Part 2 Security Interests in Land Section II Enforcement

1
Part 2Security Interests in LandSection
IIEnforcement Receiverships Land and
Personal Property
2
Mortgagees Remedies

• 1) Action on the Covenant
• 2) Possession
• 3) Foreclosure
• Similar to PPSA right to retain in satisfaction
• Not available in NB, NS

3
Mortgagees Remedies

• 4) Sale
• Judicial Sale
• Not available in NB
• Private/Contractual/Extrajudicial Sale
• Not available in NS
• Usual action in N.B., Nfld Lab, PEI, Ont

4
Mortgagees Remedies

• 5) Right to rents
• Similar to PPSA proceeds
• 6) Distress
• 7) Appointing a receiver
• Also in respect of personal property

5
Possession

• Mee has right to go into possession
• By inherent right as owner once mortgage is in
  default
• Because a mortgage is in form a conveyance of the
  fee simple, the mee would have a right to
  possession even before default, but for a
  standard clause giving the debtor quiet
  possession until default
• Similarly with equitable mortgage (e.g.
  conveyance of right of redemption)
• Second mee has better right to possession after
  default than does mor
• First mee has better right than 2nd

6
Possession

• Mee has right to go into possession
• No notice required
• Unless BIA applies
• Possession by any means without a breach of peace
• Often attornment of rents is sufficient to induce
  commercial mor to give up possession

7
Possession

• Mee in possession has duty to manage property
  prudently (e.g. ensure that rental property is
  leased) and is liable for failure to do so
• For this reason mee is very reluctant to go into
  possession
• It is said that the duty is is onerous
• But as importantly, it is a fruitful field for
  litigation

8
Equity of Redemption Foreclosure

• In form a mortgage is a transfer of the fee
  simple with a covenant for reconveyance on
  condition (or defeasible on condition subsequent)
• Originally given strict legal interpretation
• Condition is not satisfied if a payment is missed
• Debt remains owing, with no obligation to
  reconvey land

9
Equity of Redemption

• The Court of Equity intervened to allow the
  mortgagor to redeem the property by paying the
  debt
• Thus the equity of redemption
• Originally the right of redemption was recognized
  only in limited circumstances
• Eg when the delay was short and the failure to
  redeem was the result of accident or fraud
• Eventually, the mortgagor became entitled to
  redeem within a reasonable time
• This is recognition that the mortgage is merely
  security for a debt rather than a true transfer

10
Equity of Redemption

• The right of redemption is the right to pay the
  debt and regain title to the land, even after
  default
• The right of redemption cannot be waived
  contractually consumer protection
• Is the right of redemption necessary?
• Recall, when it was originally introduced, if the
  debtor did not redeem she would lose the land and
  still be liable for the debt
• Now the proceeds of disposition are applied to
  the debt

11
Foreclosure

• Foreclosure is a correlative right in the mee to
  extinguish the right of redemption, which might
  otherwise persist indefinitely
• It is a motion asking the court to terminate or
  foreclose the debtors equity of redemption
• In effect either redeem now on the terms on
  which you would be entitled if you filed a suit
  for redemption in equity, or forever hold your
  peace."

12
Foreclosure

• Effect of a order of foreclosure
• The property vests in the mee
• The mee cannot sue the debtor for any
  deficiency, unless the mee is in a position to
  reconvey the property (ie. has not sold to a
  third party)
• Deficiency action automatically re-opens the
  foreclosure
• Similar to PPSA retention in satisfaction
• Except PPSA cuts off right to sue for deficiency
  completely cannot be reopened

13
Foreclosure

• Disadvantages
• Requires judicial action
• Expensive
• Slow typically 6 months
• Uncertain
• The foreclosure can be reopened on a motion by
  the debtor, sometimes even after the property has
  been transferred to a third party
• Advantage
• Judicially supervised

