October 2012

The following is an increasingly frequently occurring scenario.  A farmer ("Debtor") carries on the business of producing and selling one or more crops ("Crops").  To finance the Debtor's operations, the Debtor obtains a revolving operating line of credit from a Canadian chartered bank ("Bank").  The Debtor utilizes this credit to obtain various goods and services which it requires in order to conduct its operations, in particular, to grow, to harvest and to sell its Crops.  These include such items as seeds, fertilizers and pesticides ("Primary Inputs"), servicing and obtaining parts for the Debtor's production equipment (including the acquisition of fuel for same), consumption of electricity and payments made to farm employees/workers.  As security to better assure the Debtor's payment of its obligations arising out of such credit, the Bank obtains a general security agreement ("GSA") from the Debtor which, by its very nature, covers all of the from time to time existing personal properties, both tangible and intangible, of the Debtor, including the Debtor's Crops.  The Bank perfects its GSA security under the applicable Personal Property Security Act ("PPSA") by registering a financing statement in the Personal Property Registry ("PPR"), thereby establishing the priority of the Bank's security against, amongst other things, the Debtor's Crops.  Additionally, and to protect the Bank's security against real estate interests, the Bank files a PPSA Crops Notice against the title(s) to the Debtor's farmland on which the Debtor's Crops are to be/are growing.  For argument's sake, assume that at this point in time, no one has priority over the Bank with respect to the Bank's security against the Debtor's Crops.

Subsequently, the Debtor, decides that it needs more Primary Inputs than it has acquired via the Bank's financing.  It also concludes that it would be less expensive for it to acquire such additional Primary Inputs from an agricultural products supplier ("Primary Inputs Supplier").  So the Debtor acquires one or more of seeds, fertilizer and pesticides from a Primary Inputs Supplier on credit.  The Primary Inputs Supplier takes a security interest in the Primary Inputs which it has sold on credit to the Debtor plus a security interest in the Crops being grown/about to be grown by the Debtor.  The Primary Inputs Supplier promptly perfects its security interest. 

Can the Primary Inputs Supplier, in effect, retroactively, achieve priority over the Bank's security?  Consider these arguments which the Primary Inputs Supplier might make to support its claim for priority over the Bank's security:

