Things You May Not Know About the Farm Debt Mediation Act

7 juillet 2016 | David G. Gerecke

( Disponible en anglais seulement )

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

(a) enforce any remedy against the property of a farmer, or

(b) 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).  Even if the farmer is not insolvent, the notice must still be given: Antrim Balanced Mortgage Fund Ltd. v. Pastula, 2015 BCSC 1061 (“Pastula”) at paras. 14 and 15.

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 SKCA 140.

2. 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 Pastulas applied for and obtained a stay in March 2015 and that stay was terminated.  In the original foreclosure proceedings in 2014 the Pastulas 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 Pastulas 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 creditor would have to give the FDMA notice and start again from the beginning.

3. 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:

  1. prepare an inventory of all the assets of the farmer;
  2. verify periodically the presence and condition of those assets; and
  3. advise the administrator of any act or omission that would jeopardize those assets.

4. 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.

5. 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, 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:

  1. the farmer or majority of the creditors refuse to participate or continue in good faith in mediation;
  2. the mediation will not result in an arrangement between the farmer and the creditors;
  3. the farmer has contravened a directive issued by the administrator; or
  4. the farmer has jeopardized his or her assets or obstructed the guardian’s carrying out of his or her duties.

We 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.

Note: a version of this Financial Services and Insolvency Communiqué has been posted on The Food Web blog.

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