Mortgagee’s Remedies

Part 2Security Interests in LandSection IIEnforcement & Receiverships – Land and Personal Property

Mortgagee’s Remedies • 1) Action on the Covenant • 2) Possession • 3) Foreclosure • Similar to PPSA right to retain in satisfaction • Not available in NB, NS

Mortgagee’s Remedies 4) Sale Judicial Sale Not available in NB Private/Contractual/Extrajudicial Sale Not available in NS Usual action in N.B., Nfld & Lab, PEI, Ont

Mortgagee’s Remedies • 5) Right to rents • Similar to PPSA proceeds • 6) Distress • 7) Appointing a receiver • Also in respect of personal property

Possession • M’ee has right to go into possession • By inherent right as owner once mortgage is in default • Because a mortgage is in form a conveyance of the fee simple, the m’ee would have a right to possession even before default, but for a standard clause giving the debtor quiet possession until default • Similarly with equitable mortgage (e.g. conveyance of right of redemption) • Second m’ee has better right to possession after default than does m’or • First m’ee has better right than 2nd

Possession • M’ee has right to go into possession • No notice required • Unless BIA applies • Possession by any means without a breach of peace • Often attornment of rents is sufficient to induce commercial m’or to give up possession

Possession • M’ee in possession has duty to manage property prudently (e.g. ensure that rental property is leased) and is liable for failure to do so • For this reason m’ee is very reluctant to go into possession • It is said that the duty is is onerous • But as importantly, it is a fruitful field for litigation

Equity of Redemption & Foreclosure • In form a mortgage is a transfer of the fee simple with a covenant for reconveyance on condition (or defeasible on condition subsequent) • Originally given strict legal interpretation • Condition is not satisfied if a payment is missed • Debt remains owing, with no obligation to reconvey land

Equity of Redemption • The Court of Equity intervened to allow the mortgagor to redeem the property by paying the debt • Thus “the equity of redemption” • Originally the right of redemption was recognized only in limited circumstances • Eg when the delay was short and the failure to redeem was the result of accident or fraud • Eventually, the mortgagor became entitled to redeem within a reasonable time • This is recognition that the mortgage is merely security for a debt rather than a true transfer

Equity of Redemption • The right of redemption is the right to pay the debt and regain title to the land, even after default • The right of redemption cannot be waived contractually – consumer protection • Is the right of redemption necessary? • Recall, when it was originally introduced, if the debtor did not redeem she would lose the land and still be liable for the debt • Now the proceeds of disposition are applied to the debt

Foreclosure • Foreclosure is a correlative right in the m’ee to extinguish the right of redemption, which might otherwise persist indefinitely • It is a motion asking the court to terminate or “foreclose” the debtor’s equity of redemption • In effect “either redeem now on the terms on which you would be entitled if you filed a suit for redemption in equity, or forever hold your peace."

Foreclosure • Effect of a order of foreclosure • The property vests in the m’ee • The m’ee cannot sue the debtor for any deficiency, unless the m’ee is in a position to reconvey the property (ie. has not sold to a third party) • Deficiency action automatically re-opens the foreclosure • Similar to PPSA retention in satisfaction • Except PPSA cuts off right to sue for deficiency completely – cannot be ‘reopened’

Foreclosure • Disadvantages • Requires judicial action • Expensive • Slow – typically 6 months • Uncertain • The foreclosure can be reopened on a motion by the debtor, sometimes even after the property has been transferred to a third party • Advantage • Judicially supervised

Power of Sale • The defects of the foreclosure remedy led parties to insert a power of sale into the mortgage contract • Sale conducted by the m’ee • This power was accepted by the courts and recognized legislatively • Most jurisdictions statutorily imply a private power of sale into any mortgage, e.g. NB Property Act s.44(1) • Some jurisdictions (e.g. N.S.) also allow judicial sale. • Sale, not foreclosure, but conducted by the court

Power of Sale • Effect of the sale essentially the same as under the PPSA right of disposal • Debtor has right of redemption up until the time of sale • M’ee has duty to take reasonable steps to secure fair market price • Proceeds are applied to the debt • M’ee can sue debtor for any deficiency • Debtor is entitled to any surplus • Property is conveyed to third party clear of all subordinate interests, subject to all senior interests • Purchaser takes good title regardless of defects in sale • With damages remedy against m’ee for sale defects

Power of Sale • Notice prior to sale • Usually a statutory notice requirement: • 4 weeks in NB • Property Act s. 45(1)(b) • 15 days after default before notice of sale; 35 days after notice before sale in Ont • S. 33 Mortgages Act

Power of Sale • Property Act s.47(2) • S.47(2) Where a conveyance is made in professed exercise of the per of sale conferred by section 44, the title of the purchaser is not impeachable on the ground that no case had arisen to authorize the sale, or that due notice was not given, or that the power was otherwise improperly or irregularly exercised; but any person damnified by an unauthorized or improper or irregular exercise of the power shall have his remedy in damages against the person exercising the power.