14
Power of Sale

• The defects of the foreclosure remedy led parties
  to insert a power of sale into the mortgage
  contract
• Sale conducted by the mee
• This power was accepted by the courts and
  recognized legislatively
• Most jurisdictions statutorily imply a private
  power of sale into any mortgage, e.g. NB Property
  Act s.44(1)
• Some jurisdictions (e.g. N.S.) also allow
  judicial sale.
• Sale, not foreclosure, but conducted by the court

15
Power of Sale

• Effect of the sale essentially the same as under
  the PPSA right of disposal
• Debtor has right of redemption up until the time
  of sale
• Mee has duty to take reasonable steps to secure
  fair market price
• Proceeds are applied to the debt
• Mee can sue debtor for any deficiency
• Debtor is entitled to any surplus
• Property is conveyed to third party clear of all
  subordinate interests, subject to all senior
  interests
• Purchaser takes good title regardless of defects
  in sale
• With damages remedy against mee for sale defects

16
Power of Sale

• Notice prior to sale
• Usually a statutory notice requirement
• 4 weeks in NB
• Property Act s. 45(1)(b)
• 15 days after default before notice of sale 35
  days after notice before sale in Ont
• S. 33 Mortgages Act

17
Power of Sale

• Property Act s.47(2)
• S.47(2) Where a conveyance is made in professed
  exercise of the per of sale conferred by section
  44, the title of the purchaser is not impeachable
  on the ground that no case had arisen to
  authorize the sale, or that due notice was not
  given, or that the power was otherwise improperly
  or irregularly exercised but any person
  damnified by an unauthorized or improper or
  irregular exercise of the power shall have his
  remedy in damages against the person exercising
  the power.

18
Power of Sale

• Differences from PPSA
• In most jurisdictions mee cannot buy in at the
  sale
• But note that mee often can buy in at judicial
  sale
• (In many U.S. jurisdictions can buy in at
  reasonable price)
• Differences in details, e.g.
• Notice period
• Statutory publicity requirements advertise in
  newspaper

19
Power of Sale

• N.B. law is extremely unusual
• Mee can buy in for their own benefit, at any
  price
• Duty to take reasonable steps to secure fair
  market price does not always apply
• Duty applies to banks, or secured party buying in
  for their own benefit
• See Canada Trustco v 040381 NB Inc

20
Right of Redemption

• Right of redemption is triggered by sale or
  foreclosure proceedings, not by possession
• Why would mee want to go into possession on
  default without intending to sell?

21
Right to Collect Rents

• A mee in possession has the right to collect
  rents as an incident of possession
• Mee will usually take an independent assignment
  of rents as additional security, with the right
  to collect rents triggered on default
• This allows mee (if careful) to collect rents
  without going into possession
• Similar to PPSA right to collect accounts

22
Distribution of Surplus

• Proceeds of sale applied to
• Costs of disposal
• Debt owing to SP
• Subordinate interest holders in order of their
  priority
• Same as under the PPSA

23
Action on the Covenant

• Mee has right to sue debtor on debt without
  realizing on security
• When would mee want to do this?
• Also a right to sue for deficiency after sale

24
Receiverships
25
Terminology

• A receiver is a person appointed to take
  possession of and dispose of the property of a
  debtor
• A manager is a person appointed to operate the
  business of a debtor
• A receiver does not have the powers of a manager
  unless appointed as such
• Very often a security agreement does provide for
  the appointment of a receiver-manager
• Accordingly, the term receiver is often used to
  refer to a person who, strictly, should be called
  a receiver- manager

26
Types of Receiver

• A receiver may be appointed (partial list)
• By a secured party pursuant to a power granted by
  the security agreement
• A private receiver or privately appointed
  receiver
• Private receivers are unknown in the U.S.
• By a court to preserve and protect the debtors
  property pending judgment
• A court appointed receiver
• By a court to aid an unsecured party to liquidate
  assets which could not be reached by execution
  (judgment creditors normal remedy)
• Receiver in aid of equitable execution

