In the recent decision of Griffon Partners Operation Corp (Re), 2024 ABKB 277 [Griffon] the Court of King's Bench of Alberta (the "Court") considered the applicability of the doctrine of marshalling. The case involved a debtor indebted to both senior and subordinate creditors, with an affiliated entity granting a guarantee and share security solely to the Senior Creditors (defined below). The subordinate creditor, Tamarack Valley Energy Ltd. ("Tamarack"), sought to use marshalling to compel the Senior Creditors to exhaust their recourse under such affiliate guarantee and share security before realizing on the proceeds of their shared security. This order of realization would result in sufficient funds to satisfy the obligations of the Senior Creditors and to satisfy at least some of the obligations of Tamarack. The Court held that both the affiliate guarantor's lack of obligations to Tamarack and its relationship with the primary debtor did not support engaging the doctrine of marshalling.
Background Facts
The Griffon case concerned Griffon Partners Operation Corporation ("GPOC"), Griffon Partners Holding Corporation ("HoldCO"), and Griffon Partners Capital Management Ltd. ("ManagementCO"). GPOC and HoldCO are subsidiaries of ManagementCO with all three sharing common directors. ManagementCO is owned by four holding companies, (collectively, the "Director Holdcos") each of which is owned by one of ManagementCO's four directors. Jonathan Klesch ("Klesch"), one of the aforementioned directors, owned one of the Director Holdcos, Stellion Limited ("Stellion"). In a separate capacity, Klesch, also owned Spicelo Limited ("Spicelo"), which holds shares of a separate Alberta oil and gas company called Greenfire.
In July 2022, GPOC acquired all of its holdings from Tamarack for a sum of $70 million. This transaction was funded by two principal financing arrangements:
- The first financing was made pursuant to a credit agreement (the "Credit Agreement") between GPOC and certain lenders as senior creditors (the "Senior Creditors"). The obligations of GPOC under the Credit Agreement were guaranteed by each of ManagementCO and HoldCO. The individual Director Holdcos guaranteed the obligations of GPOC under the Credit Agreement pursuant to a Limited Recourse Guarantee and Securities Pledge Agreement. Like the Director Holdcos, Spicelo also guaranteed the obligations of GPOC under the Credit Agreement pursuant to a Limited Recourse Guarantee and Securities Pledge Agreement (the "Spicelo LRG").
- The second financing arrangement was made pursuant to a Subordinated Secured Promissory Note by GPOC in favour of Tamarack (the "P-Note"). Under the terms of the P-Note Tamarack agreed to subordinate the security interests granted under or pursuant to the P-Note to the prior payment and satisfaction of the obligations owing to the Senior Creditors under the Credit Agreement.
GPOC subsequently encountered financial difficulties, for which the Court approved a Sale and Investment Solicitation Process ("SISP") in late 2023 that would result in the sale of all of GPOC's assets. However, it became apparent that the sale of GPOC's assets would be insufficient to cover the debts owed to the Senior Creditors, and that liquidation of some Spicelo-held shares pursuant to the Spicelo LRG would be necessary to satisfy the outstanding obligations of the Senior Creditors in full. However, Tamarack contested the Senior Creditors' realization from the proceeds of the SISP prior to the liquidation of the Spicelo-held shares. Tamarack had no security in the Spicelo-held shares, and thus such a realization by the Senior Creditors would leave Tamarack without any anticipated realizations and no further recourse. If the Senior Creditor instead realized from the Spicelo-held shares first, then there would be some funds remaining from the SISP and the sale of GPOC's assets to satisfy part of GPOC's obligations to Tamarack. Tamarack thus sought to invoke the doctrine of marshalling.
The Court's Decision
The Court began the analysis by delineating the doctrine of marshalling. The doctrine of marshaling is an equitable remedy which posits that a creditor with security interests in multiple assets for debt recovery should first exhaust the fund not available to other creditors before tapping into the common pool. It is typically applied by courts where a single common debtor is indebted to multiple creditors. Marshalling allows for a fair distribution of assets among creditors by preserving the common collateral for those without alternative recourse. The Court identified five preconditions for marshalling to apply:
- two creditors;
- one common debtor;
- two funds of the debtor with the superior creditor having access to both and the inferior creditor to but one;
- no interference with the choice of remedy of the superior creditor; and
- no prejudice to third parties.
All parties were in agreement that in a strict sense, there was not one common debtor, as Spicelo had only guaranteed GPOC's obligations to the Senior Creditors, and was not otherwise indebted or obligated to Tamarack, the party seeking to invoke marshalling.
However, that did not end the inquiry as the Courts have recognized certain limited exceptions to the single debtor rule. The common thread in previous rulings was that exceptions were warranted when debtors could ascribe primary liability to one another in relation to the creditor. However, the usual exceptions did not apply in the circumstances of this case due to Spicelo being a guarantor and not a primary obligor under the obligations owing to the Senior Creditors.
The Court then considered whether it would nonetheless be equitable to employ marshalling. Tamarack presented two arguments in support of its position that marshalling should be invoked:
- That there was effectively "one debtor" because Klesch owned and controlled GPOC, Spicelo and Stellion; and
- That the corporate veil should be pierced in relation to Klesch's conduct in his capacity as a director of GPOC, as Klesch allegedly negotiated and arranged the execution of the P-Note under fraudulent pretenses with no intention of repaying Tamarack.
The Court dismissed both of Tamarack's arguments. First, it determined that Klesch being a director of one of the Director Holdcos and Spicelo did not suffice to conclude that GPOC, Stellion and Spicelo were effectively one company, under common control. The Court found that the corporate structure of the entities needed to be respected and did not create the type of relationship for which marshalling would be an appropriate remedy.
Additionally, the Court found an absence of extraordinary circumstances that would necessitate piercing the corporate veil in the interests of justice. Tamarack, a sophisticated commercial party, willingly entered into an agreement where it subordinated its security interests to the Senior Creditors and did not try to take its own security pledge in the Spicelo shares. There was no evidence to suggest that Tamarack was unable to negotiate a commercially sound arrangement for itself. Further, it would be inequitable to Spicelo to essentially make it liable for GPOC's debt to Tamarack, when it was not the guarantor and had no obligation to Tamarack.
Implications
In the end, the Court declined to invoke the doctrine of marshalling and expand the limited exception to the single debtor rule. While the case is largely fact dependent, it provides a useful summary of the principles of marshalling and the appropriate circumstances in which the doctrine can be invoked. It also serves as a reminder to subordinate creditors to ensure they understand the nature and extent of a senior creditor's guarantee and security package before they agree to the terms of subordination. Tamarack has sought leave to appeal the decision to the Alberta Court of Appeal, and as at the time of publication, the decision on leave had not yet been issued.
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