) XIII. DOING IT YOURSELF 25

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1 SEIZING ASSETS OF A DEBTOR I. INTRODUCTION II. SEIZING ASSETS IN SECURED TRANSACTION SITUATIONS III. ENFORCEMENT REMEDIES AVAILABLE 3 IV. DEBTORS' RIGHTS IN ENFORCEMENT SITUATIONS INVOLVING SECURED TRANSACTIONS 6 V. METHODS OF SALE 8 VI. IS PART V OF THE PPSA A COMPLETE ENFORCEMENT CODE? 9 VII. JUDICIAL SUPERVISION OR ASSISTANCE IN ENFORCEMENT SITUATIONS 12 VIII. PRE-REQUISITES TO SEIZURE 13 IX. SEIZING ASSETS OF A DEBTOR IN UNSECURED SITUATIONS 15 X. USING AN AGENT IN BANK ACT SECURITY CASES 17 XI. USING A RECEIVER 22 XII. PROBLEMS TO AVOID 24 ) XIII. DOING IT YOURSELF 25 XIV. PRECEDENTS AND CHECKLISTS 27 XV. BOOKS CITED 27 XVI. TABLE OF CASES 28 XVII. XVIII. XIX. APPENDIX A - Checklist for Possession, Sale or Retention Under the Personal Property Security Act 29 APPENDIX B - Checklist for Repossessions Under the Limitation of Civil Rights Act 38 APPENDIX C - Notice of Appointment of Agent Pursuant to the Bank Act 41 XX. APPENDIX D - Notice of Appointment of Receiver Manager 43

2 SEIZING ASSETS OF A DEBTOR Dale R. Doan INTRODUCTION It is my pleasure to address the topic of "Seizing Assets of A Debtor" in secured and unsecured transactions. This area encompasses a myriad of issues, many of which have gone the full circle as far as case law is concerned in the past. Therefore, I would like to give an overview of some of these issues for reference purposes only and deal with certain newer issues facing the practitioner in enforcement proceedings dealing with secured and unsecured transactions. SEIZING ASSETS IN SECURED TRANSACTION SITUATIONS This topic involves taking possession of real and personal property by virtue of real property security (mortgages, hypothecations of mortgage, and so on), personal property by virtue of security agreements (The Personal Property Security Act- "PPSA" situations) and unique forms of security over personal property (such as S. 178 of the Bank Act security). The Bank Act security situation will be dealt with below and the foreclosure situation is beyond the scope of this paper. Therefore, we will focus for the moment on the enforcement procedures in PPSA secured transaction situations.

3 Page 2 Practitioners should be alerted to the fact that Part V of the PPSA is very readable and understandable. It is a codification of enforcement procedures available in secured transactions situations involving personal property. A few themes run through Part V of the PPSA which are of importance when enforcement is considered. Firstly, the Part V remedies do not apply to all secured transactions involving person property. The enforcement schema deals only with security interests that secure payment or performance of an obligation. Basically this means that those "deemed" security interests which do not, in fact, create a security interest over personal property securing payment or performance of an obligation (such interests generally being in the form of leases for a term of one year, assignments of accounts or chattel paper, and possibly consignments) will not be afforded the benefit of using the Part V remedies. Any security agreement that does secure payment or performance of an obligation through a security interest over personal property will be governed by Part V. A second important theme which runs through Part V of the PPSA involves the tests of "commercial reasonability" and "good faith". The obligation of commercial reasonability appears in a few specific subsections. For example, S. 59(3) allows a secured party, after seizure, to delay disposition of collateral in whole or in part for any period of time that is commercially reasonable. S. 59(2) allows a secured party to

4 Page 3 ) dispose of collateral at any commercially reasonable time of day or place. However S. 64 (1) clearly states that all rights, duties and obligations arising under a security agreement, under the PPSA or under any applicable law shall be exercised or discharged in good faith and in a commercially reasonable manner. This general theme is critical in importance when considering enforcement. The secured party who acts arbitrarily and without regard to the procedures set forth in Part V acts at its peril. In addition, the arbitrary secured party may find that the provisions of S. 64 (2), the "deemed damages" provisions, may come into play and the debtor may be entitled to recover the losses or damages which the debtor suffered and which were reasonably foreseeable as a result of the failure of the secured party to act in good faith and in a commercially reasonable manner in the enforcement proceedings. Please refer to the interesting case of Bank of Montreal v. Switensky (1988) 68 Sask R. 168 (Sask Q.B.) where the court held that a defendant seeking to prove damages under section 64(2) of the PPSA must do so by way of counterclaim pursuant to Rule 105. ENFORCEMENT REMEDIES AVAILABLE An initial reading of Part V of the PPSA would leave one with the impression that it is "pro-secured party" in its ) orientation. This is partly correct. In the next portion of this paper I will explain some of the debtor protections which are available. However, the concept of commercial