27
Governing Acts

• In addition to common law
• BIA part XI
• Applies to all receivers (CAR or PAR) of
  substantially all the property of an insolvent or
  bankrupt person
• PPSA
• All receivers of personal property (incorporated
  or unincorporated debtor, court or privately
  appointed receiver)
• Business Corporations Acts (except Ont.)
• Receivers of corporations (real and personal
  property)
• PPSA and Bus. Corp. Acts are very similar
• Rule 41 NB Rules of Court CAR only

28
Governing Acts

• BIA and PPSA are almost identical and provide the
  most comprehensive regulation
• Only receivers of real property of individual
  debtors (mostly residential mortgages) are not
  subject to either of these Acts
• Receivers are rarely appointed in such cases
• In what follows, we will only consider the law as
  amended by statute
• Note that only receivers of real property of
  solvent individual debtors are not subject to any
  statutory regulation

29
Status of Receiver

• A receiver is not simply the agent of the SP
• Court appointed
• Normally appointed on recommendation of SP, but
  formally
• Officer of the Court
• Acts as principal, not as agent
• Privately appointed
• Typically agent of both SP and Debtor because of
  deemed agency clause

30
Deemed Agency Clause

• The security agreement normally provides that the
  receiver is appointed as agent of the debtor
• If the agreement does not so provide, then the
  PAR is simply an agent of the SP
• Since the clause is almost universal, in what
  follows we will assume that the security
  agreement does have such a clause

31
Deemed Agency Clause

• Two goals
• Allow receiver to enforce contracts on behalf of
  debtor, enter into new contracts
• Receiver is like new management
• Insulate SP from liability for acts of receiver
  in dealing with property
• Only partially successful
• Courts have held that notwithstanding the deemed
  agency clause, the receiver is agent of the SP
  for purposes of dealing with the collateral

32
Deemed Agency Clause

• It seems to me that the receiver and manager in a
  situation, like the present, is wearing two hats.
  When wearing one hat, he is the agent of the
  debtor company when wearing the other, the agent
  of the debenture holder. In occupying the
  premises of the debtor and in carrying on the
  business, the receiver and manager acts as the
  agent of the debtor company. In realizing the
  security of the debenture holder, notwithstanding
  the language of the debenture, he acts as the
  agent of the debenture holder, and thus is able
  to confer title on a purchaser free of
  encumbrance.
• Peat Marwick Ltd. v. Consumers' Gas Co. (Ont
  C.A.)

33
PARM as Agent of SP

• Since PARM is agent of the SP for the purposes of
  realization,
• PARM can give clear title to purchase
• Presumably SP is liable for any breach of duty by
  PARM in realization

34
Receivers Duty

• Either type of receiver has strong reputational
  incentive to look after the interests of SP
  behind appointment
• CAR owes fiduciary duty to all parties with an
  interest in the estate of the debtor, ie debtor
  and all creditors, secured and unsecured

35
Receivers Duty

• PAR
• PPSA s.64(7) On application by an interested
  person, the Court may. . . (e) notwithstanding
  anything contained in a security agreement or
  other document providing for the appointment of a
  receiver, make an order requiring a receiver or a
  person by or on behalf of whom the receiver is
  appointed to make good a default in connection
  with the receiver's custody, management or
  disposition of the collateral of the debtor or to
  relieve the person from any default on such terms
  as the Court thinks fit, ...
• See similarly BCA s.58(d)
• Liability of both SP and receiver for any default
• Applies in principle to CARM but not in practice
  because of close court supervision

36
Managers New Contracts

• The receiver-manager may enter into new contracts
• CARM as principal, PARM as agent of debtor
• RM may want to
• Borrow money to finance receivership
• Enter into contracts for everyday operations of
  the debtor company ie for the supply of gas and
  electricity
• Enter into contract for more ambitious operations
  of debtor, e.g. finance completion of existing
  contracts

