How Lemare Lake Logging Ltd. v. 3L Cattle Company Ltd. could dramatically change how lenders realize on security over farm land in Saskatchewan
On April 1, 2014, the Saskatchewan Court of Appeal rendered its decision in Lemare Lake Logging Ltd. v. 3L Cattle Company Ltd. (2014 SKCA 35) (“Lemare Lake”). Read the Court’s decision.
In Lemare Lake, the Court of Appeal has opened the door in Saskatchewan for creditors to bypass the procedures for enforcement against farm land provided for in Part II of The Saskatchewan Farm Security Act, S.S. 1988-89, c. S-17.1 (the “SFSA”) by appointing a receiver under section 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”).
Part II of the SFSA has been a source of great frustration for lenders to farmers who go into default. It provides for an extensive and time-consuming set of procedures that must be followed before one can apply to court for leave to commence an action to enforce against farm land. In short, a creditor is forced to wait at least 150 days before applying for such leave (participating in mandatory mediation during that period), and that time period can be extended. By the time a creditor obtains leave, which the court has discretion to refuse to grant, 9 months can easily have elapsed since the creditor demanded payment and served notices on the farm debtor.
The paramountcy issue
At the Court of Queen’s Bench, the Chambers Judge refused to order the appointment of a receiver over the farm debtor, 3L Cattle Company Ltd., in part on the basis that the creditor, Lemare Lake Logging Ltd., had not followed the procedures in Part II of the SFSA. The creditor argued that Part II of the SFSA was inoperable in the circumstances because it conflicted with section 243(1) of the BIA. The Chambers Judge rejected that argument.
Saskatchewan’s Court of Appeal held that Part II of the SFSA does conflict with section 243(1) in such circumstances, because it frustrates the purpose of section 243 of the BIA in at least two ways. First, it would “dramatically displace” the 10 day notice period under the BIA by forcing a creditor to wait at least 150 days before applying for a court order. That is particularly significant where “being able to act in a time-sensitive manner is essential to the root effectiveness of the receivership remedy prescribed by the BIA” (para. 55). Second, Part II of the SFSA would effectively add a layer of new criteria for the appointment of a receiver under the BIA, as there are tests in the SFSA for granting of leave to commence an action that go far beyond the “just and convenient” test in the BIA for appointment of a receiver.
The Court of Appeal therefore held that a creditor can apply under section 243 of the BIA to appoint a receiver over farm land, without first having to follow Part II of the SFSA.
At this very early stage, only days after the Court of Appeal rendered its decision, we do not know whether leave to appeal will be sought from the Supreme Court of Canada. If any party does seek leave, it likely would be the Attorney General for Saskatchewan, which was named as a respondent and participated in argument. The SFSA has been at the core of Saskatchewan’s farmer protection legislative regime for over 25 years, and it would not be surprising to see the government attempt to ensure that all creditors must follow Part II and its procedures when enforcing against farm land.
Application of the “just and convenient” Test
Although the Court of Appeal held that a receiver could be appointed under section 243 of the BIA without following the SFSA procedures, it determined that in the circumstances of this case, it was not just or convenient to appoint a receiver.
Many of the Court’s reasons on this point were specific to the highly unique circumstances of the case. There were, however, three elements that would have broader application:
- The debtor had been attempting to sell farm assets to satisfy the debt owed to the creditor. The sale efforts had apparently been ongoing for a considerable time, but the Court had no evidence that the creditor considered the efforts to have been misdirected or that the land had been inappropriately priced.
- Although the debtor did not have the cash flow to satisfy the debt obligations in the short term, there was substantial equity in the collateral. The Court concluded that the creditor would probably be paid in full after following the SFSA procedures.
- The Court noted that there was no evidence that the security was being dissipated, and no evidence of apprehended or actual waste requiring the immediate preservation of the creditor’s collateral.
Is this the revolution?
Creditors of farm debtors who are in default have long been frustrated by the requirements imposed by Part II of the SFSA. They are expensive and time consuming and there is no certainty that the court will grant leave to commence a court action to enforce the creditor’s mortgage. Less experienced lenders are often shocked to learn of what they have to go through in order to obtain a remedy following default.
At first glance, it would seem that Lemare Lake could revolutionize the enforcement of farm mortgages in Saskatchewan, and it may end up doing so. If the farm land appears to have sufficient realization value to cover the costs of a modest receivership and also pay out the mortgage, any creditor would have to consider applying to appoint a receiver to avoid the SFSA requirements. Even where there is not such sufficient equity, creditors may prefer to apply to appoint a receiver in order to start enforcement in short order.
However, by declining to order a receivership in respect of a debtor whom it found to clearly be insolvent, the Court of Appeal has potentially left an opening for the courts below to be reluctant to appoint receivers in respect of farm land. One can expect that, except where the debtor is not resisting, receivership applications in respect of farm land will be scrutinized closely by the courts.
As we expect Saskatchewan courts to be cautious in appointing receivers over farm land, it may be premature to declare this the “revolution”. A very important door has been opened, however. Ag lenders and their counsel will be considering whether their farm mortgages that are in default are candidates for receiverships, and those of us who work in this area will be watching closely to see how the jurisprudence evolves.