A recent application within the SemCAMS ULC (SemCAMS) Companies' Creditors Arrangements Act (Canada) (CCAA) proceeding considered a claim for set-off by Trilogy Energy LP (Trilogy) against SemCAMS.1
SemCAMS was the operator of four natural gas processing plants and gathering lines in Alberta (each, a "Facility" and collectively, the "Facilities"). Most of the Facilities were jointly-owned, with SemCAMS being an owner and the operator of each of the Facilities pursuant to a number of Construction, Ownership and Operation Agreements (CO&Os). As operator, SemCAMS maintained the facilities, gathered and processed natural gas on behalf of its co-owners and collected funds in respect of capital fees and operating expenses on behalf of the joint account for each Facility. For each Facility, the respective joint owners were each entitled to a share of the Facility's throughput capacity, with excess capacity being allocated first to the Facility's respective joint owners and second to third parties on a fee for processing basis.
Trilogy was an oil and natural gas producer with production near the Facilities. Trilogy and SemCAMS were parties to three types of arrangements in relation to the Facilities:
- Pursuant to an Inlet Purchase Agreement, Trilogy sold raw natural gas to SemCAMS in its own corporate capacity as buyer, which gas SemCAMS then processed and sold on its own behalf. The Inlet Purchase Agreement expressly provided for netting of Trilogy's debts against SemCAMS' debts to Trilogy. SemCAMS owed Trilogy approximately $4.1 million under the Inlet Purchase Agreement.
- Pursuant to a number of Gas Processing Agreements, SemCAMS as operator on behalf of the joint owners (under 24 separate CO&Os) gathered and processed raw natural gas for Trilogy as a third party user of excess capacity.
- Pursuant to three other Gas Processing Agreements, SemCAMS as sole owner or lessee gathered and processed raw natural gas for Trilogy.
The issue before the Court was whether Trilogy had a right, based on contractual, legal or equitable set-off, to set-off amounts owed to it by SemCAMS under the Inlet Purchase Agreement against amounts it owed to SemCAMS (as operator) under the Gas Processing Agreements. SemCAMS conceded that Trilogy was entitled to set-off its debts under the latter of the three arrangements against SemCAMS' debts to Trilogy under the Inlet Purchase Agreement. Madam Justice Romaine rejected Trilogy's claim for set-off with respect to the balance of the claim (i.e. where SemCAMS was operator on behalf of the joint owners).
The Court dealt with whether the CO&Os gave rise to a trust relationship (with SemCAMS, in its capacity as operator, as trustee, and the joint owners as beneficiaries). Madam Justice Romaine held that the CO&Os that contained express trust conditions created a trust and placed SemCAMS as operator in a fiduciary position.2 The Court's ruling regarding the CO&Os without express trust language did not go so far as to "determine with finality" whether those CO&Os created a trust relationship "since.they all create a relationship in which the funds collected by the Operator are collected for the Joint Account on behalf of and for the benefit of the Joint Owners of the Facility".3 The Court later stated that "if SemCAMS contracting as Operator was not acting as a trustee for the Joint Owners under the CO&O Agreements and the Gas Processing Agreements, it was at a minimum acting as administrator of an account set up for a special purpose".4 The Court, however, did not explain the relevance of "collecting funds on behalf of and for the benefit of other parties" and "acting as administrator of an account for special purposes" if the party doing so is not a trustee.
The Court then dealt with Trilogy's claim under contractual, legal and equitable set off. Contractual set-off requires an express or implied agreement between the parties that provides for a right of set-off. While the Inlet Purchase Agreement expressly provided for netting of payments between Trilogy and SemCAMS under other agreements, Madam Justice Romaine reasoned that the provision did not extend to other agreements where SemCAMS was contracting in its capacity as operator (and, therefore, on behalf of its fellow joint owners). Interestingly, Justice Romaine commented that:
[f]or Trilogy to be successful on its argument that the set-off provision in the Inlet Purchase Agreement extends to the Gas Processing Agreements and the Trilogy CO&O Agreements, it would have to establish that the set-off language was broad enough to cover agreements in which SemCAMS was contracting as Operator, or, at least, that sufficient ambiguity exists in the contract to make evidence of the surrounding circumstances or the intention of the parties a relevant consideration.5
Legal set-off requires liquidated debts that are mutual cross obligations between the parties, with mutual cross obligations meaning cross-claims between the same parties involving the same right.6 Madam Justice Romaine again rejected Trilogy's argument based on the distinction between SemCAMS as operator (as under the CO&Os and Gas Processing Agreements) versus SemCAMS in its own right (as under the Inlet Purchase Agreement). The Court reasoned that this resulted in the debts at issue being between different parties and involving different rights.7
In order to establish a claim under equitable set-off, five principles are relevant: (i) the party relying on a set-off must show some equitable ground for being protected against its adversary's demands; (ii) the equitable ground must go to the very root of the plaintiff's claim; (iii) a cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross claim; (iv) the plaintiff's claim and the cross-claim need not arise out of the same contract; and (v) unliquidated claims are on the same footing as liquidated claims.8 Here, Madam Justice Romaine reasoned that there was no close connection between the claims, as the only connection between the claims was that the agreements related to gathering and processing of natural gas and had a common operator. The claims, however, concerned 20 different facilities governed by 29 separate contracts entered into over the course of 10 years, with the Inlet Purchase Agreement being particularly unique from the CO&Os and the Gas Processing Agreements.9
Trilogy also sought to particularize its claim for legal and equitable set-off as against amounts received under the Gas Processing Agreements by SemCAMS for its own benefit (i.e. in its capacity as joint owner, rather than operator). Justice Romaine also rejected this argument, relying primarily on the complexity of determining the amounts that were actually payable to SemCAMS in its own right as joint owner, especially in light of annual equalization adjustments that SemCAMS was required to pay (or collect) under the CO&Os to (or from) the respective joint owners in order to correct monthly payments once actual throughput and gas composition at the respective Facilities was known.10 The Court further reasoned that "[s]uch a result would allow creditors to pursue Operators for debts owed by Joint Owners, which would materially complicate the operation of the Joint Account."11