5 Page 4 reasonability in personal property security legislation seems to accept the premise, rightly or wrongly that "a debtor" must suffer the consequences if the loan is not repaid". You will also note that if a deficiency should exist, in most cases the debtor will be responsible to the secured party for the deficiency once enforcement steps have been completed. This rather common sense approach finds its way into the choice of remedies available to a secured party. Some of the more important remedies and rights of the secured party may be listed as follows: 1. Mixed security involving both real and personal property - section 55(4) - where a security agreement covers both real and personal property, the secured party may choose whether to proceed under Part V as to the personal property, or to proceed as to both real and personal property, in which case Part V applies to the personal property only to the extent that it is not inconsistent with the laws applicable to proceedings against real property and personal property in a single action. 2. Whether to appoint a receiver section 56(1) - the secured party has the choice of including in any security agreement wording allowing for the appointment of a receiver or a receiver manager and describing his rights and duties. 3. Whether to apply for the appointment of a receiver manager - section 56 (2) - the secured party has the choice of applying to court for the appointment of a receiver manager whether or not receivership terms are included in the security agreement. 4. Preservation or repair of the personal propertysection 17(1),Section 56(5) and Section 59(1) a secured party when in possession of the collateral has the right to preserve or care for the personal property in question and repair the collateral and prepare it for disposition. 5. Taking possession of equipment - section 58(b) - if the collateral secured is equipment and the secured party has protected the security interest by way of registration, the secured party may choose to leave the

6 Page 5 ) equipment at the debtor's premises and render the equipment unuseable, at which point the secured party is deemed to have taken possession of the equipment Disposition of the seized collateral - section 59 - the secured party may choose the mode of disposition of the collateral including whether or not to repair, process or prepare for disposition the goods. The collateral may be disposed of by public or private sale, at any commercially reasonable time of day or place, as a whole or in commercial units or parts, and so on. Purchase of collateral section 59(11) a secured party may choose to purchase collateral or any part thereof at public sale but only at a price that bears a reasonable relationship to the market value of the goods. Retention of the collateral - section 61 - the secured party in possession may choose to retain the collateral in full satisfaction of the obligation secured rather than dispose of the same pursuant to section 59. SUbject to an objection by the debtor or other interested parties, the secured party may take advantage of this provision. Seeking relief section 63 - the secured party has a significant range of choice as to procedures to be incorporated if the collateral requires protection from dissipation or if a ruling of the court might be needed to properly dispose of a dispute between the secured party and the debtor. These are some of the more important examples of choices available to the secured party in enforcement situations. other choices also exist. Should the secured party arrange for one of its managers to seize the collateral in the event of a default? Or should the secured party hire a bailiff for these purposes? Another alternative would be to reduce the claim to judgment and use the offices of the sheriff to enforce a writ of Execution by way of seizure of the collateral in question. A number of considerations exist and each must be carefully looked at prior to enforcement steps being taken. It is important for counsel to advise the client on these matters as well as the rights of the debtor which would be prejudiced if the secured party acts arbitrarily.

7 Page 6 DEBTORS' RIGHTS IN ENFORCEMENT SITUATIONS INVOLVING SECURED TRANSACTIONS Just as Part V of the PPSA contains a number of rights and remedies in favour of the secured party, it contains provisions protecting the debtor in a number of circumstances. Here are a few of the more important debtor related rights and remedies which should be considered: 1. Rights and remedies available - section 56(7) - where the debtor is in default under a security agreement, the debtor has the rights and remedies provided in the security agreement as well as any other rights and remedies provided in Part V and those found in section 17 (Which requires the secured party to care for the collateral when in the secured party's possession). 2. No forced waiver of protections - Section 56(8) many of the protections in favour of the debtor found in the PPSA may not be waived or varied by virtue of this section. In addition, some of the duties imposed upon the secured party may not be waived or varied. 3. Notice prior to any disposition of collateral - section 59 (4) - prior to the secured party disposing of any seized collateral, a 20 day notice must be provided to the debtor and any other person known to have a subordinate interest in the collateral of the intended disposition. A receiver manager, if appointed, must also serve a notice of intended disposition. This allows the debtor an opportunity to protect its interest in the collateral in question. 4. Purchase of the collateral by the secured party section 59(11) - this section allows the secured party to purchase the collateral if the collateral is sold at public sale and only if the price paid bears a reasonable relationship to the market value of the goods. 5. Objection to retention - section 61(2) - if the debtor, or any other person interested in the collateral, feels he or she would be adversely affected by the secured party retaining the collateral in full satisfaction of the debt, a written objection may be provided and the collateral will then be disposed of pursuant to the normal disposition rules found in section Redemption of collateral - Section 62 - prior to the secured party disposing of the collateral, or prior to the secured party being found to have irrevocably

8 Page 7 ) elected to retain the collateral, the debtor may redeem the collateral by tendering fulfillment of all obligations secured by the collateral. Expenses must be paid as well. In addition, there are limits to the number of times a debtor may reinstate the security agreement. 7. Damages for breach by secured party - section 64 - this section includes deemed damages available to the debtor in the event that a secured party fails to discharge any duties or obligations imposed by the PPSA. The damages will be in an amount which is reasonably foreseeable as a result of the breach by the secured party. It should be noted that the principles of common law, equity and the law merchant continue to apply except insofar as they may be modified by the PPSA (Section 64 (5». Therefore, common law and equity case law should be reviewed in order to determine if any other protections are available to the debtor in enforcement situations. It is my view that the deemed damages provisions found in section 64 of the PPSA are generally not of critical importance. Case law indicates a willingness on the part of the courts to find liability on the part of the secured party for any damages suffered by a debtor as a result of the secured party's lack of compliance with legal and statutory requirements and duties. But the damages are restricted. The deemed damages provisions imply that the result of technical non-compliance (for example lack of giving a proper amount of notice) will be foreseeable damages rather than the more drastic result of deeming the security interest to be at an end. Following the ontario decision of National Bank of Canada v. LaSalle Excavating of SUdbury Ltd. (1986) 5 PPSAC 279, it was felt that non-compliance with a technical aspect