1. The Primary Inputs Supplier has a purchase money security interest in the Crops.  In Section 1 of the PPSA (Manitoba), "purchase money security interest" is defined (insofar as a credit seller is concerned) to be "a security interest taken or reserved in collateral, other than investment property, to the extent that it secures all or part of its purchase price".  It is doubtful that the Primary Inputs Supplier could successfully argue that its security covers all of or any part of the "purchase price" of the Crops.  What the Primary Inputs Supplier does have is a purchase money security interest in the Primary Inputs themselves which it has sold on credit to the Debtor.  But it does not (likely) hold a purchase money security interest in the Crops.
2. The Primary Inputs Supplier's purchase money security interest in the Primary Inputs attaches to the Crops (with the same priority that its purchase money security interest had in the Primary Inputs themselves) on the basis that the Crops are "proceeds" of the Primary Inputs.  Section 1 of the PPSA (Manitoba) defines "proceeds" to include "identifiable or traceable personal property, fixtures and crops (i) derived directly or indirectly from any dealing with collateral or the proceeds of collateral, and, (ii) in which the debtor acquires an interest".  Clearly, the Crops are a species of personal property and clearly, the Debtor acquires an interest in them when they start growing.  But there are two problems for the Primary Inputs Supplier in making this argument.  First, it may be difficult to "trace" the Primary Inputs Supplier's Primary Inputs to the Crops themselves, bearing in mind that some of the Primary Inputs utilized by the Debtor to create the Crops (in the above example) were financed with value provided by the Bank.  Second, can it really be said that the Crops are "derived" from the Debtor's "dealing" with the Primary Inputs?
3. The Primary Inputs Supplier has obtained a perfected security interest in the Crops which "enables (the Debtor) to produce the Crops".  The quoted words come from the PPSA (Manitoba) Section 34(10) which states: "A perfected security interest in crops or their proceeds given for value to enable a debtor to produce the crops and given while the crops are growing crops or during the six months immediately before the time the crops become growing crops, has priority over any other security interest in the same collateral given by the same debtor".  There can be no doubt that provision of credit to the Debtor of the Primary Inputs by the Primary Inputs Supplier does "enable" the Debtor to "produce the crops".  But doesn't the Bank also provide value to the Debtor which enables the Debtor to produce the Crops?  In the example given here, the Bank assists the Debtor to produce the Crops by enabling the Debtor to acquire some (although only some) of the Primary Inputs required to produce the Crops.  So the situation is that both the Bank and the Primary Inputs Supplier have enabled the Debtor to produce the Crops.  There are two problems or questions which arise here: (i) where the financing provided by the Bank is utilized, not only to enable the Debtor to obtain some of the Primary Inputs required to produce the Crops, but also to enable the Debtor to generally carry on its crop production business (as described above), is the financing of the Debtor's acquisition of such other non-Primary Inputs costs and expenses just as much "value to enable (the Debtor) to produce the Crops" as the utilization by the Debtor of the Bank's financing to acquire some of the Primary Inputs for the Crops?, and, (ii) if both the Bank and the Primary Inputs Supplier can be said to have enabled the Debtor to produce the Crops, what rule in the PPSA resolves the priority dispute?  As to the latter question, one cannot look to the rule that provides, in effect, that in a competition between a seller's purchase money security interest and a lender's purchase money security interest, the seller's security interest holds priority over the lender's security interest.  Arguably, the Bank's and the Primary Inputs Supplier's security interests in the Crops are security interests governed by Section 34(10) and not "purchase money security interests" at all.  If that is the case, then one must fall back on the "residual" priority rule in the PPSA which provides that in a competition between two perfected security interests, priority is determined by who has perfected (in this case registered) first (Section 35(1) of the PPSA (Manitoba)).  In the example given here, that would put the Bank 100% ahead of the Primary Inputs Supplier insofar as the Crops are concerned.

In essence, I would argue that my analysis in paragraph #3 above is correct provided that a Court held that:

(a)          the Debtor's Crops are not "proceeds" of the Primary Inputs; and

(b)          the non-Primary Inputs acquired by the Debtor utilizing the Bank's funds are just as much inputs which "enable (the Debtor) to produce the (Crops)", as are the Primary Inputs themselves.

In support of my argument that the non-Primary Inputs should be considered to perform the same function as the Primary Inputs, I would ask readers to review Section 34(11) of the PPSA (Manitoba) which provides a limited priority for those taking security interests in animals to secure obligations arising out of the secured party's provision of value to the animals' owner to acquire "food, drugs or hormones to be fed to or placed in the animal(s)".  Section 34(11) specifies types of inputs for animals, but Section 34(10) does not specify types of Primary Inputs.  The expression "Primary Inputs" has been made up by the writer for illustrative purposes only and no such expression appears in the PPSA (Manitoba).

Assume that a Court disagreed with the writer's analysis of the above-described fact scenario. What could be done to protect the Bank?  Consider the following:

(A)          The Bank could take a Bank Act, Section 427 security assignment covering the Debtor's Crops.  If the Primary Inputs Supplier (which presumably is not another chartered bank) takes security in the Crops, it will undoubtedly be governed by the PPSA.  In a contest between a Bank Act, Section 427 security assignment and a PPSA governed security interest, the priority rules found in the Bank Act will determine priority.  If the Bank has taken and properly registered notice of its taking of its Bank Act, Section 427 security before the Primary Inputs Supplier has taken and properly registered its PPSA governed security, the Bank will prevail.  Section 4(k) of the PPSA (Manitoba) provides that the PPSA does not apply to Bank Act, Section 427 security where, as is the case with the Bank Act, the federal legislation spells out the rights and priorities of competing claimants against commonly charged collateral.

