National Insolvency Review, February 2017
Most or all creditors who lend to farmers will be familiar with the Farm Debt Mediation Act, S.C. 1997, c. 21 (the “FDMA”) and the need to serve a notice under the FDMA before taking action against a farmer. However, there are some details of how the FDMA operates that may not be as well-known. This piece will highlight some of those details.
As a brief introduction, the FDMA requires every secured creditor who intends to enforce any remedy against a farmer’s property, or commence proceedings for the recovery of a debt or the realization of any security against a farmer must give written notice to the farmer (following a prescribed form) of no less than 15 business days. If a secured creditor fails to give that notice, any act done against the farmer will be null and void. The relevant provisions state as follows:
21. (1) Every secured creditor who intends to
- enforce any remedy against the property of a farmer, or
- commence any proceedings or any action, execution or other proceedings, judicial or extra-judicial, for the recovery of a debt, the realization of any security or the taking of any property of a farmer
- shall give the farmer written notice of the creditor’s intention to do so, and in the notice shall advise the farmer of the right to make an application under section 5.
(2) The notice referred to in subsection (1) must be given to the farmer in the prescribed manner at least fifteen business days before the doing of any act described in paragraph (1) (a) or (b).
22. (1) Subject to subsection (2), any act done by a creditor in contravention of section 12 or 21 is null and void, and a farmer affected by such an act may seek appropriate remedies against the creditor in a court of competent jurisdiction.
Upon receiving the notice, a farmer may apply to the Farm Debt Mediation Service (also referred to herein as the “administrator”) for mediation or for a stay of proceedings (which would also involve mediation). Many creditors will voluntarily hold off moving forward with enforcement while mediation is ongoing where a stay has not been obtained by the farmer, but creditors are not required by law to do so.
1. Giving the notice
As most creditors who regularly lend to farmers will be aware, it is critical for a secured creditor to give notice under the FDMA before taking any steps to enforce any remedy against the property of a farmer, or to commence any proceedings or enforce any security against a farmer. Even if the action contemplated by the secured creditor is not enforcement of security, the FDMA requires that the notice be given.
The notice period is 15 business days (not merely 15 days).
The Farm Debt Secured Creditors Notice Regulations (SOR/86-814) set out the methods by which a farmer may be served. There may be differences depending on whether the farmer is an individual, partnership or corporation. In other contexts, service on a corporation can be most easily achieved by serving the registered office, which is often a law firm. However, under the
FDMA, service on a corporation’s registered office is not necessarily effective. It is important to serve correctly, so one should ensure that the Farm Debt Secured Creditors Notice Regulations are followed in selecting a method of service.
One must also be careful about what can be served concurrently with the FDMA notice. In Saskatchewan, for example, creditors are permitted to serve a notice to start the process of enforcement against land under The Saskatchewan Farm Security Act (the “SFSA”) at the same time as serving the FDMA notice. In contrast, the notice prescribed by the SFSA to start the process of seizing equipment cannot be served until the fifteen business day period has expired. If served earlier, it will be void, which could result in serious jeopardy for the creditor if they start enforcement
prematurely. See Chmil v. National Leasing Group Inc., [2006] S.J. No. 786, 2006 SKCA 140.
2. Who qualifies as a “farmer”?
The relatively recent decision of Harding v. 0780194 B.C. Ltd., [2010] B.C.J. No. 9, 2010 BCSC 5 (“Harding”) represents a thorough examination of case law on the question of who will be deemed a farmer under the FDMA. In this case, the debtors were a couple whose primary employment was outside of farming — he worked as an excavator operator and she as a bookkeeper and administrator. They owned a numbered company that had purchased a cherry orchard of about 6 acres, on which their home was also located. The creditor was the former owner of the orchard, who had been granted a take-back mortgage on selling the land.
The debtors actively worked the orchard and had taken two harvests, although their net revenues were minimal.
Mr. Justice Barrow canvassed the case law in arriving at his determination that the debtors were farmers entitled to the protection of the FDMA. The principles discussed include the following (see paragraphs 19 to 41; we will not attempt to cite the various authorities referred to by Justice Barrow):
(a) The FDMA is remedial in nature and is intended to provide farmers with a short standstill period to give an opportunity to demonstrate long-term viability to creditors. As such, it should be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects, and doubt should be resolved in favour of debtors claiming to be farmers.
(b) The definition of “farmer” in the FDMA requires that the farming activity be for “commercial purposes”. As such, commercial farming can be distinguished from farming pursued as a hobby or farming where generating a profit is not a primary object.