37
Managers New Contracts

• In either case (CARM or PARM), SP at whose
  instance receiver was appointed is not liable on
  new contracts (unless that SP specifically agrees
  to be liable)
• Terminology
• For convenience, the party with whom the receiver
  contracts will be referred to as the receivers
  creditor even though, as we will see, the
  receiver is not necessarily liable on the contract

38
CARM New Contracts

• CARM normally contracts as principal
• However, CARM has control over the legal persona
  of the debtor company and may attempt to contract
  solely on behalf of the company
• In which case CARM is not liable and CARMs
  creditor has only a claim against the debtor
  company ie is unsecured creditor of insolvent
  company
• This result is unusual and would depend on the
  wording of the contract

39
CARM New Contracts

• When CARM contracts as principal, CARM has
  unlimited personal liability on the contract,
  absent contractual wording the to contrary
• But is entitled to indemnification as charge on
  the assets, in priority to the charge of the SP
  at whose instance he was appointed and all
  subordinate charges
• CARMs creditor is entitled to be subrogated
  against the rights of the CARM and so has a
  senior charge against the assets of the debtor if
  the CARM were itself to become insolvent

40
CARM New Contracts

• CARM often limits personal liability to the
  extent of its charge against the assets of the
  debtor
• What if CARM disclaims its personal liability
  entirely?
• In principle, CARMs creditor cannot have
  subrogated right against the debtor company if
  CARM is not liable at all
• Rule 41.06 of the NB Rules of Court may give
  direct right
• Where the receiver exercises the powers granted
  under this rule, the property which is subject to
  the receivership is charged with the payment of
  obligations arising from the exercise of such
  powers.

41
PARM New Contracts

• PARM is not personally liable on new contracts
• PARM is agent, and the liability is that of his
  principal
• Which is normally the debtor company
• In which case the third party contracting with
  the receiver has a worthless claim against an
  insolvent company
• PARM may accept (usually limited) personal
  liability on new contracts
• In which case, like CARM is entitled
  indemnification as charge on the assets, in
  priority to the charge of the SP at whose
  instance he was appointed and all subordinate
  charges
• PARMs creditor is entitled to be subrogated to
  those rights

42
Managers New Contracts

• CARM and PARM are both usually able to borrow
  money to finance the receivership and to grant
  new charges against the assets of the debtor in
  priority to the charge of the SP at whose
  instance he was appointed and all subordinate
  charges
• CARM has power by order of appointment
• PARM has power with permission of SP by
  instrument under which it was appointed

43
Managers New Contracts

• Can subordinate interest holders object to the
  creation of this senior charge?
• Not against CARM since charge is created with the
  authorization of the court
• Not against PARM for routine charges, since these
  are expenses of the receivership and can be added
  in priority PPSA s.59(3)(a)
• For unusual charges, at one time SP might seek to
  have CARM appointed to avoid challenges of this
  kind
• Now, PPSA s.64(7)(c), BCA s.58(f) allows PARM to
  seek pre-approval of the court without need to
  appoint CARM

44
Managers New Contracts

• In circumstances in which receiver is personally
  liable on new contract and is entitled to be
  indemnified as a first charge on the assets of
  the debtor, parties who contracted with the
  receiver are entitled to be subrogated to the
  receivers rights against the assets
• So, if receiver becomes insolvent, party who
  contracted with receiver who was personally
  liable is becomes entitled to a first charge on
  the assets of the debtor

45
Court Appointed Receiver

• Advantages
• Useful where privately appointed receiver is
  having difficulty taking possession, or
• Where there are many parties attempting to
  realize at the same time
• Insulated from actions for improper disposition,
  since disposal is made pursuant to order of the
  court
• Insulated from frivolous actions typically
  cannot be sued without leave of the court
• Disadvantages
• Slow court motions required
• Expensive court motions required

46
Court Appointed Receiver

• Courts are reluctant to appoint a receiver when a
  privately appointed receiver is adequate