(B)          If, for whatever reason, the Bank chooses not to take Bank Act, Section 427 security, or, as might well be the case in the future, chartered banks are no longer able to obtain security under the Bank Act, then, absent a legislative solution to sort out priorities in the above-described fact scenario (ie, an amendment to the PPSA), the Bank could obtain a covenant from the Debtor to the effect that the Debtor is not to obtain additional credit (or at least additional secured credit) from any Primary Inputs Supplier without first obtaining the written consent of the Bank.  That way - and assuming that the Debtor honours its covenant - when the Debtor approaches the Bank and requests permission to obtain (secured) credit from a Primary Inputs Supplier, the Bank can then make a reasoned decision as to what to do.  The Bank may well agree to permit the Debtor to obtain some additional (secured) credit from a Primary Inputs Supplier, but only if the Primary Inputs Supplier enters into an intercreditor agreement with the Bank spelling out the Bank's and the Primary Inputs Supplier's respective priorities regarding the Debtor's Crops.

Note that in order to narrow a potential priority dispute down to one whereby the Bank and the Primary Inputs Supplier are the only meaningful competing claimants to the Debtor's Crops, both the Bank and the Primary Inputs Supplier will have to be mindful of certain "time restrictions" imposed on them by the PPSA (Manitoba).  Assume that the Bank is relying on PPSA security rather than Bank Act Section 427 security.  First, Section 13(2)(a) of the PPSA (Manitoba) provides that as a general rule, in order for a creditor's security interest to attach to crops at all, the crops must start growing no later than one year after the "security agreement is entered into".  Second, as noted above, Section 34(10) of the PPSA (Manitoba) requires that a creditor wishing to have as high as possible a security interest in crops must ensure that the security interest arises during a period of time commencing six months before the crops start growing, and continuing down to when the crops are threshed.  The need to have the security agreement signed no more than one year before the crops start growing is subject to an exception; where the security in the crops is given "in conjunction with…a mortgage of land…". Then if the parties so agree, the creditor's security interest in the crops will "attach to (the crops) to be grown on the land during the term of the…mortgage…".  In the above-described scenario, I have assumed that the Bank and the Primary Inputs Supplier have, in effect, "complied" with the aforementioned "time restrictions".

January 2019

Clearly, more and more people are attempting to act as their own lawyer, both in non-litigious matters and in matters which come before our Courts. In a perfectly ideal world, no one would need a lawyer and everyone would be fully capable of representing their best interests in legal matters, whether in Court appearances or in arranging one's personal or business affairs. We would still need judges, but every citizen would be a capable advocate for himself, or herself or their business or other common interest grouping. Unfortunately, such an ideal world, if it ever existed and to any degree at all, did so at least four hundred years ago. Even then, people seeking legal advice and guidance sought out those who had immersed themselves in the study and operation of the legal system. In our modern, exceedingly complicated world, self-representation becomes less and less viable with every passing day.

Nevertheless, we still see (and hear of) instances where people attempt to draft their own legal documents and attempt to argue their positions in disputes which come before the Courts. The recent case, Farm Credit Canada v. 1055496 Ontario Limited, judgment given June 25, 2018 (hereinafter, the "Bucholtz Case") is a fairly dramatic example of the problem. In the Bucholtz Case, a corporation owned by Stanley Bucholtz and Gail Bucholtz obtained credit from FCC and that corporation provided real and personal property security to FCC which was properly registered/perfected. Stanley and Gail provided a limited guarantee of the debt. The corporation defaulted in its payment obligations to FCC, FCC made demand and failing demand, sued the corporation and its guarantors. Neither the corporation, nor Stanley, nor Gail, defended FCC's claims, but a relative, Christopher Bucholtz filed a statement of defence and appeared before the Court to argue the matter on behalf of the defendants. The Court observed that:

(i)    Christopher's defence did not challenge FCC's claim that it had advanced credit, there was a default and that FCC was entitled to realize on its security;

(ii)   Christopher's statement of defence stated that "the plaintiff (FCC) received a requirement to perform but failed to do so and is now in dishonour";

(iii)  Further material filed by Christopher stated that he was seeking "a petition for subrogation", a "petition for judicial review of an inquisitorial matter" and a "petition for a trustee";

(iv)  Christopher further attempted to argue that his birth certificate - which he referred to as a "certificate of title" somehow "made the Province of Ontario responsible for him because he had not waived or abandoned his "birthright"".