(c) However, farming need not be the only or primary source of income and the “commercial purposes” test does not require that the farmer show a profit, or even generate income, every year.
(d) A landowner who has purchased land for development purposes and temporarily leased it to another party for farming may not be considered to be a farmer.
(e) Where a commercial entity owns some farm land but the income represents a tiny portion of revenues, and no indicia of farming (such as applying for tax relief for farmers, actually farming the land, and where the indebtedness was unrelated to the purchase of the farm lands) exists, the entity may not be considered to be a farmer.
(f) The FDMA was not intended to protect large multinational corporations that hold agricultural lands as part of their operations, on which a small crop is produced by their employees or contractors.
3. The farmer need not be insolvent for the notice requirement under FDMA to apply
In Antrim Balanced Mortgage Fund Ltd. v. Pastula, [2015] B.C.J. No. 1313, 2015 BCSC 1061 (“Pastula”), the creditor had commenced foreclosure proceedings without having given an FDMA notice. Later, when the farmers argued that the creditor had failed to give the notice such that its proceedings were a nullity, the creditor pointed to section 6 of the FDMA, which states as follows:
Farmers must be insolvent
6 Only farmers
(a) who are for any reason unable to meet their obligations as they generally become due,
(b) who have ceased paying their current obligations in the ordinary course of business as they generally become due, or
(c) the aggregate of whose property is not, at a fair valuation, sufficient, or if disposed of at a fairly conducted sale under legal process would not be sufficient, to enable payment of all their obligations, due and accruing due are eligible to apply under section 5.
Section 5, referred to in section 6, provides the authority for a farmer to apply for mediation or a stay or proceedings.
Relying on section 6, the creditor argued that the famers were not insolvent and thus did not qualify for the protection of the FDMA. Mr. Justice Johnson essentially separated the requirement to give the FDMA notice from the farmer’s ability to apply for relief under section 5, as follows:
[14] … my reading of the statute is this: That is that if sections 21 and 22 make the proceedings a nullity, there is nothing to stay by way of an application. So insolvency is not a requirement in order for a farmer to seek the protection of the Farm Debt Mediation Act, and that makes some sense, I suppose, and that is it ought not to have to get to the point where a farmer is insolvent before seeking, for example under section 5(b), some assistance from the administrator for a review of the farmer’s financial affairs.
Justice Johnston went on to say in paragraph 15 that “… if it is not already clear, I do not agree that the [farmers] need to demonstrate insolvency before they can invoke the protection of the Act”.
In referring to “the protection of the Act”, it is likely that Justice Johnston was referencing the section 21 notice requirement, such that a farmer would still have to demonstrate insolvency before having a right to mediation or a stay of proceedings under section 5.
Other decisions confirming that a farmer need not be insolvent for sections 21 and 22 to apply include: McKenna v. Marshall, [2004] O.J. No. 1963, 186 O.A.C. 199 (ON CA), Westminster Savings Credit Union v. Font, [2006] B.C.J. No. 1958, 2006 BCSC 1308 and Chrysler Financial Canada v. Morris, [2009] S.J. No. 748, 2009 SKQB 510.
To the extent that courts have found that the FDMA does not apply where there is evidence that the farmer may not have been insolvent, such as Royal Bank of Canada v. Habib, [2003] B.C.J. No. 1200, 2003 BCSC 792 (“Habib”) and Rai v. Can-Pacific Farms and Packers Ltd., [2013] B.C.J. No. 614, 2013 BCSC 545 (“Raj”), there have been other elements at play — questions about whether the debt in question had any connection to the debtors’ farm operation (Habib) and about whether the creditor was properly considered a secured creditor (Raj).
It seems entirely clear that no secured creditor can safely take proceedings against a farmer without having given the notice to satisfy section 21 of the FDMA.
4. If the FDMA notice is not given, when is it too late for the farmer to challenge the validity of the proceedings?
The answer to this appears to be that it is almost never too late, except perhaps once legal positions are irrevocably changed (such as when land is transferred to a third party).
In Pastula, the foreclosure proceedings were commenced by the creditor in 2014 without a FDMA notice having been served. The farmers applied for and obtained a stay in March 2015 and that stay was terminated. In the original foreclosure proceedings in 2014, the farmers failed to respond to the creditor’s application for an order nisi for foreclosure and the redemption period had expired in early 2015. Then the creditor’s assignee applied for a final foreclosure order and the Pastulas responded by asking that it be dismissed as the FDMA notice requirement had not been complied with. The court agreed with the farmers and held that the commencement of the foreclosure action was a nullity.
