Creditors playing nice with other creditors

Overview: In this case, the Court considered the doctrine of marshalling, which dictates that if a creditor has two funds to draw upon to satisfy the debt, the Court will require him to take satisfaction from that fund upon which another creditor has no security.

GPHC, GPOC and GPCM (collectively, the “Griffon Entities”) are private corporations registered in Alberta, engaged in the exploration and development of oil and gas in Alberta and Saskatchewan. GPHC and GPOC are wholly owned subsidiaries of GPCM. GPOC is the operating entity that holds all the Griffon Entities’ interests and conducts all of the Griffon Entities’ business and operations.

GPOC acquired all its holdings from Tamarack Valley Energy Ltd. (“Tamarack”) in July 2022, for a total purchase price of $70.0 million. GPOC’s purchase from Tamarack was funded in part by financing pursuant to an Amended Credit Agreement between GPOC, as the borrower, and certain lenders (the “Lenders”). The Lenders were granted security over all GPOC’s present and after-acquired property. GPCM and GPHC are guarantors under the Amended Credit Agreement.

GPOC’s purchase from Tamarack was also funded in part pursuant to a Subordinated Secured Promissory Note for $20.0 million issued by GPOC to Tamarack (the “Subordinated Tamarack Note”). The Subordinated Tamarack Note was secured against all present and after-acquired property of GPOC. Tamarack agreed to subordinate all security interests granted under the Subordinated Tamarack Note to all senior loan obligations to the Lenders under the Amended Credit Agreement.

In late 2022, GPOC ran into financial difficulties and defaulted on its payments due under the Amended Credit Agreement. Efforts to refinance or restructure the business were unsuccessful. In August 2023, the Griffon Entities each filed a Notice of Intention to Make a Proposal under the Bankruptcy and Insolvency Act in response to the Lenders demanding payment under the Amended Credit Agreement.

On October 18, 2023, the Court granted an Order approving a Sale and Investment Solicitation Process pursuant to which the assets of GPOC were to be sold. The proceeds from the sale of the GPOC assets will not be sufficient to satisfy the full amount outstanding to the Lenders, let alone the amount owed to Tamarack. Tamarack objected to the Lenders realizing upon the proceeds from the SISP first because all of those proceeds would be used to satisfy GPOC’s obligations to the Lenders, leaving nothing to satisfy GPOC’s obligations to Tamarack. Tamarack argued that the Lenders should resort to their security against certain related entities to the Griffon Entities (“Spicelo”), then the proceeds from the SISP, which would result in there being something to satisfy GPOC’s obligations to Tamarack under the Subordinated Tamarack Note. Essentially, Tamarack argued that the principle of marshalling applies. The Griffon Entities argued that the Lenders were not required to exhaust their other remedies prior to realizing on the proceeds from the SISP.

The doctrine of marshalling dictates that if a creditor has two funds to draw upon to satisfy the debt, the Court will require him to take satisfaction from that fund upon which another creditor has no security. There are criteria which must be met before marshalling becomes available:

• 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.

Considering whether these criteria are met in this case, there certainly is a senior creditor (the Lenders) and a junior creditor (Tamarack), but there is not a single debtor with two funds. Rather, there is one debtor indebted to both creditors (GPOC) and one surety having provided a guarantee only to the Lenders (Spicelo). There clearly is an exception to the general rule that there be one debtor. That exception appears to be that marshalling may be employed in cases involving more than one debtor when one of the debtors can put primary liability upon the other, for example, when the debtors are principal and surety. Such a relationship must exist, otherwise it would be inequitable to force one debtor to pay the other’s debt when that debtor was not under any obligation to do so.

The Court had to assess whether there was a relationship between GPOC on one hand and Spicelo on the other such that it was equitable to compel the Lenders to enforce their security with Spicelo first, leaving some assets within the SISP for Tamarack. Simply pointing to a common director’s role in the various corporate entities does not automatically create the relationship necessary for marshalling. One could not say that Spicelo and GPOC were truly “alter egos” of each other. While it was clear that Spicelo was GPOC’s guarantor with respect to the debt owed to the Lenders, Spicelo was not the guarantor with respect to the debt owed to Tamarack, and had no obligation to Tamarack. There was nothing which would compel Spicelo to pay the debt owed to Tamarack and there was nothing which would compel GPOC to repay Spicelo if Spicelo paid anything to satisfy Tamarack.

Accordingly, the Court concluded that the relationship between GPOC and Spicelo that was necessary to support marshalling did not exist. It granted the Griffon Entities’ application for a declaration that Tamarack had no claim against the assets of Spicelo and the Lenders were not required to exhaust their remedies pursuant to the Spicelo guarantee prior to realizing on the proceeds from the SISP.

Judge: the Honourable Justice L.K. Harris

Counsel: Randal Van de Mosselaer and Julie Treleaven of Osler, Hoskin & Harcourt LLP for the applicants, Kyle Kashuba of Torys LLP for the Monitor (Alvarez & Marsal Canada Inc.), Karen Fellowes, K.C. and Natasha Doelman of Stikeman Elliott LLP for the Primary Lenders (Trafigura Canada Limited and Signal Alpha C4 Limited) and Matti Lemmens and Jakub Maslowski of Stikeman Elliott LLP for the 2nd Lien Creditor (Tamarack Valley Energy)