Bank of Montreal v. Linden Leas Limited, 2017 NSSC 223

SUPREME COURT OF Nova Scotia Citation: Bank of Montreal v. Linden Leas Limited , 2017 NSSC 223 Date: 20170818 Docket: Tru No. 408708 Registry: Truro Between: Bank of Montreal Applicant v. Linden Leas Limited Respondent Decision Judge: The Honourable Justice Gerald R.P. Moir Heard: June 28, 2017, in Halifax, Nova Scotia Counsel: Bruce D.

Clarke, Q.C., counsel for the Bank of Montreal Jillian Foster, agent for Linden Leas Limited Sean Foreman, counsel for the Nova Scotia Farm Loan Board Moir, J. : Introduction [ 1 ] Five years ago the Bank of Montreal sued for the appointment of a receiver of a beef farm owned and operated by Linden Leas. The suit was brought by notice of application in chambers. The application is scheduled to be heard next October 30 th . [ 2 ] The Bank of Montreal moves for the appointment of an interlocutory receiver with limited authority to sell parts of the herd.

Linden Leas moves for the preliminary determination of what it says are questions of law: “A. Did the applicant creditor BMO act in contravention of

section 12 of [the Farm Debt Mediation Act ]?” and “B. Did the applicant BMO give the respondent farmer notice of 15 business days as prescribed in section 21(2)…?” It says an order should follow declaring that this application is null and void, setting aside various agreements, and releasing the secured debt. Interlocutory Receivership: Facts [ 3 ] The bank claims to be owed $513,058, and the principal position at least is not contested by the farming company. It mortgaged its assets, including the herd, to the Nova Scotia Farm Loan Board and the bank. It settled with the Farm Loan Board.

The rights of the bank over the herd, including rights to appoint a receiver and to request the court to appoint a receiver, are uncontested. [ 4 ] The bank gave notice of its intention to enforce security sometime between March 13, 2012 and April 3, 2012. It sued on April 11, 2012. [ 5 ] Two weeks later, Justice Edwards heard the bank’s motion for an interim receiver. In the meantime, the bank had received a

notice from the Farm Debt Mediation Service that Linden Leas had made an application under the Farm Debt Mediation Act and that astay of proceedings was in effect until May 19, 2011. [6] The notice was proved before Justice Edwards and evidence was given by affidavit that the Farm Debt Mediation Servicesupported the appointment.

Counsel for the bank pointed out that the draft order was for a purely supervisory interim receiver and one ofthe affidavits swore, “BMO does not intend to seize any cattle or take possession of any assets of Linden Leas at this time.” [7] Linden Leas contested the motion and referred to the Farm Debt Mediation Act provisions for notice by a secured creditor andthe stay that follows upon a farmer’s application. Nevertheless, Justice Edwards granted the order. No appeal was undertaken. [8] Two years later, the order was rescinded.

The Bank of Montreal and Linden Leas had come to terms. [9] In October of 2012 the bank agreed to forbear for a few months, and the farming corporation agreed to make four substantialpayments. Further forbearance agreements saw the parties through to the late spring of 2016. The last payment was made this pastOctober. [10] Linden Leas’ 2015 financial statements acknowledge close to $500,000 owed to the Bank of Montreal. The cattle inventory isbooked at over a million dollars in value. The 2016 financial statements and a recent appraisal suggest the values have remained aboutsteady.

Having settled with the Farm Loan Board and having realized a modest net income, the company reduced its deficitsignificantly. However, the bank is not getting paid. [11] Linden Leas is concerned that the herd has to be kept at a critical mass for viability, which mass is made up of a mixture of cullor slaughter cows, males, heifers, yearlings, and calves and of breeding bulls, yearling heifers, older heifers, and cows with calves mostlynot to be slaughtered or culled.

Partial liquidations could take the herd below the critical mass required for viability or upset the balancerequired for viability. [12] The Bank of Montreal is concerned that the debt owed to it has been in arrears for many years and there is no satisfying plan forretiring the debt. It is a secured creditor, and its borrower is in breach of its covenant to pay.

Interlocutory Receivership: Principles [13] The original Judicature Acts codified and extended, in a single provision, the equitable powers to order, on an interlocutorybasis, a mandatory injunction, then referred to as mandamus, a prohibitory injunction, or a receivership. For Nova Scotia, see JudicatureAct S.N.S. 1984, c. 25, s.14(7), which was taken word for word from the English Supreme Court of Judicature Act, 1873, s. 25(8). Thiswas a codification because the courts of equity had been granting these interlocutory remedies for years.