9 Page 8 of the Act (in this case service of notice provisions) could result in a bar to an action for deficiency. In fact, a closer reading of this case indicates that the court in question felt that a substantial non-compliance with the notice provisions, such as failure to serve the notice at all, may bar an action for deficiency, however technical non-compliance may result in the deficiency being reduced to the extent of the loss or damages actually suffered by the debtor as a result of the non-compliance. As far as Saskatchewan courts are concerned, it appears that technical non-compliance by a secured party will not bar an action for deficiency. It also appears that substantial non-compliance will similarly not bar an action for deficiency. For a review in this area, please refer to Canada Permanent Trust Company v. Thomas (1983) 6 WWR 130 and Canstar Trucking Ltd. v. Bank of Nova scotia (1986) 48 Sask R 136. METHODS OF SALE It is true that Section 59(2) ostensibly provides a series of choices in favour of the secured party as to how the collateral may be sold. However, the commercial reasonability test when applied by the courts may add an additional twist that requires considered attention and sound judgment in certain fact situations. Consider for example the case of Chrysler Credit Canada Limited v. Jelic Real Estate Limited (unreported - ontario

10 Page 9 Co. ct. March 8, 1990) a decision commented on in "commercial Insolvency Bulletin" October 1990, a publication of Fasken Campbell Godfrey. The secured party in that situation had seized a luxury automobile from a local businessman. The secured party had to choose whether to sell the collateral at the wholesale level or attempt a retail sale. Obviously, the most accessible market for the sale of collateral is at the wholesale level and the best price would be anticipated through a sale at the retail level. Secured parties, however, are in the business of lending funds and_not retailing. In the Jelic Real Estate decision, the ontario County Court felt that the secured party's sale of this luxury automobile at the wholesale level resulted in less than half of the current value of the motor vehicle and that this significant difference was not justified. Thus, the sale was not conducted in a commercially reasonable manner and the debtor was entitled to a credit for the balance of the amount that might have been expected if the sale had taken place on a retail basis. IS PART V OF THE PPSA A COMPLETE ENFORCEMENT CODE? There has been some discussion recently that secured parties must look to Part V to see if remedial provisions exist and if ) procedures exist given the fact situation faced by the secured party. If they do exist, these provisions must be strictly complied with only and the terms of contract or other statutory provisions may not be considered.

11 Page 10 It is my view that this position is erroneous. Firstly, section 69 states that where there is a conflict between the provisions of the PPSA and a provision of The Limitation of Civil Rights Act, The Exemptions Act, The Distress Act, or The Agricultural Implements Act, the provisions of the latter Act prevails. Similarly, if there is a conflict with any Act for the protection of consumers, the provisions of the consumer protection legislation will prevail. It is only in the instance where there is a conflict between the provisions of the PPSA and the provisions of a general or special Act other than those mentioned above, that the provisions of the PPSA will prevail. Consider, for example, the case of Bank of Montreal v. Gravelle (1982) 2 PPSAC 219, a decision of the Saskatchewan Court of Queen's Bench. The Court in that case held that the constructive possession provision found in Section 58 (b) (this is where the secured party may render equipment unuseable and is thus deemed to have taken possession of the same even if the equipment is left at the debtor's premises) do not override the requirements of Section 21 of The Limitation of civil Rights Act (which requires the secured party intending to take possession of an article to serve two copies of a notice in Form A on the debtor). A case which is often cited dealing with Section 58(b) is Bank of Montreal v. Gravelle where a secured party felt it had seized equipment of a debtor by removing the keys from a tractor and removing a rotor from a combine. However, the debtor continued to use the machinery and the Court eventually

12 Page 11 held that the secured party's action did not render the machinery unuseable, thus no constructive possession existed pursuant to the Act. In addition, where an article is sold, which has a selling price in excess of $ and the vendor retains a lien or security interest for part of the purchase price, then the vendor/secured party's right to recover the unpaid purchase price is restricted to its lien on the article sold and the right to repossession and sale. This is a conflict with the PPSA provisions entitling the secured party to a deficiency. In John Deere Ltd. v. Remmen (1972) 1 WWR 365 (Sask C.A) it was held that a secured party who reduced its claim to judgment in these circumstances had abandoned its right to repossess under the contract. Please refer also to Ford Credit Canada Ltd. v. Ross (1988) 5 WWR 573 (Sask Q.B.) where the court held that a vendor is limited to repossession and sale of the goods or to an action for the unpaid price. The vendor is not able to sue for deficiency after repossession. Thus, it is my view that statutory provisions found in those specified Acts which either help or hinder the secured party will prevail over Part V of the PPSA. Secondly, the PPSA contains provisions stating that the secured party and the debtor may agree as to rights and remedies. For example, Section 56(5) states that the secured

