Section II
Enforcement &
Receiverships – Land and Personal
Property
Mortgagee’s Remedies
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

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


Originally the right of redemption was recognized only
in limited circumstances

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Thus “the equity of redemption”
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
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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


This power was accepted by the courts and
recognized legislatively


Sale conducted by the m’ee
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

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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


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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
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
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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.

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By a court to preserve and protect the debtor’s property
pending judgment

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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
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In addition to common law:
BIA part XI
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PPSA
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All receivers of personal property (incorporated or unincorporated
debtor, court or privately appointed receiver)
Business Corporations Acts (except Ont.)
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Applies to all receivers (CAR or PAR) of substantially all the
property of an insolvent or bankrupt person
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


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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
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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

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Privately appointed

Typically agent of both SP and Debtor because of
“deemed agency clause”
Deemed Agency Clause
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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
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
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
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PAR
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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
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The receiver-manager may enter into new contracts

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CARM as principal, PARM as agent of debtor
RM may want to

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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
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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?
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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
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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

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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

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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?

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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


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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