As a result, even though there were more than two years of property taxes and substantial arrears of mortgage payments, the court held that the creditor would have to give the FDMA notice and start again from the beginning.
5. A stay of proceedings likely will not stay an interim receivership
In Jacob’s Hold Inc. v. Canadian Imperial Bank of Commerce, [2000] O.J. No. 5702, 52 O.R. (3d) 776 (Sup. Ct.) (“Jacob’s Hold”), Jarvis J. held that the appointment of an interim receiver pursuant to the Bankruptcy and Insolvency Act is not “a proceeding for the recovery of a debt, the realization of a security or the taking of any property of a farmer”. As such, an interim receivership would not be a proceeding to which the FDMA stay would apply.
The context for the decision in Jacob’s Hold was an application for the discharge of the interim receiver, and approval of the interim receiver’s activities, rather than in opposition to the appointment of an interim receiver. Nonetheless, it would appear that it represents good authority. Indeed, in Saskatchewan (Attorney General) v. Lemare Lake Logging Ltd., [2015] 3 SCR 419, 2015 SCC 53, (“Lemare Lake”), Jacob’s Hold was cited in Justice Cote’s dissenting reasons as authority for the proposition that a FDMA stay “does not preclude the appointment of an interim receiver under the BIA”. See paragraph 106 of Lemare Lake.
6. Who watches the farmer’s assets during the stay of proceedings?
Where a stay of proceedings is put into place, a “guardian” will be appointed in respect of the farmer’s assets. In most cases, the Farm Debt Mediation Service will appoint the farmer as the guardian but the secured creditor can seek the appointment of someone else as guardian. Even if the farmer is initially appointed as guardian, the Farm Debt Mediation Service has the power to appoint a replacement guardian later. Generally, this would occur only if a creditor has raised concerns about the farmer filling the role of guardian.
If the secured creditor nominates a guardian then the creditor must pay the guardian’s expenses. If Farm Debt Mediation Service has named the guardian without that person having been nominated by the creditor, Farm Debt Mediation Service will pay the guardian’s expenses. To avoid incurring additional costs, a creditor may wish to avoid nominating a particular person to be the guardian.
A guardian’s responsibilities will include the following:
(a) prepare an inventory of all the assets of the farmer;
(b) verify periodically the presence and condition of those assets; and
(c) advise the administrator of any act or omission that would jeopardize those assets.
7. How long should a creditor expect the stay of proceedings to last?
The initial stay of proceedings is for 30 days, with the potential for three further 30 day extensions, to a maximum of 120 days in total.
If a farmer obtains an initial stay of proceedings, the norm is that extensions will be granted so that creditors will be stayed for at least 90 days and potentially the full 120 days. Part of what occurs
during a stay of proceedings is mediation and it is common for the mediation meeting to not be set down until during the second extension. If there is any continuation of discussions from the mediation, then it would be common for the stay to be extended for the third extension period.
8. What options does a creditor have to get the stay terminated early?
It is definitely possible to get early termination of a stay of proceedings, including within the initial stay period.
One basis for getting early termination is to challenge whether the party obtaining the stay is a “farmer” within the meaning of the FDMA. However, as discussed earlier, courts will take a broad view of who will qualify as a farmer.
Another way to get the stay terminated early is to come within section 14(2) of the FDMA, where the administrator may direct that the stay be terminated if:
(a) the farmer or majority of the creditors refuse to participate or continue in good faith in mediation;
(b) the mediation will not result in an arrangement between the farmer and the creditors;
(c) the farmer has contravened a directive issued by the administrator; or
(d) the farmer has jeopardized his or her assets or obstructed the guardian’s carrying out of his or her duties.
One would not expect the administrator to lightly terminate a stay because creditors refuse to participate in mediation. However, where there is a reasonable basis for finding misconduct on the farmer’s basis, the stay can and will be terminated by the administrator.
There is little case law on terminations of stays because, while there is an appeal process available to the farmer under the FDMA, that process is carried out by the Farm Debt Mediation Service and those decisions are not reported.
However, we are aware of an instance where the farmer had engaged in suspicious activities prior to applying for the stay (selling cattle that appeared to be subject to a creditor’s security while being engaged in forbearance negotiations with the creditor). Although the stay was initially granted, once the administrator was apprised of those suspicious activities, the administrator lifted the stay very quickly — within the initial 30 day period. That was also a case where the administrator had appointed an independent guardian. The guardian had also expressed concerns about his ability to carry out his duties, which appeared to be an additional factor that influenced the administrator’s decision to terminate the stay.