On November 13, 2015, the Supreme Court rendered its decision in Lemare Lake Logging Ltd. v. 3L Cattle Company Ltd. (2015 SCC 53) ("Lemare Lake"). A copy of the Court's decision is available here. The majority overruled the Saskatchewan Court of Appeal decision, which we wrote about previously for this blog: On the Verge of a Revolution? How Lemare Lake Logging Ltd. v. 3L Cattle Company Ltd. could dramatically change how lenders realize on security over farm land in Saskatchewan.
The Supreme Court's findings represent another piece in the federal / provincial paramountcy puzzle as it relates to creditors' remedies. In this instance, the Supreme Court held that the provincial legislation could stand. Therefore it appears that there will be no revolution in the enforcement of security over farm land in Saskatchewan, and this piece of the Saskatchewan farmer protection regime will continue to stand.
The case arose out of unique circumstances. The creditor and debtor, Lemare Lake Logging Ltd. and 3L Cattle Company Ltd., respectively, had been related companies in which a father and his two sons were involved. The companies were restructured to separate them so that the creditor was owned by the sons and the debtor owned by the father. The debtor was indebted to a credit union, but the creditor was contingently liable for that debt. The debtor indemnified the creditor for the credit union debt and granted a mortgage and other security to the creditor to further secure the indemnity. The creditor later became subject to a protection order under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA") and wanted to realize on the security granted by the debtor to help it emerge from the CCAA proceedings.
In making the application to have a receiver appointed over the debtor, the creditor relied solely on section 243 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "BIA"), which provides for the appointment of a national receiver. In applications to appoint receivers in Saskatchewan, the most common practice is to refer to both provincial and federal sources of jurisdiction so it seems likely that the creditor was making a very deliberate choice to rely only on section 243.
The debtor objected to the appointment, arguing that the creditor was obliged to first comply with Part II of The Saskatchewan Farm Security Act S.S. 1988-89, c. S-17.1 (the "SFSA"). Part II sets out onerous and time-consuming procedures for enforcement of security against farm land in Saskatchewan, forcing a creditor to wait at least 150 days before applying for leave to commence an action to enforce a mortgage on farm land.
The Court of Queen's Bench held that Part II of the SFSA governed and that no appointment of a receiver could occur until Part II had been complied with. On appeal, the Court of Appeal held that Part II of the SFSA was inconsistent with section 243 of the BIA. Consequently, the Court of Appeal determined that SFSA Part II was inoperative due to federal paramountcy, focusing on two factors: (i) it frustrated the purpose of section 243 by requiring creditors to wait for the SFSA-mandated period to expire before appointing a receiver, and (ii) Part II of the SFSA would effectively add a layer of new criteria for the appointment of a receiver under the BIA, as there are tests in the SFSA for granting of leave to commence an action that go far beyond the "just and convenient" test in the BIA for appointment of a receiver.
The Supreme Court's Ruling
The Court emphasized the principle of cooperative federalism, which requires that paramountcy must be narrowly construed, and that courts take a restrained approach, favouring harmonious interpretations of federal and provincial legislation over interpretations that result in incompatibility.
The Court distinguished between "operational conflicts", where compliance with both federal and provincial law is impossible, and "frustration of purpose", where the provincial law thwarts the purpose of the federal law. The majority held that no operational conflict existed because it is possible to comply with both statutes by complying with Part II of the SFSA before applying to appoint a receiver under section 243 of the BIA.
That left the question of whether the SFSA frustrated the purpose of section 243. The Court of Appeal had emphasized the time sensitive nature of insolvency proceedings, and the need to have quick access to remedies, noting the enormous gap between the 10 day waiting period prescribed by section 243 and the minimum of 150 days required by the SFSA.
The majority of the Supreme Court was unconvinced by the "timeliness" argument. They noted that the language of section 243 is permissive – a court "may" appoint a receiver if it is "just or convenient" to do so. Further, they held that section 243 is not a complete code (i.e., a comprehensive remedy exclusive of provincial law), as there are other sources of jurisdiction for appointing receivers, and that federal permissive legislation, without more, will not establish that the federal purpose is frustrated when provincial legislation restricts the scope of the federal permission. They also referred to section 72(1) of the BIA, which states:
72. (1) The provisions of this Act shall not be deemed to abrogate or supersede the substantive provisions of any other law or statute relating to property and civil rights that are not in conflict with this Act, and the trustee is entitled to avail himself of all rights and remedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by this Act.
In the Court's view, section 72(1) confirmed that provincial law will continue to operate in the bankruptcy and insolvency context, except where inconsistent with the BIA.
The Court also noted that the timeliness question might be addressed by section 47 of the BIA, which provides for appointment of interim receivers.
Ultimately, the Court appears to have determined that the principal reason behind the enactment of section 243 was to enable the appointment of national receivers, to supplement the limited powers that had previously existed for interim receivers and eliminate the need to apply to appoint receivers in multiple jurisdictions.
Implications and Unanswered Questions
The Supreme Court expressed a rationale that we had expected the Saskatchewan Court of Appeal to adopt. Saskatchewan is Canada's most debtor-friendly province from a legislative perspective, and also the province that likely has the most far-reaching legislation to protect farmers. With respect to enforcement against farmers in Saskatchewan there are some implications and unanswered questions:
- As noted above, the Supreme Court referred to interim receiver provisions in section 47 of the BIA. They did not, however, comment on whether there would be a conflict between section 47 and Part II of the SFSA, which leaves open the question: could an interim receiver be appointed to preserve farm land while the steps in Part II of the SFSA were undertaken?
- In this case, the debtor had operations only in Saskatchewan. What if a farmer were to have operations in multiple jurisdictions? Could that particular situation persuade a court that the ability to appoint a national receiver was frustrated by the SFSA?
- The assumption of the Court seemed to be that a receiver could not be appointed until Part II of the SFSA had been complied with. There have been prior Saskatchewan cases where a receiver was appointed to take possession of personal property and, before that personal property was disposed of, notices required by other parts of the SFSA were served (whether by the receiver or the creditor). Will that practice be affected? Similarly, there are notice provisions under other provincial legislation that must be complied with before creditors may take certain actions. One hopes that the Supreme Court's decision in Lemare Lake will not affect those practices. There seems to be no need for every possible notice to be served as a precondition to appointment of a receiver, as long as the debtor is ultimately served prior to disposition of property. If Lemare Lake does interfere with those practices, then interim receiverships would likely become more common, or would last longer before receivers with full powers are appointed, which would increase costs for creditors.
We note that Côté J. delivered a strong dissent, but none of the other Justices concurred with it, resulting in a 6-1 majority. Perhaps the dissent will be influential in narrowing the future effect of Lemare Lake, but that remains to be seen.
In the meantime, lenders to Saskatchewan farmers need to understand the obstacles and time frames in enforcing security against Saskatchewan farm land: notices under the Farm Debt Mediation Act, S.C. 1997, c. 21 must be served, which can delay any further steps for several months if the farmer obtains a stay under that Act. Then Part II of the SFSA must be complied with. While that process involves a minimum of 150 days, in reality it can take months longer, and the creditor must still persuade the court to grant permission to commence an action. While the creditor usually succeeds in that, there are instances where creditors have not been successful. If it fails to obtain the court's permission, the creditor is prohibited from re-starting the process for a year. In the meantime, the farmer can get away with making no payments.
Note: a somewhat modified version of this blog entry has been posted as a Financial Services and Insolvency Communiqué.
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