The Court stated the obvious that "…none of these important sounding but legally meaningless phrases are a defence to the enforcement of the loan documents". Accordingly, FCC prevailed and costs were awarded against both the corporation and Christopher Bucholtz.

August 2003

In the very recent (judgment February, 2003) Manitoba Court of Queen’s Bench case (Willman and Ducks Unlimited, hereinafter the “Willman Case”), the Court confirmed that Section 80 of The Real Property Act (Manitoba) means what it says.  Section 80 provides, in effect, that where a person acquires an interest in realty and that person registers knowing that someone else has a pre-existing interest in the land who has failed to register his or her claim, the first-mentioned person will acquire the realty free and clear of the pre-existing claim unless the first-mentioned person has acted fraudulently.  Section 80 makes it clear that knowledge of the pre-existing interest is not fraud, and previous judicial authority has also stated that registering with the knowledge that such registration will subordinate (or perhaps extinguish) the pre-existing unregistered interest is not to be considered fraud in this context.

            In the Willman Case, Ducks Unlimited had entered into an agreement with a farmer which gave it certain rights to come on the farmer’s land for the purpose of operating or maintaining a wetlands development/maintenance program.  The agreement stated that it would run for a period of twenty-one years and Ducks Unlimited registered a caveat giving notice of that agreement against the farmer’s title.  Later, the farmer and Ducks Unlimited entered into an agreement which extended the operation of the original agreement from twenty-one years to thirty years, but Ducks Unlimited did not register a further caveat to give notice of this change in the agreement’s term.  Still later, the original contracting farmer sold the land to a second farmer (“Second Purchaser”), and although the Second Purchaser was aware of Ducks Unlimited’s caveat and was given a copy of the original contract whose term was for twenty-one years, the Second Purchaser was not immediately made aware of the extension agreement providing for a term of thirty years.  In fact, the Second Purchaser only obtained a copy of the amending agreement about seventeen years after it was entered into.  Still later, the Second Purchaser sold and transferred the property to his son (“Third Purchaser”).  The Third Purchaser was aware of the Ducks Unlimited caveat, the original agreement and the amending agreement which extended the term to thirty years.  At the time of the Third Purchaser’s acquisition, Ducks Unlimited had still not registered notice of the amending agreement.

            The Third Purchaser took the position that he was only bound by the original (twenty-one year) agreement.  Ducks Unlimited took the position that the Third Purchaser should be bound by both the original and the amending agreement because the existence of the registered caveat should have prompted anyone thinking of acquiring an interest in the land to make enquiries which would have resulted in such person acquiring knowledge of the extension of the agreement’s original term.  They also took the position that it was not equitable for the Third Purchaser to acquire the property without being subject to the agreement as extended because the Third Purchaser was entirely aware of the extension of the original agreement when he purchased.

            On the basis of the above legal reasoning, the Court held that the Third Purchaser was not bound by the extension of the original agreement, and even though that result might seem inequitable, the wording of Section 80 of The Real Property Act (Manitoba) is quite clear on this point.

            Lawyers acting for clients who acquire interests in land which are then registered by caveat must keep in mind (and advise their clients accordingly) that if the underlying caveated arrangement is altered in any material way, a further caveat should be registered so that third parties subsequently acquiring interests in the land or thinking of doing so will be bound by the underlying arrangement as amended. 

