Operator’s Liens and the PPSA Priority Regime

Joint venture partners commonly enter into operating agreements which grant operators a security interest, referred to as an operator’s lien.  Operator’s liens are, for the most part, consensual and contractual security interests subject to the provisions of the Personal Property Security Act, RSA 2000, c P-7 (the “PPSA”) and the priority regime set out therein.

A recent example of the interplay between an operator’s lien and a prior registered general security interest is set out in Cansearch Resources Ltd. v Regent Resources Ltd., 2017 ABQB 535.  In Cansearch Resources the Alberta Court of Queen’s Bench considered the priority of a joint venture partner’s, Cansearch Resources Ltd.’s (“Cansearch”), unregistered operator’s lien vis-a-vie Alberta Treasury Branches’ prior registered General Security Agreement (the “GSA”), with respect to proceeds derived from the sale of Regent Resources Ltd.’s (“Regent”) 29.15% interest in the “Functional Units” in a jointly owned Joffre Gas Battery and Compression Facility (the “Joffre Facility”).  The operation of the Joffre Facility was governed by the Operating Agreement between Cansearch and Regent, which incorporated the 1999 Petroleum Joint Venture Association Operating Procedure.  The 1999 Petroleum Joint Venture Association Operating Procedure granted Cansearch an operator’s lien against Regent’s interests in the Joffre Facility as security for any unpaid expenses incurred by Cansearch in its capacity as operator and for the joint account.  In the end, the Court held that the prior registered General Security Agreement had priority over the unregistered operator’s lien.

In arriving at its decision, the Court in Cansearch Resources sets out certain key principles concerning the priority of an operator’s lien under both the PPSA and the Possessory Liens Act, RSA 2000, c P-19 (the “PLA”).  These key principles fall in line with previous decisions of the Court, including  those in Blue Range Resource Corp. (Re), [1999] AJ No 1665 and Direct Energy Marketing Ltd. v Kalta Energy Corp., [2002] AJ No 463.  Generally, operator’s liens that arise under an agreement are consensual security interests that are subject to the framework and priority system set out in PPSA. Furthermore, contractual liens, such as operator’s liens, are not afforded priority under section 32 of the PPSA.  Instead, operator’s liens are subject to the general priority system set out under section 35 of the PPSA which focuses on the timing of perfection.  Perfection may be by registration (section 25 of the PPSA) or possession (section 24 of the PPSA), which requires that the property in question be held as collateral.

While the PLA may allow an operator to claim priority over a secured creditor with a pre-existing registration, such priority will be subject to substantial evidentiary scrutiny and, more importantly, will be significantly limited in scope and magnitude.  Specifically, possessory liens under the PLA are limited since: (i) they only relate to and secure interests against chattel(s); and, (ii) they do not secure general debts as they only cover specific sums of money or services rendered to improve specific chattel(s).

It is both possible and advisable for operators to perfect their operator’s lien by registering such security interests in accordance with the PPSA.  However, this is not common practice. As a result, operators remain unperfected secured creditors. Additionally, in many situations there are pre-existing registrations made by operational lenders or other secured parties.  As a result, in the event an operator does perfect their security interests in an operator’s lien, they will likely be in a subordinate priority position to any prior registered secured creditors.  While each situation is different, prudent operators may wish to consider, in addition to filing registrations in the PPSA, seeking collateral security such as an unconditional letter of credit from their joint venture partner’s financial institution or some form of an intercreditor agreement with any prior registered secured creditors, as a way of reducing potential credit exposure to their contractual counterparties.

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