Enforcement of Cross-Default Clauses

It is common in Saskatchewan that a farmer will go to the same financer for more than one loan facility. In many cases, the typical situation plays out as follows:

The farmer, getting started or acquiring land from a parent, requires a mortgage to purchase the land. Then, as spring approaches each year, the farmer requires an input loan to purchase seed, fertilizer, fuel etc. Each year the farmer may consider purchasing new equipment, and each time he or she does, they likely ask for additional financing to purchase that equipment.

Typically included in the financing agreement is what is called a cross-default clause. Typically, only the land purchase is secured by a mortgage, and the lending agreements will often state that, while the input loan is not secured against the land, a default on the input loan is also a default on the mortgage and equipment loans, allowing the bank to call on all its security. From there, the bank may decide to enforce on all of the equipment and land and collect on all of its debts, even though the other loans are current.

Recently, the Honourable Madam Justice Richmond called into question whether this is permissible. In the unpublished decision of Farm Credit Canada and Bodnar (QB 167 of 2021 – JC of Yorkton), the Bodnars ran into financial difficulty and defaulted on their input loan with FCC. They also had mortgages with FCC, which remained current. FCC sought to enforce on the land and the mortgage under a cross-default clause in the input loan.

After attending Court mandated mediation, FCC sought leave to foreclose. The Court concluded that not only could the Bodnars meet their obligations under the mortgage (being the monthly payments), they were actually doing so. Given the remedial nature of The Saskatchewan Farm Security Act, as codified by section 4 of the same, the Court concluded that it was not just and equitable to grant FCC leave and dismissed the application. FCC was not permitted to realize on the land.

While each application before the Court is fact specific, and in no way should this be seen as preventing leave in every application relying on a cross-default provision, it does provide hope to the farmer who is trying their best and keeps their mortgage current. Provided the mortgaged lands are not at risk of loss, which in most cases they are not, the Court may not permit realizing on land where the mortgage is current, even where one, or perhaps more, of the other loans, are not current.

It should be noted, however, that if an input loan remains unpaid and judgment is obtained, the lender may eventually be able to enforce the judgment against the land. While this process is significantly lengthier, the decision in Bodnar should be considered a temporary reprieve and not a fulsome solution.

This article is intended to provide legal information only, not legal advice. For more information about debt enforcement issues in Saskatchewan, contact:

Travis K. Kusch
Direct: 306-933-1373
Email: [email protected]

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DIVISION OF FAMILY PROPERTY: ENTITLEMENT TO FARMLAND OWNED BY EX-SPOUSE AND THIRD PARTIES

When two parties are separating and dividing the family property, there may be questions surrounding property owned by one of the spouses and third parties. In Saskatchewan, this is particularly true for farmland. Often a husband or wife will own farmland with their parents for estate planning purposes. So how does the court deal with this in the division of family property?

Courts ask two questions: first, is the farmland matrimonial property? And if so, what value should be attributed to it?

The answer to the first question is simple. As defined in The Family Property Act, family property means any real or personal property, regardless of its source, kind or nature, that, at the time an application for separation is made, is owned, or interest is held, by one or both spouses, or by one or both spouses and a third person. A joint tenant owns a legal right in the property by virtue of being a registered owner on title. Therefore, farmland held by one spouse in joint tenancy with their parents is family property as defined in the Act.

The second question is where the true analysis lies – what value should be attributed to the jointly held farmland? If the joint tenancy was legitimately for estate planning purposes, its value for the division of family property will be nil. This is because the spouse, and therefore the family unit, did not collect a benefit from the farmland during the marital relationship. Rather, the spouse was simply on title for estate and succession planning once their parents pass away. Courts will look to factors such as who maintained control over the land, who used the land and who paid the expenses and received the benefits from the land when determining if a transfer of title was truly for estate planning purposes. If there is evidence to suggest the spouse received a benefit from the land during the marital relationship, it will be assigned a monetary value by the court and be subject to division. 

Should you have any questions about the division of family property, or need advice on your family law matter, please contact Robertson Stromberg LLP.