July, 2010

If you are a property owner, manager, or mortgagee of, or, a neighbour of an abandoned and/or run-down building (residential or non-residential), the property's existence in its woeful state can cause problems for you as well as for those at The City of Winnipeg charged with the responsibility of minimizing or eliminating such problems. 

The City's legal answer for dealing with this matter was its 2004 enactment of the "Vacant and Derelict Buildings By-law No. 35/2004, (hereinafter "the By-law"). 

Broadly speaking, the By-law deals with two categories of "problem" properties:

1. structures which are not being used or occupied (i.e., what would be typically thought of as "abandoned" or "vacant"); and
2. structures which have not been maintained and have become so run-down that they pose a health, safety, environmental, etc. hazard (ie, what would be typically thought of as "derelict"). 

Regarding vacant structures:

(a)          the By-law distinguishes between residential structures designed or used for occupancies by one or two families and residential structures which are designed or used for occupancies by more than two families.  It also distinguishes between residentially occupyable structures of all types on the one hand, and structures which are used or designed for occupancies other than residential purposes;

(b)          responsibility for alleviating problems arising with respect to vacant buildings are imposed on the "owner" of a property.  The definition of "owner" goes beyond normal fee simple indefinite ownership, and also includes a person who manages the property (either for his or her own account or as agent on behalf of someone else), persons who would receive the rent (or rents) derived from the property if the property was rented, and, persons who have sold the property and who continue to receive instalments of the purchase and sale price and/or who have paid (or continue to pay) the property taxes on the property.  A mortgagee of a vacant property which takes over management of the property or receives the rents (or who would be entitled to receive the rents if the property was rented) may well be caught up in the definition of "owner" and thus saddled with the obligations which are imposed on an "owner". 

(c)          a property is considered to be "vacant" notwithstanding the presence in the structure of one or more trespassers. 

(d)          a number of obligations are imposed on the "owner" of a vacant property, in particular:

(i)            the obligation to maintain the property in accordance with specified standards;

(ii)           the obligation to file a "fire safety plan" with the City Fire Prevention Branch of the City's Fire Paramedic Service;

(iii)          the obligation to secure the property in accordance with specified requirements; and

(iv)         the obligation to obtain a "boarded building permit" for the property while it continues to be vacant (and to pay fees to obtain and maintain such permit).

(e)          failure to properly secure a vacant property can result in the City remedying the non-compliance, with the cost of doing so being added to the property tax bill.  Mortgagees should always be leery of potential situations where the property taxes for a property may be increased by the City by reason of the owner failing to take certain actions, as property taxes always rank in priority to real property mortgages as charges against realty. 

Regarding derelict buildings:

(a)          a "derelict property" is defined to mean a property, the registered (freehold) owner of which has been found guilty of the offence of contravening the By-law.  Essentially, that means an owner who has been convicted of non-compliance with the above-described rules pertaining to vacant properties.

(b)          where a property has become a "derelict property", then, subject to the owner having certain rights to an opportunity to remedy the property's deficiencies and/or challenge the City's position that the property has not been, or as the case may be, has not been properly, brought into good order, the City may apply to obtain title to the property, thus extinguishing the previous owner's rights and interests therein.

(c)          the City is supposed to ensure that before it applies to obtain title to a derelict property, "there is a satisfactory plan for redeveloping the property".

Recently, the Manitoba Legislature amended the City's Charter dealing with derelict properties.  Of particular interest to mortgagees, is the fact that the City has the right, when taking title to a derelict building property (and this is essentially unchanged in the legislation, and if anything, made more explicit in the aforementioned amendments), to take title free and clear of all existing registered (and for that matter, fully advanced) mortgages.  This means that a creditor who is unfortunate enough to hold a mortgage on a derelict property will see its security completely extinguished when the City acquires ownership.  Thus such a mortgagee will not even have the benefit of a charge on the underlying land.  This seems grossly unfair to such a mortgagee where the value of the underlying land is something more than minimal, which may well be the case where there is a redevelopment plan for refurbishment, rebuilding or other enhancement of the property and/or the neighbourhood.