt), Re (1997), 46 O.T.C. 83; 49 C.B.R.(3d) 192 (Gen. Div. Bktcy.), refd to. [para. 41, footnote 12].

Wiebe, Re (1995), 30 C.B.R.(3d) 109 (Ont. Gen. Div. Bktcy.), refd to. [para. 41, footnote 12].

United States v. Noland (1996), 517 U.S. 535, refd to. [para. 67, footnote 16].

Negus v. Oakley's General Contracting et al. (1996), 152 N.S.R.(2d) 172; 442 A.P.R. 172; 40 C.B.R.(3d) 270 (S.C.), refd to. [para. 76, footnote 19].

Froment, Re; Alberta Lumber Co. v. Department of Agriculture, [1925] 2 W.W.R. 415 (Alta. T.D.), refd to. [para. 78, footnote 20].

Authors and Works Noticed:

Jog, V.M. et al., Flow Through Shares: Premium-Sharing and Trust-Effectiveness (1996), 44 Can. Tax J., p. 1017 [para. 53, footnote 14].

Counsel:

Frank Dearlove and Chris Simard (Bennett Jones, LLP), for Arthur Andersen Inc.;

William E. McNally (McNally and Cuming) and David A. Klein (Klein Lyons), for Larry Delf, Representative Flow-Through Shareholder;

Jim G. Shea (Shea Nerland Calnan), for the Flow-Through Shareholders who are not members of the Representative Class;

Norman D. Anderson, agent for Magellan Aerospace Ltd. and Canada Dominion Resources Limited Partnership III;

Matthew R. Lindsay and Phil J. Schreiber (Fraser Milner Casgrain), for the Underwriters except First Energy Capital Corp.;

Tristram Mallet (Osler, Hoskin & Harcourt), for First Energy Capital Corp.;

Douglas G. Stokes (Rooney Prentice), for certain Directors;

D. Detomasi (Scott Hall), for Barry Stobo;

Jeff Sharpe (Burnett Duckworth & Palmer), for Duncan Chisholm and Laurence Waller;

Graham McLennan (McLennan Ross), for PricewaterhouseCoopers LLP;

Steven H. Leitl (Macleod Dixon), for National Bank of Canada, Bank One, NA and Bank One, Canada.

This application was heard on April 30, 2001, by LoVecchio, J., of the Alberta Court of Queen's Bench, Judicial District of Calgary, who delivered the following decision on July 3, 2001.