Be Careful of Taking “Any Action” Against a Farmer*

By on 2019/01/31

Farm protection legislation dictates creditor enforcement action in the agricultural sector. Separate and apart from the usual considerations surrounding “reasonably notice” and waiver or expiry of the BIA s. 244 Notice of Intention to Enforce Security, the federal Farm Debt Mediation Act S.C. 1997 c.21 (“FDMA”) prescribes an additional Notice of Intention to Realize Security (“NIRS”) which must be served with 15 business days’ notice before any enforcement action can occur. This provides farmers with the right to a stay of all proceedings for up to 120 days as well as mediation services. This layer of protection is compounded in Manitoba and Saskatchewan where there are also separate provincial farm protection regimes which establish statutory notices or applications, stays and mediation requirements, that must be complied with before secured creditors can proceed with their enforcement remedies.[1]

Enforcement steps taken by secured creditors in contravention of such farm protection legislation are typically deemed null and void. The need for compliance cannot be taken too lightly. For example, see M & D Farms Ltd. v. MACC 1999 CanLii 648 where the Supreme Court of Canada set aside eight years of mortgage sale and foreclosure proceedings (and related litigation) and forced a creditor to transfer back the lands to an affected farmer when it inadvertently filed and continued its FFPA leave application during a FDMA stay.

While there are practical and public policy reasons to place such restraint on secured creditors enforcing their security against farm assets, there is always some question as to how far these notice requirements might impact creditors enforcing unsecured creditors’ remedies such as say an ordinary debt action or a bankruptcy application. Should a creditor be restrained in taking ordinary debt enforcement actions simply because it holds some security? Even if that creditor is not actually enforcing its security? The NIRS is a “Notice of Intention to Realize on Security”; how can it possibly be necessary if the creditor is “not intending” to enforce security?

In late 2017 the Saskatchewan Court of Queen’s Bench set aside a civil action for recovery of damages under a farm land lease in HCI Ventures Ltd. W.S.O.L. Acres[1] because the Plaintiff creditor held security even though it was not actually intending to enforce that security.

HCI Ventures was an owner of a significant acreage of farm land in Saskatchewan. It in turn leased 4,500 acres of this farm land to SOL Acres (“SOL”) for cash rent. The farm land lease provisions were fairly standard but did include a proviso that SOL grant a security interest in all of its present and future property to HCI as collateral security for the lease obligations. SOL also executed a General Security Agreement in favour of HCI which had been attached as a schedule to the lease.

SOL failed to make rent payments and then abandoned the land, unable to afford the input costs.

HCI demanded payment of the rent arrears and then filed a Statement of Claim for damages arising from the rent arrears and other related obligations. It then applied for summary judgment.

Before commencing the Court action HCI did not issue the FDMA s. 21 Notice of Intention to Realize on Security.

Just to set out the applicable provisions of FDMA we note the following:

“Farmer” means any person, cooperative, partnership or other association of persons that is engaged in farming for commercial purposes and that meets any prescribed criteria”

 “Secured Creditor” means:

a) any creditor holding a mortgage, hypothec, pledge, charge, lien, privilege, priority claim or other security interest on or against the property of a farmer or any part thereof as security for a debt due or accruing due from the farmer;

b) Any person, cooperative, partnership or other association of persons: i) with which a farmer has entered into an agreement for sale, a lease with an option to purchase or conditional sale contract relating to any property used or possesses by the farmer, or; ii) to which such an agreement or contract has been assigned; and

c) any Bank, or authorized foreign Bank within the meaning of Section 2 of the Bank Act to which security on the property of a farmer or any part of the property has been given under Section 427 of that Act or under Section 427 as incorporated by Section 205 of that Act, as the case may be.”

Section 21(1) every secured creditor intends to:

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

b) commence any proceeding 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. (Emphasis added)

22(1) subject to (2), any act done by a creditor in contravention of Section…21 is null and void, and a farmer affected by such an act may seek appropriate remedies against the creditor in the Court of competent jurisdiction.”

When the matter came up for summary judgment HCI argued that it was not a secured creditor for the purposes of the action. Instead it argued it was merely a landlord suing for damages under a lease.

Even though HCI was pursuing an unsecured creditor’s remedy the Saskatchewan Court clearly found that it was a Secured Creditor under the FDMA by virtue of the executed GSA, as well as the specific provision in the lease granting the security interest and therefore was obliged to comply with FDMA s. 21 even though it was not actually taking a secured creditor’s remedy. A plain reading of FDMA s. 21(1)(b) clearly encompasses “any proceeding or any action for recovery of a debt” and there are no words to limit its application to where security enforcement is part of the relief sought. Having failed to comply with FDMA s. 21, the action was deemed to be nullity.

HCI also tried to argue that as the claim was for “damages” it was not an action or proceeding “for the recovery of a debt”. The Court dismissed this argument.

Accordingly, any creditors that might possibly fall into the definition of “Secured Creditors” under the FDMA must be particularly cautious in taking any action, even ordinary unsecured creditors remedies. This may of course cause a problem for certain creditors who do not realize that they are or may be “Secured Creditors”. It is not unusual to find in various sale agreements title reservation and similar security type language where the creditors are not even aware that it exists nor do they register their security in PPSA or otherwise. The door appears to be open for farm debtors to raise the FDMA s. 21 defence in these circumstances.

Also interesting is whether the FDMA s. 21 requirement applies to debts of farmers which are unrelated to actual farm operations. The Saskatchewan Court was clear that it was not deciding whether a debt action caught by FDMA s. 21 must relate to “farming operations”. In this instance the Court was satisfied that the debt in question included at least a debt that relates to farming operations. HCI Ventures was recently followed by another Saskatchewan Court in Input Capital Corp. v. Gustafson 2018 SKQB 154.

Given that any proceeding in violation of the FDMA notice requirements is a nullity, creditors must exercise extreme caution before even taking unsecured creditor remedies.

[1]  2017 SKQB 264

[1] The Family Farm Protection Act CCSM c.F15 (“FFPA”) and Farm Security Act SS 1988-89 c.S-17.1

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