Blue Lobster: the court decides whose debt the repayment paid

Blue Lobster Capital Limited sold its condominium at 225 Prince Street in Charlottetown in the summer of 2024, months before it and three affiliated Nova Scotia companies filed under the CCAA, and the net proceeds went to Royal Bank of Canada. Which company the bank was entitled to credit them to was, on the monitor's account, the only material issue still requiring determination in the proceeding, per the Tenth Report of the Monitor, Aug. 10, 2026, s. 3.0, para. 1. On August 19, 2026 the Supreme Court of Nova Scotia reserved on it and put two questions to counsel about the equitable doctrine of marshalling.

When the court last saw these companies, in August, the monitor had asked it to say who the repayment had belonged to: Blue Lobster Capital Limited (BLCL), the real estate company out of whose account the money came, or 3284906 Nova Scotia Limited — Spirit Co, the distiller — whose operating line RBC used it to reduce. RBC has been repaid in full and is not the target of any claim; the answer decides only which estate's unsecured creditors are paid from it, per the Tenth Report of the Monitor, Aug. 10, 2026, s. 3.2, paras. 2–3.

Two questions from the bench

Associate Chief Justice Jamieson approved the monitor's Tenth Report and its activities at that hearing and reserved on the rest — the settlement of the fee allocation, and the direction on the repayment. She then directed the monitor to file a brief of law on the equitable doctrine of marshalling, and put two specific questions to it: whether an unsecured creditor may invoke the doctrine, and whether the doctrine requires a common debtor. She also directed the applicants' counsel to deliver a copy of the forbearance agreement executed between the applicants and RBC, per the Supplementary Brief of Law of the Applicants (Doctrine of Marshalling), Sept. 1, 2026, paras. 1–2, and the Eleventh Report of the Monitor, Aug. 28, 2026, s. 3.0, paras. 1–3.

The doctrine had come into the case through the monitor. In the Tenth Report it had flagged, without pressing, a potential marshalling issue: RBC, as secured creditor, had recourse to the assets of multiple applicants, whereas Spirit Co's unsecured creditors have recourse only to Spirit Co's assets. A successful marshalling argument would send the proceeds to Spirit Co and increase its unsecured recoveries while reducing what is left for BLCL's stakeholders, per the Tenth Report of the Monitor, Aug. 10, 2026, s. 3.5, paras. 3–4.

The forbearance agreement arrived on August 27, exhibited to an affidavit of the applicants' solicitor — a copy of the agreement between RBC and BLCL dated February 26, 2024, per the Affidavit of Darren D. O'Keefe, Aug. 27, 2026, para. 3.

What the monitor would not say

The monitor's brief, filed August 26, is a survey and says so. It sets out the five conditions drawn from Green v. Bank of Montreal — two creditors, one common debtor, two funds with the superior creditor having access to both, no interference with the superior creditor's choice of remedy, no prejudice to third parties — and records that the doctrine "has not received any significant treatment by the Supreme Court of Canada and only limited treatment among appellate courts across the country," and "has historically been applied inflexibly and in limited circumstances," per the Brief of Law of the Monitor, Aug. 26, 2026, paras. 7–8.

On the first question it answered that the authorities are mixed: the traditional formulation involves two secured creditors, and in most instances courts accept that marshalling is not available to unsecured creditors, but there are authorities to the contrary and the issue "has not been meaningfully considered by appellate courts." On the second it was firmer — "[t]he authorities are clear that there must be a common debtor for marshalling to be invoked," whether there is one being a question of fact, subject to a principal-surety exception and to the cases in which a corporation's separate legal personality is disregarded. It closes by recording that the monitor "takes no position on whether the doctrine of marshalling applies to the RBC Debt Repayment or the appropriate disposition of the underlying allocation issue," per the Brief of Law of the Monitor, Aug. 26, 2026, paras. 33–34.

Four propositions, any one of them enough

The applicants filed on September 1 and advanced four propositions, each said to be independently sufficient to dispose of the doctrine. The first is that marshalling is a remedy asserted by an identified junior creditor against an identified senior creditor, and nobody has asserted it: the monitor had served the Tenth Report on the service list and on the applicants' five largest unsecured creditors so that constituency could consider the issue and take a position, and none did. "The doctrine is not before the Court at the instance of any person who claims its benefit," the brief says, adding that the applicants do not put silence as consent and accept that the court decides the question on its merits, per the Supplementary Brief of Law of the Applicants, Sept. 1, 2026, paras. 4(a), 17–18.

The second and third go to the architecture of the borrowing. RBC financed BLCL under a credit agreement dated January 18, 2021, amended and restated on August 10, 2021, secured by a general security agreement, guarantees from Mr. Rice, a guarantee from Spirit Co and collateral mortgages including security over the Charlottetown property. It financed Spirit Co separately, under a loan agreement of the same date amended and restated twice, for four facilities supported by their own security package. The monitor's review "has not identified any express direct guarantee by BLCL of Spirit Co's obligations," and the guarantee that does exist runs the other way, per the Tenth Report of the Monitor, Aug. 10, 2026, s. 3.3, paras. 1–2; s. 3.5, para. 1. Since the principal-surety exception is grounded in the principal's obligation to indemnify the surety, and a surety has no obligation to indemnify a principal, the applicants say it cannot be run in reverse to place primary liability for Spirit Co's operating line on BLCL, per the Supplementary Brief of Law of the Applicants, Sept. 1, 2026, paras. 31–33.