Power of Sale • Differences from PPSA • In most jurisdictions m’ee cannot buy in at the sale • But note that m’ee often can buy in at judicial sale • (In many U.S. jurisdictions can buy in at reasonable price) • Differences in details, e.g. • Notice period • Statutory publicity requirements – advertise in newspaper

Power of Sale • N.B. law is extremely unusual • M’ee can buy in for their own benefit, at any price • Duty to take reasonable steps to secure fair market price does not always apply • Duty applies to banks, or secured party buying in for their own benefit: • See Canada Trustco v 040381 NB Inc

Right of Redemption • Right of redemption is triggered by sale or foreclosure proceedings, not by possession • Why would m’ee want to go into possession on default without intending to sell?

Right to Collect Rents • A m’ee in possession has the right to collect rents as an incident of possession • M’ee will usually take an independent assignment of rents as additional security, with the right to collect rents triggered on default • This allows m’ee (if careful) to collect rents without going into possession • Similar to PPSA right to collect accounts

Distribution of Surplus • Proceeds of sale applied to: • Costs of disposal • Debt owing to SP • Subordinate interest holders in order of their priority • Same as under the PPSA

Action on the Covenant • M’ee has right to sue debtor on debt without realizing on security • When would m’ee want to do this? • Also a right to sue for deficiency after sale

Receiverships

Terminology • A “receiver” is a person appointed to take possession of and dispose of the property of a debtor • A “manager” is a person appointed to operate the business of a debtor • A receiver does not have the powers of a manager unless appointed as such • Very often a security agreement does provide for the appointment of a receiver-manager • Accordingly, the term “receiver” is often used to refer to a person who, strictly, should be called a “receiver- manager”

Types of Receiver • A receiver may be appointed (partial list): • By a secured party pursuant to a power granted by the security agreement • A “private receiver” or “privately appointed receiver” • Private receivers are unknown in the U.S. • By a court to preserve and protect the debtor’s property pending judgment • A “court appointed receiver” • By a court to aid an unsecured party to liquidate assets which could not be reached by execution (judgment creditor’s normal remedy) • “Receiver in aid of equitable execution”

Governing Acts • In addition to common law: • BIA part XI • Applies to all receivers (CAR or PAR) of substantially all the property of an insolvent or bankrupt person • PPSA • All receivers of personal property (incorporated or unincorporated debtor, court or privately appointed receiver) • Business Corporations Acts (except Ont.) • Receivers of corporations (real and personal property) • [PPSA and Bus. Corp. Acts are very similar] • Rule 41 NB Rules of Court – CAR only

Governing Acts • BIA and PPSA are almost identical and provide the most comprehensive regulation • Only receivers of real property of individual debtors (mostly residential mortgages) are not subject to either of these Acts • Receivers are rarely appointed in such cases • In what follows, we will only consider the law as amended by statute • Note that only receivers of real property of solvent individual debtors are not subject to any statutory regulation

Status of Receiver • A receiver is not simply the agent of the SP • Court appointed • Normally appointed on recommendation of SP, but formally • Officer of the Court • Acts as principal, not as agent • Privately appointed • Typically agent of both SP and Debtor because of “deemed agency clause”

Deemed Agency Clause • The security agreement normally provides that the receiver is appointed “as agent of the debtor” • If the agreement does not so provide, then the PAR is simply an agent of the SP • Since the clause is almost universal, in what follows we will assume that the security agreement does have such a clause

Deemed Agency Clause • Two goals • Allow receiver to enforce contracts on behalf of debtor, enter into new contracts • Receiver is like new management • Insulate SP from liability for acts of receiver in dealing with property • Only partially successful • Courts have held that notwithstanding the deemed agency clause, the receiver is agent of the SP for purposes of dealing with the collateral

Deemed Agency Clause • It seems to me that the receiver and manager in a situation, like the present, is wearing two hats. “When wearing one hat, he is the agent of the debtor company; when wearing the other, the agent of the debenture holder. In occupying the premises of the debtor and in carrying on the business, the receiver and manager acts as the agent of the debtor company. In realizing the security of the debenture holder, notwithstanding the language of the debenture, he acts as the agent of the debenture holder, and thus is able to confer title on a purchaser free of encumbrance.” • Peat Marwick Ltd. v. Consumers' Gas Co. (Ont C.A.)

