In a previous Communique post entitled Things You May Not Know About the Farm Debt Mediation Act, we discussed several aspects of how the federal Farm Debt Mediation Act (referred to throughout as the “FDMA” or the “Act”) operates, and what creditors need to know when starting to enforce security against farmers.
We published an expanded version of that piece in the National Insolvency Review (February 2017). Two questions not discussed in that post were (1) when a party claiming against a farmer will be treated as a secured creditor, and (2) what will constitute a “debt”. In HCI Ventures Ltd. v. S.O.L. Acres 2017 SKQB 264 (“HCI Ventures”), Mr. Justice Barrington-Foote was faced with those questions.
While the Court’s findings were neither surprising nor ground-breaking, the decision is interesting as another cautionary tale for creditors attempting to recover from farmers, and the matters discussed provide a good opportunity to supplement our previous post.
The facts were straightforward. The defendant, S.O.L. Acres (“SOL”) was a farming partnership comprised of two individuals. It had leased farmland from the plaintiff, HCI Ventures Ltd. (“HCI”) pursuant to a cash lease. The annual rent was substantial, as the lease covered over 4,500 acres even after some acreage had been removed by a lease amendment.
Most of the lease provisions reproduced in the Court’s decision appear quite standard, but two were of particular relevance. In one clause, SOL granted to HCI a “security interest in all present and future personal property of the tenant”. As well, there was a general security agreement attached as a schedule to the lease, in which the defendants granted security in all of their personal property as a general collateral security for the payment and performance of all obligations and indebtedness of SOL to HCI from time to time.
SOL failed to make certain rent payments and then abandoned the land, unable to afford input costs.
HCI demanded payment of the rent arrears, and then commenced a court action claiming “damages” arising from the rent arrears and other related obligations. It then applied for summary judgment. The Court decision deals with that summary judgment application.
Before commencing the court action, HCI served no notice under the FDMA.
Section 21 of the FDMA requires service of a prescribed notice on a farmer before a secured creditor (i) starts to enforce any remedy against the property of a farmer, or (ii) commences any proceedings for the recovery of a debt against a farmer.
HCI Ventures arose in a somewhat unique context for FDMA cases, with the claim against the farmer having been brought pursuant to a real property lease.
In the summary judgment application, HCI argued that it was not a secured creditor and that it was not attempting to recover a debt. Instead, it argued that it was merely a landlord under a lease, and that it was suing for damages, not a debt. The Court’s decision revolved around those two points.
The problem facing HCI was that the lease contained a clear grant of security, and also attached a security agreement as a schedule. On its face, it appeared that HCI was a secured creditor of SOL. HCI attempted to persuade the Court that the definition of “secured creditor” should be interpreted narrowly, to include only lenders who took security in respect of loans or financing provided for farm purposes. In the Act, “secured creditor” is defined as including any creditor holding a “security interest…for a debt due or accruing due from a farmer.”
Similar to the approach taken in many other decisions interpreting the FDMA, Justice Barrington-Foote emphasized the purpose of the Act – to provide insolvent farmers with some breathing room and an opportunity to try to reorganize their financial affairs given the volatility of markets for farm produce. Given that protective purpose, the Court was unwilling to interpret the Act narrowly. With little difficulty, Justice Barrington-Foote determined that HCI was a secured creditor of SOL.
The remaining question was whether the rent arrears constituted a debt. The Court noted that “debt” has been broadly defined in case law. The key distinction was between a liquidated money demand, which would be a debt, and an unliquidated claim for damages. Justice Barrington-Foote gave examples of numerous types of claims, even where liability would be imposed by law rather than contract, that would constitute liquidated demands and thus debts, and he concluded that it was an “obvious proposition that overdue rent may be a debt”.
As such, the claims asserted by HCI were to recover debts. HCI’s attempt to characterize its claim as damages could not overcome the proper interpretation of the FDMA.
HCI was therefore subject to the requirement to serve SOL with notice under Section 21 of the FDMA, and its action was a nullity by reason of its failure to do so.
Lessons For Creditors
1. One cannot be too careful when starting any enforcement proceedings against a farmer. Every creditor in that position must carefully evaluate whether the notice under section 21 of the FDMA needs to be served.
2. In many cases, creditors may not think of themselves as secured creditors. For example, crop input suppliers often have brief provisions in their credit agreements where the farmer grants a security interest. A simple one-sentence paragraph may cause the supplier to be a secured creditor, even if the supplier rarely thinks about that clause in its standard form. All such agreements must be reviewed carefully to ensure that they do not contain clauses that might be treated as a grant of security.
3. It is entirely clear that “debt” will be interpreted broadly for the purpose of the FDMA, and creditors must take that into account.
While a creditor of a farmer may think the FDMA will not apply to it because the arrangement does not involve debt relating to the farm operation, that may not relieve of the obligation to serve the notice. In obiter, Justice Barrington-Foote added the comment that he was not deciding that “a debt is caught by s. 21 only if it relates to the farming operation.” He expressly stated that he was deciding only that “debt” includes at least debt of that kind. That leaves open the possibility that debt that is entirely unrelated to the farm operation might also be subject to the notice obligation.
4. We consistently advise clients to serve the FDMA notice if there is any chance that section 21 might apply. The fifteen business day notice period is not substantially longer than a normal demand period, so serving that notice places minimal extra burden on creditors. On the other hand, the consequences of erroneously not serving the notice can be extremely harsh, particularly if the farmer’s property is seized, which may give rise to a claim for damages by the farmer.
Thus, it is difficult to envision a circumstance where taking any risk of non-compliance with the FDMA would be warranted. Even in this case, where the landlord was merely suing for judgment, it will have incurred substantial expense, will be liable for SOL’s court costs, and will have to start again from the beginning.