13 Page 12 party has, in addition to any other rights and remedies, "the rights and remedies provided in the security agreement" except as limited by certain provisions of the Act. Similarly, section 56 (6) states that the secured party may enforce the security interest by any method available or permitted by law, which includes, presumably, contractual rights contained in the security agreement itself. On the debtor's side, section 56 (7) states that the debtor has the rights and remedies provided for in the security agreement as well as any other rights and remedies provided in Part V of the PPSA and elsewhere in the Act. Thus, contractual provisions in the security agreement obtained at the beginning of the secured transaction are critically important and should be considered carefully where possible. This is an opportunity for the parties to define rights and remedies as well as procedures available, should enforcement become necessary. Even special remedies may be contracted for in the security agreement as long as they don't conflict with those provisions of Part V of the PPSA which are obligatory. JUDICIAL SUPERVISION OR ASSISTANCE IN ENFORCEMENT SITUATIONS The PPSA brings with it a number of aids to secured parties in anxious enforcement situations. In particular, Section 63 allows the secured party, or any person interested in the collateral, to apply to the court for a number of remedies,

14 Page 13 including any order necessary to ensure compliance with Part V of the PPSA or section 17, directions regarding the exercise of a party's rights or discharge of a party's obligations under Part V or section 17, relief from compliance of onerous or inconvenient terms on just and reasonable grounds, and so on. Of great importance is Section 63 (e) which allows the court to make an order protecting the interests of any person in the collateral. This will enable a secured party to obtain a non-dissipation order equivalent to an injunction. These matters are spoken to by Mr. smith in his paper, however it should be pointed out that the enhanced access to the courts will assist both the secured party and the debtor. As far as the secured party is concerned, it is able to protect the assets and the secured party's interest in the same. As far as the debtor is concerned, section 63 allows judicial control of the realization process and limits the secured party's ability to exercise remedies without judicial supervision (see McLaren - Secured Transactions in Personal Property in Canada (2d) p. 40-4). PRE-REQUISITES TO SEIZURE Normally, a security agreement will set out the conditions that will enable the secured party to consider the collateral to be in jeopardy and thereafter seize the same. A default is usually required, however the PPSA does not require strict definitions of default. In the old form debenture, defaults were often listed in the "events of default" provisions of the

15 Page 14 debenture and usually centred around non-payment of the indebtedness or monetary obligations found somewhere in the old form of the security agreement. By virtue of section 2(1) "default" has an extended meaning pursuant to the PPSA. It means the failure to payor otherwise perform the obligations secured. This could mean a breach of a covenant found in the agreement not necessarily related to payment. The secured party has an opportunity to create provisions outlining when a default will exist. If this is found in the security agreement, these provisions will be paramount. What about acceleration clauses? The PPSA allows acceleration clauses. section 16, however, allows a secured party to exercise the right of acceleration if the secured party "has commercially reasonable grounds" to believe that the prospect of payment or performance of the obligation is, or will be, impaired or that the collateral is, or will be, placed in jeopardy. The PPSA also provides an absolute right to the secured party to take possession of the collateral in the event of default. As long as possession is taken by "any method permitted by law" it will be acceptable. The only qualifier that comes to mind arises out of the Mid-Can Radio Communications Ltd. v. Mechanical Services (1979) Ltd. case (reported at (1984) 3 PPSAC 203 Sask Q.B.) where the court held that the existence ofa statutory right to repossession was dependent upon such rights existing in the security agreement. Again, the initial

16 Page 15 drafting of the security agreement is thus important. This case does seem to temper what appears to be an absolute right to possession found in Part V of the PPSA and future developments in this area should be monitored closely. SEIZING ASSETS OF A DEBTOR IN UNSECURED SITUATIONS This topic is more than adequately taken care of by a number of speakers on this panel. My comments will therefore be brief and will focus mostly on pitfalls to avoid. Seizing assets of a debtor in unsecured situations will most likely arise after a judgment has been obtained and the sheriff has been instructed to enforce a writ of Execution. The debt is unsecured and the sheriff and the creditor must be careful to avoid seizing assets which are either SUbject to a registered security interest or SUbject to a provincial exemption. The requirements of the sheriff's office are, of course, being dealt with by the Sheriffs presenting papers at this seminar. There are other situations when an unsecured creditor may consider seizing assets of the debtor. This arises in the area of "self help". What should be noted here is the possibility of the creditor SUbjecting itself to conversion actions and possibly trespass actions should it attempt to move against assets of a debtor in an unsecured lending situation. Usually when self help is used, the creditor is

17 Page 16 not represented by counsel and thus has not considered prior security interests, exemptions of the debtor, or the rights of other parties in the assets in question, thus the risk of successful conversion and trespass proceedings. On the practical level, should the unsecured creditor be lucky enough to seize a completely unsecured and unencumbered asset which is owned by the debtor, it is still my belief that without proper legal process, the debtor may have the upper hand in court proceedings. The concept that possession is nine tenths of the law does not necessarily apply in creditor/debtor law. A negotiated settlement may be likely if both parties choose not to incur the legal costs related to a fight in court. It is my view that the courts would view repugnant any steps by an unsecured creditor to arbitrarily seize assets belonging to a debtor without first obtaining a Judgment and Writ of Execution or some other Order allowing the taking of possession of the goods. Although there are certain costs incurred in relation to obtaining a Judgment and writ of Execution, if there turn out to be assets exigible for seizure, the execution creditor's costs, including the cost (likely taxable costs) of recovering Judgment, issuing Execution and Sheriff's fees, and poundage, will be recoverable. The recoverable fees are not limited to the cost of executing the writ. See Re Scribner & Wheeler (1910) 3 Sask L.R. 185 and Campbell Wilson v. Gimple (1914) 7 WWR 337.