It was also an extensionbecause law and equity were fused and the remedies became available “whether the estates claimed…are legal or equitable”. [14] At the time of the Judicature Acts, an interlocutory receivership was the primary kind. Equity provided a remedy to control acorporation pending the outcome of a suit about the corporation. The use of receivership as an instrument of liquidation to enforce amortgage, or other security, was then emerging.

See John McGhee, Q.C., Snell’s Equity Thirty-Third Edition (2015, Sweet & Maxwell,Landon) at p. 530. [15] Our Civil Procedure Rules recognize that the primary role of receivership is as a final remedy for realizing on secured assets,making it necessary to afford the protections that come with notice and resolution of disputes through the trial of an action or the hearingof an application.

Thus, Rule 73 – Receiver provides for a “final remedy” in Rule 73.01(1) and Rule 41 – Interlocutory Injunction andReceivership provides for “interim receivership” and “interlocutory receivership” in Rules 41.02(2) and 41.02(3). [16] With the change in the primary role of receivership comes the recognition that the same protections for those against whom aninterlocutory injunction is sought should apply for those against whom an interlocutory receivership is sought. See, Rule 41.02(3)(c).

Itfollows that the rich jurisprudence on interlocutory injunctions applies by analogy to receiverships before default judgement,

summaryjudgement, trail of an action, or hearing of an application. [17] Writing for a majority of the Supreme Court of Canada in Google Inc. v. Equustek Solutions Inc., 2017 SCC 34, Justice Abellasummarized the three test-like questions of Manitoba (Attorney General) v. Metropolitan Stores (MTS) Ltd., (SCC),[1987] 1 S.C.R. 110 and the overriding general question of RJR-MacDonald Inc. v.

Canada (Attorney General), (SCC),[1994] 1 S.C.R. 311. …[I]s there a serious issue to be tried; would the person applying for the injunction suffer irreparable harm if the injunction were notgranted; and is the balance of convenience in favour of granting the interlocutory injunction or denying it. The fundamental question iswhether the granting of an injunction is just and equitable in all of the circumstances of the case.

This will necessarily be context-specific. [Google, at para. 25.] [18] The applicant referred me to RJR-MacDonald Inc. and Google Inc., but suggested that the approach may be more relaxed wherea secured creditor seeks receivership under security instruments that contract for receivership in default. The bank relied on EnterpriseCape Breton Corp. v. Crown Jewel Resort Ranch Inc., 2014 NSSC 128, Canadian Tire Corp. v. Healy, 2011 ONSC 4616, and Bank ofMontreal v.

Sherco Properties Inc., 2013 ONSC 7025. [19] While I accept the proposition that a security instrument containing provisions for receivership is a strong factor in favour ofordering a receivership, and engages the need to protect the credibility of security, it is prominent in trials or hearings for a final order. Although they were brought in an interlocutory proceedings, the cases relied on by the bank were for final orders. As I said, theinterlocutory receivership in Nova Scotia is a temporary remedy.

[ 20 ] The approach our Rules adopted leaves the final receivership order to default,

summary judgement, trial of an action, or hearing of an application. This embraces the policy against prejudgement that underlines the Metropolitan Stores , RJR-MacDonald Inc. , and Google Inc. line of cases. Whether to Grant the Interlocutory Receivership? [ 21 ] The question of a serious issue to be tried is equated with “the claim is not frivolous”: American Cyanamid Co. v. Ethicon Ltd. , [1975] A.C. 396 as quoted at p. 335 of RJR-MacDonald Inc. The notice of contest filed by Linden Leas Ltd. is argumentative and fails to clearly delineate what issues it raises for the hearing.

It appears that the respondent is contesting the application on the grounds of a failure to comply with the Farm Debt Mediation Act , on an argument about fairness and the court’s equitable jurisdiction, and on a complaint about the expense of the interim receivership. [ 22 ] I describe the Farm Debt Mediation Act defence in the part of their decision on the respondent’s motion for determination of a question of law.

While the respondent faces some challenges in making the defence, I cannot find that it fails to raise a serious question. [ 23 ] The applicant generously permitted the respondent to present unproved documents and to make complicated representations of facts. I cannot find that the proposal to liquidate a limited part of the herd each month is sufficiently fair to satisfy my general discretion now. Nor can I find that the respondent fails to raise serious issues for the hearing judge’s discretion on the ultimate determination. [ 24 ] I say there is a serious issue for the hearing judge with reservation.

