Fallon Energy: garnished, the oil money was still Fallon's

On April 22, 2026, lawyers for two Saskatchewan rural municipalities, a secured lender, Fallon Energy Inc. and the three marketers that bought Fallon's heavy oil met, and the marketers said what they were holding in trust for January, February and March production: approximately $419,000. Two days later three emails went round. At 12:29 p.m. counsel for the Rural Municipality of Wilton No. 472 demanded the February and March money under the tax notices the municipalities had served in January. At 1:14 p.m. counsel for the lender, 3994856 Canada Inc., wrote on a with-prejudice basis demanding, among other things, that the marketers pay the February, March and April money to the municipalities. The third, at 2:00 p.m., was Fallon's counsel giving notice that the company had filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act, and demanding the funds. So swore the administrator of the Rural Municipality of Manitou Lake No. 442, per the Loy Affidavit, May 15, 2026, paras. 12–13, Ex. H.

Whether that money became the municipalities' when their notices were served, or was still Fallon's when the stay arrived, is the question Justice Michael J. Lema answered on June 11 in Fallon Energy Inc (Re), 2026 ABKB 443. It was still Fallon's: a notice under s. 317 of Saskatchewan's The Municipalities Act moves no ownership, and is "a garden-variety garnishment tool blocked by the para 69(1)(a) stay," per 2026 ABKB 443 (June 11, 2026), paras. 7, 23. Three weeks later, on July 2, Justice B. B. Johnston ended the proposal proceeding, appointed Grant Thornton Limited receiver on the lender's application with Fallon's conditional consent, and approved a reverse vesting order under which Fallon is to issue shares to the lender and its excluded assets and claims are to go to a creditor trust with the receiver as trustee, per the Consent Receivership Order, July 2, 2026, paras. 3–4 and the Reverse Vesting Order, July 2, 2026, paras. 5–6, 9, 21, Sched. B, s. 1.2.

A heavy-oil producer and its royalty holder

Fallon, an Alberta company with its registered office in Lloydminster, holds licences for 170 wells in the Greater Lloydminster area of Saskatchewan. At its peak it ran 50 producing wells making about 600 barrels a day; just before filing it ran two, at about 20 barrels a day, selling the oil to Altex Energy Ltd., Global Petroleum Marketing Inc. and Broadbill Energy Inc., per the Nutbrown Affidavit, May 13, 2026, paras. 4–7. Revenue fell to $7,439,609 in 2025 from $9,531,249 in 2024, with a 2025 loss of $2,138,396, per the Trustee's First Report, May 14, 2026, paras. 10, 14, which names Candace Nutbrown as sole director and shareholder.

Ms. Nutbrown, the chief executive, attributes the decline to low oil prices through 2025, vandalism, repairs the company could not afford, and an October 2025 contractor error that lost oil across several wells and flooded the sites; some permits had been revoked over unpaid property taxes. A sale process run by Sayers Energy Advisers drew several bids by December 11, 2025, none accepted "due to their lower than anticipated value," per the Nutbrown Affidavit, May 13, 2026, paras. 6, 10, 13, 19–20.

The lender, 399 in the filings and owed $4,280,000, bought 18% gross overriding royalties on Fallon's share of production from certain assets in November 2024 and April 2025, secured on Fallon's property on the asset lands, and from May to December 2025 bought its receivables monthly at 90% of invoices written on projected production. Fallon's account is that after the contractor error production fell well short of the projections, and that around December 22, 2025, when 399 had not prepared the reconciliation notice for November, Fallon prepared one itself and directed the marketers to pay it. 399 sued Fallon and the marketers, among others, on January 16, 2026; the marketers began holding the January-to-April receivables in trust with their counsel, MLT Aikins LLP; and Fallon has had no revenue since January, per the Nutbrown Affidavit, May 13, 2026, paras. 23, 33–45.

The notices to the oil buyers

Fallon owed approximately $480,630.97 in property taxes to four rural municipalities, $331,243.44 of it to Wilton and $97,301.31 to Manitou Lake, per the Nutbrown Affidavit, May 13, 2026, para. 26. Section 317 lets a municipality owed taxes on a well's resource production equipment require the buyers of its oil to pay the municipality, up to the arrears, what they owe the operator, per 2026 ABKB 443 (June 11, 2026), paras. 10–11. Manitou Lake served its notices on January 15, 2026, and Wilton's went out under letters dated January 22, per the Loy Affidavit, May 15, 2026, para. 4 and the Parton Affidavit, May 15, 2026, para. 10.

The municipalities' evidence is that 399 had acknowledged their priority before the filing. Manitou Lake's administrator swore that 399 "did not dispute the priority of each R.M." to the February, March and April payments, per the Loy Affidavit, May 15, 2026, para. 9. Wilton's administrator swore, on her counsel's information, that 399 agreed the municipalities were entitled to all funds the marketers owed for production from January 2026 on, and that the approximately $419,161.29 had thereby become "trust funds of the RM and the RM of Manitou," per the Parton Affidavit, May 15, 2026, paras. 21–22. Wilton's bench brief closed its account of April 24 with the words "only thereafter did Fallon provide notice of the filing of the NOI," per the Wilton Bench Brief, May 15, 2026, para. 18.

On May 13 Fallon asked for a stay extension to July 8, a $150,000 administration charge ranking ahead of all other charges "including liens and trusts created by federal and provincial legislation," and an order sending the funds into court, receivables it said had never been assigned to 399, per the Nutbrown Affidavit, May 13, 2026, paras. 3, 50–51. Wilton applied to move the proceeding to Saskatchewan, per the Wilton Application, May 15, 2026, p. 2, arguing that there appeared to be "no Saskatchewan authority directly determining" what a s. 317 notice does to the debtor's property, per the Wilton Bench Brief, May 15, 2026, para. 50. On May 19 Justice Lema extended the stay to July 8, per the Order (Stay Extension), May 19, 2026, paras. 3–4, and reserved on the charge, per the Trustee's Second Report, June 18, 2026, para. 4.

An ordinary garnishment

The endorsement does not discuss the venue application. It answers the property question in paragraph 7: "I find it beyond question that the amounts in question remained the producer's property post-garnishment," per 2026 ABKB 443 (June 11, 2026), para. 7. Directing the buyer to pay the municipality, making it liable if it does not, and crediting the payment against what it owes the producer are, in Justice Lema's words, "standard features of most statutory-claim garnishment tools." The contrast is s. 224(1.2) of the Income Tax Act, under which the money becomes "the property of Her Majesty" on receipt of a requirement to pay, per 2026 ABKB 443 (June 11, 2026), paras. 11–13. Section 317 "lacks any wording confirming or even suggesting that ownership of the garnished amounts changes," so garnished money stays the debtor's until it is paid over, per 2026 ABKB 443 (June 11, 2026), paras. 15–16.

Fallon filed before any municipality was paid, so s. 69(1)(a) of the BIA stayed the garnishments, "leaving them with one option i.e. filing an unsecured proof of claim," per 2026 ABKB 443 (June 11, 2026), paras. 17–19. Even the Crown's s. 224(1.2) power and its provincial analogues, Saskatchewan's included, are stayed by a notice of intention, the judge noted; and garnishing did not make the municipalities secured creditors or bring them within the s. 69(2) exceptions, per 2026 ABKB 443 (June 11, 2026), paras. 20–26.