18 Page 17 USING AN AGENT IN BANK ACT SECURITY CASES section 178 of the Bank Act security creates a unique form of security interest in favour of a chartered bank. This form of security is only available to Schedule A and Schedule B banks, however once obtained, the financial institution acquires a quasi-ownership interest in the secured assets. section 179 security also affords to the bank the enforcement regime found in sections 178 through 189 of the Bank Act, which enforcement regime has been held to be complete. See Bank of Montreal v. Hall Supreme Court of Canada For the purposes of this discussion on enforcement, I am assuming that counsel and the chartered bank in question have reviewed Section 178 (1) to ensure that the lending transaction which took place is found within the list of transactions which may give rise to section 178 security. I also assume that one of the limited occurrences of default found in section 178(3) have also occurred. That being the case, the bank in question is off and running with a plethora of remedies available to it. section 178(3) itself allows the bank to take possession of or seize the property covered by the security, take care of and harvest any crop, harvest any crop, care for any livestock, and enter onto lands or premises whenever necessary in order to detach and remove any security with the exception of any wiring, conduits or piping incorporated into any building or real property.

19 Page 18 This gives you an idea of the extent of the range of enforcement authority the bank has if a default occurs. certain rules are set out in section 179 governing the sale of seized goods and the notice requirements, advertising requirements and good faith requirements imposed upon the bank upon sale. But what about the actual seizure of the secured goods? Firstly, the debtor should be made aware of section 189 of the Bank Act which makes it an offence for a debtor who is in possession or control of property covered by section 178 of the Bank Act security to part with any of the property or willfully withhold it from the bank if a demand for possession has been made by the bank after failure to pay any loan covered by the security itself. section 189 states that such an offence is an indictable offence liable to imprisonment for a term not exceeding two years. In the same vein, the bank is liable on summary conviction to a fine should it dispose of the property without complying with the disposition and advertisement rules found in the Bank Act when exercising its power of sale. Regardless of the unique nature of Bank Act security and the relatively onerous enforcement regime found in sections 178 through 189 of the Bank Act, case law has tempered the bank's enforcement actions. Firstly, numerous cases have made it clear that demand and reasonable notice must be provided to the debtor prior to enforcement steps being taken. The

20 Page 19 ) classic case of Ronald Elywn Lister Ltd. v. Dunlop Canada Limited (1982) 1 SCR 726 is applicable in Bank Act security situations. It is not usual for the bank manager to actually effect the seizure and sale of Bank Act security. Section 178(3) contemplates a bank, through its officers, employees or agents, to take possession of or seize the property covered by the security. The bank will usually appoint, in writing, a bailiff as its agent for the purposes of seizing and securing the collateral. It is, in my view, possible for the bank to appoint a receiver for the purpose of seizure, security and sale of the collateral only. There was a hint in the Quebec Supreme Court decision of Banque National du Canada v. st. Louis Automobile Ltee. (1981) 42 CBR (N.S.) 280 that an appointment of a receiver by way of agreement or otherwise for Bank Act security would be contrary to public order and would be void. This decision is unreasonable in view of the fact that the appointment of a receiver in secured transaction situations has taken place as a common commercial practice for over 100 years and the public order does not appear to be in jeopardy. At any rate, the use of an agent is the normal course, however it is important for counsel to properly instruct the agent regarding securing the collateral and thereafter proper advertisement, notice and sale of the collateral in accordance with section 179. It is true that the sale of grain may

21 Page 20 involve unique steps as a result of the necessity to obtain a special grain permit and thereafter sell the same pursuant to the Canada Grain Act. This must be reviewed carefully in each case, as it may be possible to comply with the advertisement and notice provisions found in Section 179 while waiting for the special grain permit. This would at least lessen the exposure of the bank should a creative debtor choose to argue improvident realization, improper steps taken in selling the security, or some other such position. Debtors may also consider taking the position that the secured party has not complied with sections 179(5) and (6). You will note that these provisions impose. upon the bank a duty to act honestly, in good faith and expeditiously with respect to the seized property. This onus is moderately broad and compares favourably with the PPSA test "to act in commercially reasonable manner" and "to act in good faith". The addition of the obligation to act expeditiously should be carefully considered if it appears that enforcement proceedings may drag on for some time. It would be useful to review case law in this area in order to avoid pitfalls experienced by other financial institutions. For example, refer to the case of Canadian Imperial Bank of Commerce v. Whitman (1984) 12 DLR (4d) 326 where the duties imposed upon a bank on security realization are canvassed extensively. In that case, the bank seized cattle which were subject to a special designation respecting health. The seizure by the bank caused a cancellation of that special

