The Alberta Court of Queen's Bench recently reviewed the law regarding priority of operator’s liens and emphasized the heavy evidentiary burden to be satisfied by a creditor asserting a possessory lien in Cansearch Resources Ltd v Regent Resources Ltd, 2017 ABQB 535.

Cansearch’s Operator’s Lien and the Bank’s Security

Cansearch and Regent became partners in a jointly owned oil and gas facility in 2008. Regent was the operator pursuant to an operating agreement that incorporated the 1999 Petroleum Joint Venture Operating Procedure. The operating agreement conferred an operator's lien on Cansearch for any unpaid expenses regarding Regent's interest in the facility. Like many operators in Alberta, Cansearch never registered the operator's lien under the Personal Property Security Act, RSA 2000, c P-7 (PPSA).

In 2012, Regent obtained a mortgage from the Alberta Treasury Branches (ATB) and in exchange entered into a general security agreement with ATB that covered Regent's ownership interest in the facility. ATB registered its security agreement under the PPSA. Cansearch was already operating the facility when ATB registered its security. In 2015, Regent stopped paying its share of the facility's operating expenses and accumulated a debt of $91,000 owing to Cansearch. In December 2016, Regent was placed into receivership and in April 2017 Regent's ownership interest in the facility was sold to a third party. The Receiver holds the proceeds of sale in a trust.

On August 1, 2017, Cansearch applied to the Court, asserting that its operator’s lien gave it a first priority claim to the proceeds from the April 2017 sale of Regent's ownership interest in the facility, and seeking an order directing the Receiver to distribute to it those proceeds.

Cansearch's initial position was that it had an operator's lien that gave it a first priority claim as against Regent's estate. Although Cansearch conceded that its operator's lien was subject to the PPSA and subordinate to ATB's registered security interest, Campbell J. outlined the reasoning behind this conclusion.

Campbell J. held that Cansearch's operator's lien is a consensual and contractual lien, and therefore is governed by section 35 of the PPSA, which provides that the "first in time" rule applies; priority therefore depends on if and when the security interest was perfected through registration or possession of the collateral (at paras 41–42).

Since Cansearch did not register its operator's lien, the only way it could perfect its security was through possession, which in turn required evidence that the property was held as collateral. Campbell J. held that Cansearch had provided no evidence that it held the property as collateral and agreed that Cansearch's operator's lien was an unperfected security interest under section 35 of the PPSA and subordinate to ATB's security agreement (at paras 43–46).

Cansearch Fails to Establish a Possessory Lien and Remains Subordinate to Bank Security

Cansearch argued that in addition to its operator's lien, its operation of the facility gave rise to a possessory lien under the Possessory Liens Act, RSA 2000, c P-19 (PLA). Cansearch claimed entitlement to a lien based on the nexus between certain on-site equipment at the facility and its role as operator of that facility.

Campbell J. rejected Cansearch's nexus claim and found that it failed to meet its onus of proving it had a possessory lien that would entitle it to the proceeds from the sale of Regent's ownership interest in the facility in priority to other creditors (at para 71). She referred to sections 2, 5 and 6 of the PLA and found that a possessory lien "is intended to cover a specific chattel on which someone has expended a discernable amount of time, effort or money that has enhanced the specific chattel's value" (at para 53).

Ultimately, Campbell J. found that Cansearch provided insufficient evidence with respect to what specific chattel equipment its possessory lien applied, and on what ground (at paras 60–61). She noted that Cansearch had failed to recognize the important differences between a possessory lien and an operator's lien in several ways. First, possessory liens cover only chattels and Regent's ownership interest in the facility included both real and personal property. Cansearch could not claim a possessory lien over Regent's ownership interest without specifying the chattels covered by such a lien (at para 63). Cansearch also failed to provide sufficient evidence regarding, among other things: what equipment was situated at the facility at the time that Regent's debt arose, whether the debt arose from money or services expended on the equipment, and whether the equipment at the facility was a chattel or had become a fixture (at paras 64–65). Finally, Cansearch failed to provide adequate evidence in regard to the identity of the work done or money spent to enhance specific chattels (at para 68).

An Important Reminder for Operators

This case stands as yet another reminder to operators to ensure they take all of the steps required to perfect any security interest established under their operating agreement. While the operator’s lien provisions of typical operating agreements look good on paper, they are ineffective to maintain the operator's priority against other secured creditors unless they are registered under the PPSA. As Campbell J. noted, it is both possible and advisable to register an operator's lien under the PPSA. Prudent operators would be well-served to do so, particularly where the other participants in their operations are facing financial difficulty.