Problems with the Farm Debt Mediation Act defence will be discussed. Problems with the argument about fairness include the lengthy default under contracted promises, the numerous accommodations and acknowledgements, and the need to protect the credibility of security. [ 25 ] The question of irreparable harm turns on complicated representations of fact about limiting culls to maintain the integrity of the herd. These facts and representations were permitted, and may support a finding of irreparable harm if accepted. [ 26 ] A concern was also expressed about the herd being uninsured. Representations were permitted.

The indication is that insuring beef cattle raised outside is prohibitively expensive and uncommon. The interim receiver filed four reports. The absence of insurance was recorded twice in 2012. The bank made no protective disbursement and the interim receiver did not purchase insurance. [ 27 ] The balance of convenience is much affected by the time between the hearing for an interlocutory receiver and the final hearing. I cannot find that the value of the herd will diminish these times. I have concerns that the issues may not be determined that quickly, but such is the path the applicant has set.

In the meantime, the bank’s primary concern appears to be that the herd is increasing at the expense of the obligations owed to the bank. Against that valid concern, I have to weigh the farm’s concern about partial liquidation compromising the integrity of the herd. [ 28 ] I find that granting the interlocutory receivership sought by the Bank of Montreal would not be just and equitable in all the circumstances, including the short time between now and the date for the final hearing.

Question of Law [ 29 ] I explained to the respondent that we cannot separate a question of law unless “the facts necessary to determine the question can be found without the trial or hearing”: Rule 12.02(a). The respondent submitted that the necessary fact-finding was simply counting some days. The required findings are more complicated than that. [ 30 ] The purpose of the Farm Debt Mediation Act is to allow insolvent farmers an opportunity for mediation with farm creditors. The farmer applies to an administrator. A review is conducted and a report is prepared. The administrator appoints a mediator.

If the mediation is successful, the parties execute an instrument referred to as an arrangement. If unsuccessful, the administrator terminates the mediation. [ 31 ] The mediation process is supported by restrictions on starting enforcement of security and by provisions for stays of proceedings. [ 32 ] A secured creditor who decides to “enforce any remedy against the property of a farmer”: s. 21(1)(

a) or “to commence any proceedings…for the recovery of a debt, the realization of any security or the taking of any property of a farmer”: s. 21(1)(

b) must notify the farmer of the secured creditor’s intention and of the right to make an application for mediation. This notice “must be given to the farmer in the prescribed manner at least fifteen business days before the doing of any act as described in paragraph 1(

a) or (b).” [ 33 ]

Section 17 of the Farm Debt Mediation Regulations prescribes the manner in which the secured creditor’s notice is to be given. Paragraph 17(1)(

b) allows the creditor of a farming corporation to deliver the notice to an officer, to leave it with anyone at the farm’s place of business, or to send it by “priority post, courier or registered mail” to the place of business. In the later case, the notice “is deemed to be given seven business days after the day on which the notice is sent”: s. 17(3). Subsection 1(1) defines “business day” as “a day that is not a Saturday or a holiday”. Subsection 35(1) of the federal

Interpretation Act defines “holiday” to include Sundays, Good Friday, and Easter Monday. [ 34 ] Subsection 22(1) of the Farm Debt Mediation Act provides “any act done by a creditor in contravention of

section 12 or 21 is null and void”. It also provides that the farmer “may seek appropriate remedies against the creditor”. [ 35 ] There is some suggestion the notice was delivered to the business office of the farm by a courier shortly after the notice was prepared. If it were so, and if a person was present to take the delivery, there was plenty of time before this proceeding was commenced. If the notice was not given to a person, there was not enough time for the seven day presumptive delivery time and fifteen days following that. [ 36 ] I have a discretion to separate, or refuse to separate, a question of law. In the circumstances, I would not make a finding about

when the delivery was made and, therefore, would not separate the proposed questions. But, the problems with this motion extend beyond that. [ 37 ] Even if the commencement of this proceeding was initially “null and void”, that may not now be the case or it may be something Linden Leas Limited can no longer rely on.

Conduct over the past five years, including successfully engaging in the process the secured creditor’s notice was designed to protect and entering into the arrangements with their acknowledgements of the bank’s position, may have overcome the effects of insufficient notice, waived those effects, or lead to estopple. [ 38 ] Further, the remedies sought by the respondent for insufficient notice are by no means axiomatic.

A remedy that restores the farmer to the position it would have been in had sufficient notice been given would be far less drastic than what the respondent proposes. [ 39 ] There are, therefore, findings of fact and legal determinations required before the subjects of the respondent’s motion could be resolved. Conclusion [ 40 ] I dismiss both motions. Costs will be in the cause. Moir, J.