22 Page 21 designation, resulting in a much lower value being obtained for the cattle upon sale. The bank was found to be liable to the debtor for the total loss although the court of Appeal reduced the amount of the counterclaim significantly (1984) 53 CBR (N.S.) 307. It is likely that the debtor will be forced to establish measureable prejudice or damages as a result of the bank's negligent realization of security or improvident realization following seizure. See, for example, Canadian Imperial Bank of Commerce v. Heppner (1965) 51 DLR (2d) 254 (Sask Q.B.) and Murchison v. Bank of Nova Scotia (1958) 19 DLR (2d) 93 (NBSCD). A good review of the enforcement rights of banks in this situation is found in Crawford and Falconbridge, Banking and Bills of Exchange (8d) Vol. 1, pages 421 through 433. As a caution, counsel should ensure that prior to appointment of the agent for seizure purposes, the qualifications of the agent are checked, a proper notice appointing the agent is executed, and all necessary searches of the collateral take place to ensure that the bank's security interest is a first charge. Keep in mind that the bank's security interest will appear at the Bank of Canada registry and in the written documentation supporting the registration of a Notice of Intention. other secured interests may appear at the Personal Property Registry or in governmental offices which may rank ahead of the Bank Act security if they were registered or perfected prior to the Notice of Intention at the Bank of Canada.

23 Page 22 USING A RECEIVER A receiver will often be employed in secured transaction situations. I have alluded to the fact that you may even find it appropriate to appoint a receiver in Bank Act security situations. Normally, however, a receiver is appointed pursuant to PPSA security agreements where receivership language outlines the instances where it would be appropriate to appoint a receiver and the powers of the receiver, once appointed. Part V of the PPSA, sections 89 through 96 of The Business Corporations Act of Saskatchewan, sections 89 through 96 of the Canada Business Corporations Act, and provisions found in The Queen's Bench Act all speak to the possibility of the appointment of a receiver. A reading of the provisions found in the legislation also indicates that it would be possible to apply to court for the appointment of a receiver even if a security agreement exists but appointment of receiver wording does not exist. The court application would have to be carefully drafted, however the appointment itself would not be barred. If a security agreement includes receivership language, then the secured party has the choice of applying to court for formal court appointment of a receiver, in which case the receiver is a court officer, if so ordered by the court, or pursuing a "document appointment" of a receiver and avoiding judicial process unless problems emerge during the course of the receivership.

24 Page 23 ) Consider for example Mr. Justice Matheson's comments in Royal Bank of Canada v. White Cross Properties Ltd. (1984) 34 Sask R. 315 where the Court felt that the document appointment of a receiver appeared to be sufficient and there was no reason for the Court to intervene unless there was significant evidence of interference by the debtor requiring the status quo to be preserved or requiring court intervention. Consider also the fact that once a receiver is appointed by the court, the receiver acquires all of its rights and powers through the court order and may not attempt to exercise its powers as granted in the security agreement. See Price Waterhouse Ltd. v. Creighton Holdings Ltd. (1984) 36 Sask R For a review of these and other matters also refer to A Handbook on the Saskatchewan Personal Property Security Act by Ronald C.C. Cuming and Roderick J. Wood, pages 282 through 287. Care must be taken to ensure that the receiver complies with Part V of the PPSA when dealing with provincial security interests. section 56 allows the appointment of a receiver or a receiver manager and defers to the security agreement itself in the provision of rights and duties of a receiver. Whether or not the secured party wishes the receiver to carryon the business of the debtor while disposing of the secured assets is a judgment call which must be very carefully considered. In either case, it is necessary for the receiver to comply with section 59 (5) in providing notice of any intention to sell the assets secured if they are sold out of the ordinary

25 Page 24 course of the business of the debtor. If sold in the course of carrying on the business of the debtor, the restrictions found in section 17 and 57 to 60 do not apply. It should also be noted that the receiver has access to the court by virtue of Section 63, in particular Section 63(b) and (f). Flexibility in the operation of the receivership is thus ensured as creative steps by receivers may be confirmed by the courts should the circumstances warrant it. PROBLEMS TO AVOID There are numerous pitfalls and problems to avoid. In fact, they are too numerous to deal with in detail in this short overview. However, a few more interesting problem areas will be canvassed: 1. The security itself - prior to the appointment of a receiver, the financial institution or secured party should have its security thoroughly vetted to ensure that it is legally executed, binding and enforceable, properly perfected, in priority to other potential claimants to the collateral, and so on. It is surprising how many deficiencies exist in security agreements and it is important to be aware of the weaknesses in the security prior to taking any steps. strategies may then be planned accordingly. 2. Other claims it is important to review the secured party's file in its entirety to ensure that the secured party has not postponed its security interest in part or in whole to a third party. Surprises of this nature can throw a monkey wrench into an otherwise perfectly legitimate receivership. It could be that the secured party is carrying on a receivership on behalf of a third party without realizing it. 3. Proper demand receivers will generally enquire thoroughly as to whether or not proper demand had been provided to the debtor and a satisfactory notice period has expired. Case law is clear in this respect,

