The doctrine of marshaling has existed for centuries and was developed to address inequitable circumstances in which secured parties were unable to realize on their security. The UK Supreme Court has recently considered the doctrine in a case, Szepietowski (nee Seery) (Appellant) v The National Crime Agency (formerly the Serious Organised Crime Agency) (Respondent), which provides helpful guidance concerning the limits of the doctrine.
Although it arises infrequently, the doctrine does apply in Canada. For that reason, Szepiotwski will be of interest to holders of secured debt (and their lawyers) both for the particular holdings and the court’s general comments concerning the doctrine.
Background on Marshalling
Some background on marshalling will be helpful before turning to the particular facts of Szepietowski. A classic definition, cited in Szepietowski, comes from Lord Hoffmann in In re Bank of Credit and Commerce International SA (No 8):
[A] principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one. It gives the latter an equity to require that the first creditor satisfy himself (or be treated as having satisfied himself) so far as possible out of the security or fund to which the latter has no claim.
The particular circumstances where the doctrine will apply were set out by Lord Neuberger in Szepietowski:
(i) … debt is secured by a second mortgage over property (“the common property”), (ii) the first mortgagee of the common property is also a creditor of the debtor, (iii) the first mortgagee also has security for… debt in the form of another property (“the other property”) (iv) the first mortgagee has been repaid from the proceeds of sale of the common property, (v) the second mortgagee’s debt remains unpaid, and (vi) the proceeds of sale of the other property are not needed (at least in full) to repay the first mortgagee’s debt. (para 31)
Lord Neuberger also noted:
- The doctrine “really comes into its own” where a debtor is insolvent as it allows the second secured creditor to improve its position against unsecured creditors. (para 32)
- As traditionally applied, marshalling does not prejudice the debtor because the same amount remains owing whether it is applied or not. (para 33)
- The doctrine does not allow the second secured creditor to “compel” the first secured creditor to resort to the other property. Rather, it allows the second secured creditor to resort to the other property if the event the first secured creditor chooses not to. (para 34)
Background on Szepietowski
In 2005, the UK’s Serious Organised Crime Agency (“SOCA”) brought a proceeding against Ms. Szepietowski (and her husband) in order to seize 20 properties on the basis that they were proceeds of crime and therefore constituted “recoverable property” within the meaning of section 266 of the UK Proceeds of Crime Act. The properties included two properties known collectively as “Claygate” as well as Ms. Szepietowski’s primary residence, Ashford House. These properties were registered in the name of Ms. Szepietowski and the Royal Bank of Scotland (“RBS”) had a charge against them (and others) for £3.225m (the “RBS Charge”).
In 2008, the Szepietowskis settled the SOCA proceedings on terms contained in a “Settlement Deed.” According to the terms of the Settlement Deed, Ashford House was not “recoverable property.”
In 2009, by operation of the Settlement Deed, Ms. Szepietowski granted a charge to SOCA over Claygate for £1.24m. The charge explicitly confirmed that Ms. Szepietowski did not personally owe any money to SOCA. The RBS Charge was still not satisfied (about £2.33m remained) and the SOCA charge was a therefore a second charge on the property.
In December, 2009, Ms. Szepietowski sold Claygate for £2.33m, the proceeds were used to pay off the RBS Charge and the remainder, £1,324.16, was left to satisfy the SOCA charge.
SOCA brought an action against Ms. Szepietowski for marshalling of the debt. SOCA’s case was that it was entitled to look to Ashford House to satisfy its charge, which was over Claygate only. This was because the RBS Charge was over both Ashford House and Claygate, RBS had satisfied itself from the proceeds of the sale of Claygate, and Ashford House remained unsold.
Ms. Szepietowski resisted on the basis that SOCA could not marshal because there was no underlying debt owed from Ms. Szepietowski to SOCA.
At trial, Justice Henderson held that marshalling did apply to the facts set out above. The Court of Appeal agreed.
Lord Neuberger, concurred with by Lord Sumption and Lord Reed, found that the doctrine did not apply in the particular facts of the case for two reasons. First, he accepted the argument of Ms. Szepietowski, that marshalling cannot apply in a circumstance where there is no underlying debt owed. In such a circumstance, there is “simply nothing… from which the right to marshal can arise, once the common property has been sold and the proceeds of sale distributed in accordance with the legal priorities.” (para 50)
Second, Lord Neuberger accepted, based on the language of the Settlement Deed and the nature of the resulting charge, that the doctrine of marshalling was precluded. As Lord Neuberger explained, to make such a determination a court must look to:
(i) the terms of the second mortgage, (ii) any contract or other arrangement which gave rise to it, (iii) what passed between the parties prior to its execution, and (iv) all the admissible surrounding facts, it is reasonable to conclude that the second mortgagee was not intended to be able to marshal on the occurrence of the facts which would otherwise potentially give rise to the right to marshal. (para 62)
This argument was advanced by Ms. Szepietowski for the first time at the Supreme Court.
Implications of the Decision
Two particular holdings arise from the decision which limit the scope of the doctrine of marshalling:
- A secured creditor cannot invoke the doctrine of marshalling unless there is an underlying debt owed to them by the debtor; and
- Marshalling will not apply if, taking into account the terms and admissible surround facts of the second charge, it is reasonable to concluded that the second secured party was not intended to be able to marshal.
Of the two holdings, (a) is likely confined to the particular facts of the case, however (b) may have more general application. As such, parties should turn their mind to the court’s comments when drafting a charge, which they may wish to marshal in the future, and when deciding whether to attempt to marshal debt.
Marshalling in Canada
The doctrine is applied in Canada and therefore all secured creditors should be aware of its potential application. This is particularly true in circumstances where the debtor becomes insolvent as marshalling can allow a “second” secured creditor to improve its position against unsecured creditors.
Although not binding on Canadian courts, UK Supreme Court decisions are highly persuasive, particularly in cases concerning equitable remedies and therefore the particular holdings will likely be followed by Canadian courts moving forward.
The doctrine of marshalling is not often considered by Canadian courts (CanLii for example notes 24 cases in the last 10 years). Perhaps the most noteworthy recent case in Canada is Gerrow v. Dorais wherein the Alberta Queen’s Bench held that the holder of a builder’s lien, like any other secured party, may take advantage of the doctrine.
The last fulsome appellate consideration of the issue in Canada was Green v. Bank of Montreal, wherein the Ontario Court of Appeal declined to apply the doctrine in the absence of a common debtor and where a third party would be prejudiced by the application of marshalling.
Docket: UKSC 2011/0196
Date of Decision: October 23, 2013