PARM as Agent of SP • Since PARM is agent of the SP for the purposes of realization, • PARM can give clear title to purchase • Presumably SP is liable for any breach of duty by PARM in realization

Receiver’s Duty • Either type of receiver has strong reputational incentive to look after the interests of SP behind appointment • CAR owes fiduciary duty to all parties with an interest in the estate of the debtor, ie debtor and all creditors, secured and unsecured

Receiver’s Duty • PAR • PPSA s.64(7) On application by an interested person, the Court may. . . (e) notwithstanding anything contained in a security agreement or other document providing for the appointment of a receiver, make an order requiring a receiver or a person by or on behalf of whom the receiver is appointed to make good a default in connection with the receiver's custody, management or disposition of the collateral of the debtor or to relieve the person from any default on such terms as the Court thinks fit, ... • See similarly BCA s.58(d) • Liability of both SP and receiver for any default • Applies in principle to CARM but not in practice because of close court supervision

Managers & New Contracts • The receiver-manager may enter into new contracts • CARM as principal, PARM as agent of debtor • RM may want to • Borrow money to finance receivership • Enter into contracts for everyday operations of the debtor company ie for the supply of gas and electricity • Enter into contract for more ambitious operations of debtor, e.g. finance completion of existing contracts

Managers & New Contracts • In either case (CARM or PARM), SP at whose instance receiver was appointed is not liable on new contracts (unless that SP specifically agrees to be liable) • Terminology • For convenience, the party with whom the receiver contracts will be referred to as “the receiver’s creditor” even though, as we will see, the receiver is not necessarily liable on the contract

CARM & New Contracts • CARM normally contracts as principal • However, CARM has control over the legal persona of the debtor company and may attempt to contract solely on behalf of the company • In which case CARM is not liable and CARM’s creditor has only a claim against the debtor company ie is unsecured creditor of insolvent company • This result is unusual and would depend on the wording of the contract

CARM & New Contracts • When CARM contracts as principal, CARM has unlimited personal liability on the contract, absent contractual wording the to contrary • But is entitled to indemnification as charge on the assets, in priority to the charge of the SP at whose instance he was appointed and all subordinate charges • CARM’s creditor is entitled to be subrogated against the rights of the CARM and so has a senior charge against the assets of the debtor if the CARM were itself to become insolvent

CARM & New Contracts • CARM often limits personal liability to the extent of its charge against the assets of the debtor • What if CARM disclaims its personal liability entirely? • In principle, CARM’s creditor cannot have subrogated right against the debtor company if CARM is not liable at all • Rule 41.06 of the NB Rules of Court may give direct right • “Where the receiver exercises the powers granted under this rule, the property which is subject to the receivership is charged with the payment of obligations arising from the exercise of such powers.”

PARM & New Contracts • PARM is not personally liable on new contracts • PARM is agent, and the liability is that of his principal • Which is normally the debtor company • In which case the third party contracting with the receiver has a worthless claim against an insolvent company • PARM may accept (usually limited) personal liability on new contracts • In which case, like CARM is entitled indemnification as charge on the assets, in priority to the charge of the SP at whose instance he was appointed and all subordinate charges • PARM’s creditor is entitled to be subrogated to those rights

Managers & New Contracts • CARM and PARM are both usually able to borrow money to finance the receivership and to grant new charges against the assets of the debtor in priority to the charge of the SP at whose instance he was appointed and all subordinate charges • CARM has power by order of appointment • PARM has power with permission of SP by instrument under which it was appointed

Managers & New Contracts • Can subordinate interest holders object to the creation of this senior charge? • Not against CARM since charge is created with the authorization of the court • Not against PARM for routine charges, since these are expenses of the receivership and can be added in priority: PPSA s.59(3)(a) • For unusual charges, at one time SP might seek to have CARM appointed to avoid challenges of this kind • Now, PPSA s.64(7)(c), BCA s.58(f) allows PARM to seek pre-approval of the court without need to appoint CARM

Managers & New Contracts • In circumstances in which receiver is personally liable on new contract and is entitled to be indemnified as a first charge on the assets of the debtor, parties who contracted with the receiver are entitled to be subrogated to the receivers rights against the assets • So, if receiver becomes insolvent, party who contracted with receiver who was personally liable is becomes entitled to a first charge on the assets of the debtor

Court Appointed Receiver • Advantages • Useful where privately appointed receiver is having difficulty taking possession, or • Where there are many parties attempting to realize at the same time • Insulated from actions for improper disposition, since disposal is made pursuant to order of the court • Insulated from frivolous actions – typically cannot be sued without leave of the court • Disadvantages • Slow – court motions required • Expensive – court motions required

Court Appointed Receiver • Courts are reluctant to appoint a receiver when a privately appointed receiver is adequate

Mortgagee’s Remedies