26 Page 25 ) requiring the utmost good faith on the part of the secured party prior to the appointment of a receiver. 4. Scope of powersmust act within the security agreement. The directors and responsible for the authorizations. if document-appointed, the receiver scope of the powers outlined in the The receiver may go no further. officers of the corporation are balance of the corporate powers and 5. Taking possession - the receiver receives the power to take possession of the property or collateral for the debtor. The receiver has an immediate duty to preserve the collateral and take possession, including changing locks, insuring the property, taking an inventory of the assets, and so on. Failure to do so could result in a liability question for breach of duty (Bennett on Receiverships 1985, page 371). 6. Volatile assets - a receiver's first concern will be with respect to dissipating assets or assets which will decline in value rapidly. This is part of the protection and preservation of property question. Dissipating assets must be immediately sold, with or without court order. It is advisable to apply to the court for a waiver of the notice provisions or to apply for directions under section 63 of the PPSA. If this is not possible disposition should take place following receipt of legal advice. Instructions from the secured party might also be appropriate to protect the receiver. In addition, property must be kept in good repair and protected. Receivers have been found liable in instances where neglect is evident. See for example Four-K Western Equipment Ltd. v. CIBC (1983) 46 CBR (N.S.) 146 (BCSC) where the court exonerated a receiver for permitting equipment to remain outdoors during the winter which resulted in damages (Bennett, supra page 372). DOING IT YOURSELF Earlier in this paper I pointed out that the self help remedy in unsecured situations is scary and dangerous. The same applies to the self help remedy in secured transaction situations. There are numerous rules which apply to realization on security interests. Even lawyers, trained in the law, often feel inadequately prepared to advise on moderately complex enforcement cases without at least

27 Page 26 researching the current law, statutory law and scholarly works in the area. The law in this area is evolving rapidly and it takes some effort to avoid the pitfalls that are out there. Therefore, it is safe to assume that a secured party, not educated in the law in this area, is stepping into trouble if self help is used. Likely, the secured party is safe in taking possession of the assets following demand and a reasonable notice period. It is at this point, however, that the problem~ begin as the secured party may choose to simply dispose of the collateral arbitrarily and in a "forced sale" manner. The claims of improvident realization arise most often in these circumstances. In addition, a secured party acting without legal advice is not in a position to respect the legal remedies and rights of the debtor and may find its deficiency claim against the debtor in jeopardy. Some of the same comments apply with respect to receivers who are experts in the art of enforcement and accounting but sometimes may not be fully versed in the current law respecting receivership, preservation of the collateral, notices of disposition, and so on. It is important to work as a team, should you be so instructed by the secured party. In conclusion, my advice is not to do it yourself or advise any of your clients to effect seizures of unsecured or secured collateral without thorough and properly considered legal advice.

28 Page 27 PRECEDENTS AND CHECKLISTS The following appendices are added for the initial review of counsel in seizure situations. They should be used as a starting point only and the actual legislation itself should be reviewed carefully prior to any advice given or action taken based upon the same: Appendix A - checklist for possession, sale or retention under The Personal Property Security Act Appendix B - checklist for repossessions under The Limitation Of civil Rights Act Appendix C Notice of Seizure and Appointment of Agent pursuant to S. 178 of the Bank Act Appendix D Notice Receiver/Manager of Appointment of Receiver or BOOKS CITED Cuming, Ronald C. C. and Roderick J. Wood A Handbook on the Saskatchewan Personal Property Security Act Saskatoon: Law Reform Commission of Saskatchewan, Cuming and Roderick J. Wood Bennett, Frank, Receiverships Toronto: Carswell, 1985 Crawford, Bradley, Crawford and Falconbridge, Banking and Bills of Exchange Vol. 1, 8th ed. Toronto: Canada Law Book Inc., 1986.

29 Page 28 TABLE OF CASES Bank of Montreal v. Gravelle (1982) 2 PPSAC 219 Bank of Montreal v. Hall Supreme Court of Canada 1989 Bank of Montreal v. switensky (1988) 68 Sask R. 168 (Sask Q.B.) Banque National du Canada v. st. Louis Automobile Ltee. (1981) 42 CBR (N.S.) 280 Campbell Wilson v. Gimple (1914) 7 WWR 337 Canada Permanent Trust Company v. Thomas (1983) 6 WWR 130 Canadian Imperial Bank of Commerce v. Heppner (1965) 51 DLR (2d) 254 (Sask Q.B.) Canadian Imperial Bank of Commerce v. whitman (1984) 12 DLR (4d) 326 Canstar Trucking Ltd. v. Bank of Nova scotia (1986) 48 Sask R 136. Chrysler Credit Canada Limited v. Jelic Real Estate Limited (unreported - Ontario Co. ct. March 8, 1990) from Fasken Campbell Godfrey's "Commercial Insolvency Bulletin" Oct Ford Credit Canada Ltd. v. Ross (1988) 5 WWR 573 (Sask Q.B.) Four-K Western Equipment Ltd. v. CIBC (1983) 46 CBR (N.S.) 146 (BCSC) John Deere Ltd. v. Remmen (1972) 1 WWR 365 (Sask C.A) McLaren - Secured Transactions in Personal Property in Canada (2d) p Mid-Can Radio Communications Ltd. v.mechanical Services (1979) Ltd PPSAC 203 Sask Q.B. Murchison v. Bank of Nova scotia (1958) 19 DLR (2d) 93 (NBSCD). National Bank of Canada v. (1986) 5 PPSAC 27 LaSalle Excavating of Sudbury Ltd. Price Waterhouse Ltd. v. Creighton Holdings Ltd. (1984) 36 Sask R Re Scribner & Wheeler (1910) 3 Sask L.R. 185 Ronald Elywn Lister Ltd. v. Dunlop Canada Limited (1982) 1 SCR 726 Royal Bank of Canada v. White Cross Properties Ltd. (1984) 34 Sask R. 315

