Court allows junior creditor to marshal debt

Bear Creek Contracting Ltd. v. Canadian Western Bank, 2026 NLSC 13
What is the test for marshalling debt?

Summary: In this case, the Newfoundland and Labrador Supreme Court considered whether Bear Creek, a secured junior creditor, could invoke the equitable doctrines of marshalling and subrogation to recover its unpaid $2.5 million debt from surplus proceeds remaining in the bankruptcy of the Universal Group after Canadian Western Bank had been repaid in full. The dispute arose because the Bank, as senior secured creditor, enforced against the assets of Lakelse (the direct debtor of Bear Creek), exhausting these assets entirely and leaving Bear Creek with no recovery, prompting it to seek recourse instead against related entities within the Universal Group. Marshalling, the Court confirmed, requires that two creditors share a single common debtor, that the senior creditor has recourse to two funds while the junior creditor has access to only one, and that the remedy not prejudice third parties or interfere with the senior creditor’s rights. Although the corporate structure involved multiple related entities, the Court found a “single debtor” existed given the companies’ common ownership, management, consolidated financial reporting, and integrated operations, and concluded that permitting Bear Creek, as a secured but junior creditor, to recover from surplus funds would not prejudice the Bank, which had already been paid, and was fair and equitable notwithstanding the impact on unsecured creditors.

On January 19, 2022, Bear Creek Contracting Ltd. (“Bear Creek”) applied for orders “piercing” the Universal Group’s “corporate veil” so it could proceed against the Universal Group of companies. Bear Creek also sought to “marshal” the assets of the Universal Group to allow Bear Creek to recover from those assets, as a subrogate of the Universal Group. This arose when the Universal Group went bankrupt and the Canadian Western Bank, its major secured creditor, exhausted all of Lakelse’s assets and left nothing from which Bear Creek could recover its debt.

The Court pierced the corporate veil of the Universal Group but refused Bear Creek leave to sue the Canadian Western Bank. The Court also lifted the stay to allow Bear Creek to seek recovery from Universal of the surplus proceeds that remained after the Trustee in Bankruptcy of the Universal Group paid all of Universal Group’s creditors based on the principles of subrogation and marshalling. At issue on this application was whether Bear Creek could invoke the principles of marshalling and subrogation to recover its unpaid debt from the Universal Group.

Marshalling is “an equitable remedy, intended to protect the recovery of a junior creditor against the arbitrary action of a senior creditor, and to thereby treat all secured creditors equitably”. To obtain marshalling, certain specific criteria must be met. These criteria include the requirements that: two or more creditors share a single common debtor; and the senior creditor has a claim against two of the debtor's funds, while the junior creditor, ranking behind the doubly secured senior creditor, has recourse to only one. Marshalling will not be permitted if it would interfere with the superior right of a secured creditor to pursue its remedy against either of the two funds. Secondly, the doctrine is applicable unless it causes prejudice to a third party. Potential prejudice to unsecured creditors is irrelevant, as the doctrine does not apply in favour of an unsecured creditor nor a judgment creditor unless such creditor has obtained a charge on the estate that he seeks to have marshalled in his favour.

The Court found that in this case, it was self-evident that there were two creditors: Bear Creek and the Canadian Western Bank. The Bank loaned the Universal Group $8.5 million in November 2017 to refinance some of its existing debt and Universal Group gave the Bank a first charge on its fleet of helicopters and other assets to secure that loan. The Bank provided further financing of $11 million to the Universal Group for the Lakelse Acquisition in August 2018. The Bank took security over all of Lakelse’s present and after-acquired property, and all members of the Universal Group guaranteed the financing fully and signed cross-default agreements. In June 2019, the Bank extended a third loan to the Universal Group for which the Universal Group confirmed that all of the security the Universal Group gave to the Bank for the initial loan would apply to the new facility. All three loans were still outstanding when the Bank appointed MNP as receiver of the Universal Group’s assets in May 2020.

The Court noted that it was not so obvious that there was a “single common debtor”. Nevertheless, for marshalling in this proceeding, there was a single debtor, whose distinct status emerged organically from the relationship between the Universal Group and the Lakelse. All of these companies shared common management and ownership control. The directors of each of the corporate entities in the Universal Group were the same. The financial statements of the Universal Group were prepared on a consolidated basis. All decisions regarding the transfer of funds to and from operating bank accounts within the Universal Group were made by officers of the Universal Group. Universal was purchasing the Lakelse Assets to add them to, and operate them as part of, the Universal Group. Accordingly, the Universal Group and all of its corporate entities were a single debtor to the two creditors, the Canadian Western Bank and Bear Creek Contracting Ltd. The Bank and Bear Creek were “senior” and “junior” creditors respectively or the Universal Group.

Marshalling Universal Group’s assets to apply surplus proceeds that MNP held for the Universal Group to Bear Creek’s debt would not interfere with the Bank as senior creditor. The Bank had already recovered all of the money that the Universal Group owed to it and was no longer involved in the Universal receivership. The more contentious consideration was whether marshalling would materially prejudice Lakelse’s unsecured creditors.

The Court noted that the unsecured creditors of the Universal Group would suffer material prejudice from Universal Group’s bankruptcy, but Bear Creek would suffer greater prejudice. Bear Creek (except as to the Bank) was a secured creditor of the Universal Group. It worked assiduously to ensure that the Universal Group would repay the $2.5 million loan it extended by the Promissory Note and took as much security as it could avail of subject only as to the Bank. The Bank was no longer in play in these proceedings, and it was eminently fair and equitable to allow Bear Creek to recover as much of its “secured” debt as was available from the surplus proceeds. Bear Creek had a superior claim to the unsecured creditors.

The Court concluded it was fair and equitable to allow Bear Creek to satisfy the debt from the surplus funds that MNP holds for the Universal Group.

.Judge: The Honourable Justice Handrigan

Professionals involved:

• Joshua Santimaw of BOYNECLARKE for Bear Creek Contracting

• John Taylor-Hood of Сox & Palmer for MNP as Receiver of Universal Helicopters Newfoundland and Labrador LP et al.

• Christopher Isnor of Lawson Creamer for PwC as Bankruptcy Trustee of Universal Helicopters Newfoundland and Labrador LP et al.