Protecting Farmer’s Equipment: A Bushel of Rights

Perhaps more than any other profession, farmers on the Prairies are susceptible to financial pressures. Whether it be due to a late winter, a lack or precipitation, family pressures or the present Covid-19 pandemic, the agricultural business carries many risks.

To that end, farmers can be faced with difficult decision as to which bills will be paid, which payments might be missed or deferred and in worst case scenarios, which equipment is to be forfeited. In response, the legislature has recognized the uniqueness of farming and implemented special protection for farmers.

The Farm Debt Mediation Act (“FDMA”)

The federal government recognized that farmers across the country required special protection to deal with their financial pressures. In response to these pressures, and in an effort to provide farmers with the opportunity to reach a compromise with their creditors, the federal government enacted the FMDA.

The main protection afforded by the FDMA is that a farmer’s secured creditors must serve a notice on the farmer indicating their intent to commence proceedings against a farmer (for example filing a Statement of Claim) or to enforce against the farmer’s property. The secured creditor must then wait fifteen business days before taking any further steps.

During the notice period, the farmer is able to apply for farm debt mediation. Applying for mediation prevents your creditors from taking any further steps against the farmer. However, it should be noted that once a farmer applies for mediation, all of his or her creditors receive notification that the farmer has applied for mediation. To a certain extent, all of the farmer’s creditors are now aware that the farmer is in financial trouble.

It should be noted that the FMDA notice provisions apply to both individual farmers and farming corporations.

The Saskatchewan Farm Security Act (“SFSA”)

The legislature in Saskatchewan took these protections one step further in enacting the SFSA. As many farmers are likely aware, a creditor must give a farmer thirty day’s notice before attempting to seize any of the farmer’s equipment. After the farmer receives the notice, they are provided with a variety of rights to either delay or avoid the seizure.

At this point, it is helpful to draw a distinction between purchase money security creditors (“PMSI Creditors”) and general creditors. A PMSI Creditor is a creditor who provided financing for the direct purchase of a piece of farming equipment. For example, if you purchase a tractor from a dealership, and the dealership provides financing to purchase that equipment, the dealership would be a PMSI Creditor.

In the other example, there are general creditors such as banks, or other financers,  who often provide an operating line of credit to farmers. In consideration for providing this funding, banks are often provided with general security agreements over all of a farmers property and/or a mortgage. 

Where a PSMI Creditor serves a notice on a farmer, that farmer is able to apply to the Court to delay seizure. In those instances, the Court will sometimes delay the seizure where it can be demonstrated the farmer can 1) come up with a viable plan to rectify the debt in a reasonable period of time and/or 2) the farmer requires the equipment for farming. While the delay is not a guarantee the Court, and sometimes creditors, will agree to temporary reprieves in order to give the farmer a chance to remedy the arrears. After all, a creditor prefers cash in hand over the hassle of seizing and selling farm equipment. This exemption applies equally to individuals and corporations.

In the other situation, where a farmer is facing bankruptcy and/or cannot pay its general creditors, the general creditor will attempt to seize part or all of its security. In certain  situations, a farmer can apply for an exemption in order to avoid the seizure of its equipment. In order to qualify for this exemption, the farmer must demonstrate it has realistic and viable farming plan going forward and that the farming equipment is reasonably necessary for the proper and efficient operation of the farm. In these exemption applications, the exemption only applies if the equipment is owned by an individual and not a corporation.

As is set out above, there are multiple remedies available to farmers in order to delay or avoid the seizure of equipment. These tactics and remedies allow a farmer to get through the year and hopefully develop a practical solution to satisfy his or her creditors.  

Should you have any further questions about your protections as a farmer, or need advice negotiating with your creditors, please give our office a call to discuss.

Whether it’s personal or business, we handle cases ranging from wills to overseeing complex business deals, and everything in between. Our success comes as a result of our collective effort. Combining the experience of your lawyer together with the resources of our team, you can put your trust in us to handle your case with confidence.

Area of ExpertiseAgriculture