30 29 APPENDIX A CHECKLIST FOR POSSESSION, SALE OR RETENTION UNDER THE PERSONAL PROPERTY SECURITY ACT A. The Saskatchewan Farm Security Act no longer prohibits the commencement of an "action" to realize against a "Security collateral to a mortgage on farm land". B. Is the chattel charged by the security agreement? C. Is the chattel an "article" within the meaning of s. 19 of The Limitation of civil Rights Act or The Saskatchewan Farm Security Act? If so, see appropriate Checklist. D. Determine if chattel is exempt from seizure under The Exemptions Act or Part V of The Saskatchewan Farm Security Act. E. Repossession 1. The secured party has, in addition to the rights and remedies set forth in Part V of the Act, the rights and remedies set forth in its security agreement EXCEPT as limited by s. 56(8) of the Act. 2. Does the security interest secure payment or performance of an obligation? If not, then Part V does not apply unless otherwise provided therein. (S.55(1» 3. Is the security agreement in respect of a transaction between a pledgor and a pawnbroker? If so, then Part V does not apply. 4. Is any collateral an intangible or chattel paper or an instrument? If so, upon default under the security agreement, the secured party may notify the debtor on the intangible or chattel paper or the obligor on the instrument to make payment to him (whether or not the assignor was theretofore making collections on the collateral), AND the secured party may take control of any proceeds to which he is entitled under s. 28 of the Act. (See S. 57(2) for entitlement to deduct the reasonable expenses of realization from the collections.) 5. Is the chattel now a fixture? If so, see item #9 to #14 below. 6. Is the chattel now an accession? If so, see item #15 to #20 below. 7. Upon default the secured party may, unless otherwise agreed, take possession of the chattel by any method permitted by law. (Research to follow)

31 30 8. Is the chattel equipment and has the security interest been perfected by registration? If so, the secured party is deemed to have taken possession where the secured party renders the equipment unusable without removing the same from the debtor's premises. 9. If the chattel is now a fixture, see s. 36(1) and (2) for determination of priorities. 10. Where the secured party has the right to remove affixed items ("goods") from real property, he must exercise this right in a manner that causes no greater damage or injury to the land or to the other property situated thereon, or that puts the owner, lessee or occupier of the land to any greater inconvenience than is necessarily incidental to the work of effecting the removal of the goods. 11. The secured party is obligated to pay to any person, excepting the debtor, who has an interest in the real property at the time the goods attached to the real property reimbursement for any damage to such person's interests in the 'real property resulting from the removal of the goods. However, such person is not entitled to reimbursement for diminution in the value of the real property caused by the absence of the removed goods or by the necessity for replacement. 12. Has the secured party paid such reimbursement or given adequate security for the same before proposing to repossess? If not, the persons entitled to the said reimbursement may refuse permission to remove the goods until adequate security for the reimbursement is given by the secured party. (See s. 36(7) for the different applications the secured party may take to a court in this regard.) 13. The secured party cannot remove the goods from the real property until he has served written notice of his intention to remove the goods. This notice is to be served on each person who appears by the records of the Land Titles Office to have an interest in the land. This notice must contain the following information: a) the name and address of the secured party; b) the description of the goods to be removed sufficient to enable them to be identified; c) the amount required to satisfy the obligation secured by his security interest;

32 d) the description of the land to which the goods are fixed; and e) a statement of intention to remove the goods unless the amount secured is paid on or before a specified day that is not less than 12 days after service of the notice in accordance with item # The notice referred to in item #13 must be served at least 15 days before the goods are removed. This notice may be served in accordance with s. -67(1) or by registered mail addressed to the Post Office address of the person to be served as it appears on the records of the Land Titles Office. 15. If the goods are now accessions, see s. 37(1) and (2) for the determination of priorities. 16. Where the secured party has the right to remove accession goods from the whole, he must exercise his right of removal in a manner that causes no greater damage or injury to the other goods or that puts the person who is in possession of the whole to any greater inconvenience than is necessarily incidental to the work of effecting removal of the accession goods from the other goods. 17. Excepting the debtor, if any person has an interest in the other goods at the time the goods to be repossessed became an accession to the other goods, the secured party is obligated to reimburse the other person for any damage to his interest in the other goods resulting from the removal of the accession goods. However, the other person is not entitled to reimbursement for diminution in the value of the other goods resulting from the removal of the accession goods caused by the absence of the accession goods removed or by the necessity for replacement. 18. If the secured party has not made such payment or given adequate security to the persons entitled to reimbursement, such persons may refuse permission to remove the accession goods until adequate security is given for the reimbursement. (See s. 37(7) for the different applications which the secured party may make to court in this respect.) 19. The secured party may from the whole until of his intention to This notice must be not remove the accession goods he has served a written notice remove the accession goods. served on each person known to