Section 2778 of the Civil Code of Quebec provides that a creditor must obtain the authorization of the court in order to take property in payment when the debtor has discharged half or more than half of the secured obligation.
Until very recently, "half of the secured obligation" referred solely to the unpaid portion of the principal. A recent decision from the Court of Appeal alters this interpretation. In the CIBC Mortgage Corporation vs. Vasquez decision, rendered on April 10, 2000, the Court of Appeal by a majority decided that the secured obligation includes not only the principal, but also the interest and costs associated to it.
1. Court Of Appeal Decision
In April 1986, the lender had granted a hypothecary loan in the amount of $40,800, bearing interest at a rate of 11% per annum payable in monthly instalments. Following several renewals of the loan, the debtor defaulted in June 1997. At that time, the debtor had paid a total amount of $51,189, of which $6,860 was in principal. It is common knowledge that when a loan is repaid over a long period of time, the bulk of the money from the early payments is applied against interest charges and very little of it is applied to the principal owed.
The problem presented itself as follows. If the "secured obligation" mentioned in Article 2778 targets only the principal owed, then the debtor has not reimbursed half or more than half of its obligation. On the other hand, if the "secured obligation" comprises principal, interest and costs, then the debtor can benefit from Article 2778.
2. Majority Ruling
The Court of Appeal retained this last interpretation. According to the court, the secured obligation includes all of the secured sums, to wit the principal, interest and costs. In this respect, the court refers to Article 2667 of the Civil Code of Quebec, according to which "a hypothec secures the capital, the interest accrued thereon and the legitimate costs...". Since the hypothec secures all sums so mentioned it must be understood, according to the court that the secured obligation as mentioned in Article 2778 targets these same sums. On a practical note, it is interesting to see that the Court of Appeal bases its calculations on the sums paid and payable as at the date of the motion to take property in payment.
Therefore, leave of the court was required before CIBC could proceed with taking in payment the property to which the hypothec pertained.
3. Minority Ruling
The decision was the object of a strong dissenting opinion delivered by Mr. Justice Marc Beauregard. In his Lordship's view, the secured obligation represents solely the principal of the debt. The loan is for an amount of $40,800, not $51,000. The obligation is to repay the principal amount of the loan. The interest that accrued on the principal represents the amount paid in order to benefit from the principal amount. In the opinion of the dissenting judge, to decide otherwise would have the effect of rendering the procedure of taking property in payment much more costly to the creditor if the latter had had to invest a substantial amount of money either to preserve the secured property or to protect his claim as any such investment would increase the "secured obligation". This end result cannot be the aim of Article 2778.
Whether or not we agree with the Court of Appeal's decision, it remains that lenders who consider taking property in payment will have no choice but to adhere to these guidelines and govern themselves accordingly. More particularly, any lender that finds itself in this situation must make the appropriate calculations to determine whether or not it is in the grey zone defined by the Court of Appeal, where leave therefrom is required before taking property in payment. At best, we may hope that case law will eventually be reversed... or that the Civil Code will be amended.
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The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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