The seizure of assets given as security for debt evidenced by a promissory note in default was held to require prior notice. The case of 1758704 Ontario Inc. v. Priest, 157 O.R. (3d) 481 (C.A.), 2021 ONCA 588, is a reminder of the common law duty on a creditor to give notice before realizing upon security.
In the Priest case, the buyers of a business almost two years after its sale defaulted on a promissory note secured by heavy construction equipment. Without notice the sellers seized these assets from the buyers, putting them out of business. The sellers sued in the Ontario Superior Court for the money still owing. The buyers filed a counterclaim pleading breach of contract, intentional interference with economic relations, and the tort of conversion based on the seizure without notice. In the main action, the trial judge granted judgment in favour of the sellers, based on the unpaid debt. She also dismissed the buyers’ counterclaim, based on her conclusion that the sellers were not required to provide notice to the buyers prior to seizing the assets. The buyers appealed from the judgment against them in the main action and from the dismissal of the counterclaim, but at the oral hearing, they focused solely on the counterclaim.
The Ontario Court of Appeal allowed the appeal from the dismissal of the counterclaim, holding [at para. 5] that “At common law, and under the terms of the Asset Purchase Agreement (“APA”) entered into by the parties, the appellants were entitled to notice before the equipment was seized. This amounted to a breach of contract”.
The Court of Appeal reviewed the APA, the promissory note, the General Security Agreement (“GSA”) which secured payment under the promissory note and granted security over the purchased assets, and the Ontario Personal Property Security Act (“PPSA”) under which the GSA was registered. The APA, promissory note, GSA and PPSA all included provisions relevant to an event of default. The APA provided that, if the buyers defaulted on any payments under it, the sellers were required to give to the buyer 15 days’ notice before seizing the purchased assets. The promissory note included an acceleration clause in the event of default, such that the entire unpaid balance and accrued interest would become payable immediately, but it contained no notice requirement. Similarly, the GSA made any outstanding obligations immediately payable in full upon default, and specified the remedies available to the sellers, including the right to enter any premises where the purchased assets were located and to repossess and sell those items. But like the promissory note, the GSA stipulated no notice requirement.
The Court of Appeal held that the trial judge erred in finding that the PPSA relieved the sellers of the obligation to give the buyers notice of their intention to seize the secured assets. In summarizing Part V of the PPSA as it provides rights and remedies to a creditor upon default of a debtor, the Court of Appeal stated [at para. 41 and 43] as follows:
More specifically, s. 62 gives the creditor the right to take possession of the secured goods, unless otherwise agreed, or if the secured goods are equipment, the right to render the equipment unusable, but without removing it from the debtor’s premises. Section 63 then grants the creditor the right to dispose of the secured goods, provided the creditor gives the debtor at least 15 days’ advance notice, in writing: s. 63(4). However, pursuant to s. 63(7), no notice is required under s. 63(4) where the goods are “of a type customarily sold on a recognized market.” … In my view, s.63(7) of the PPSA had no application in the circumstances; it could not relieve the respondents of its common law obligation to provide notice to the appellants, and its contractual obligation under the APA.
The Court of Appeal then referred [at para. 50] to the common law obligation to give notice to a debtor before seizing secured assets, a principle adopted in Canada in R.E. Lister Ltd. v. Dunlop Canada Ltd., [1982] 1 S.C.R. 726., as follows:
The Lister principle has been embedded in Canadian debtor-creditor law for decades. This reality is important when considering the reach and effect of the PPSA. The respondents submit that it has been ousted by the PPSA. Even if I were to accept the respondents’ interpretation of s. 63(7) of that Act, there is no basis to conclude that the Legislature intended to extinguish the Lister v. Dunlop line of authority.
The Court of Appeal mentioned the notice requirement in the APA which also provided a duty to give notice in the event of default and rejected the sellers’ submission that the notice provision was inapplicable because it “merged” on closing. In concluding that the notice provision remained operative and did not “merge” upon closing, it held [at para. 61 and 62] as follows:
Although the doctrine of merger has some application to real property transactions …the doctrine has never applied to transactions involving personal property, such as goods. … Moreover, even when applicable, merger is not automatic; it is the intentions of the parties that must prevail. … In this case, the inclusion of [notice] Article 3.03 would make no sense if it were to “merge” upon closing. The entire transaction, for both purchased and leased equipment, was structured on installment payments to satisfy outstanding debt. It provided that, in the event of default “of any payment owing hereunder”, the respondents would have certain remedies, and the appellants would be entitled to notice.
In holding that the trial judge erred in finding that the sellers had no duty to give the buyers notice upon the default on the promissory note, the Court of Appeal [at para. 65] noted the failure to provide notice was not an academic exercise or a mere formality in this case:
The record before the trial judge established that, in October 2012, the appellants applied to their bank for financing to retire the balance on the promissory note, which was roughly $120,645 at the time. Just days after the illegal seizure, on December 12, 2012, the bank approved the advance of $122,000.
The Court of Appeal then set aside the trial judge’s order dismissing the counterclaim, allowed the counterclaim, and remitted the matter to the Superior Court for an assessment of damages.
In light of the foregoing, the Priest case illustrates the need for creditors to provide debtors with notice of their intention to seize the debtors’ property given as security. Even if the documentation applicable to the debtor/creditor relationship makes no mention of notice being required prior to seizing security upon default, the common law imposes such an obligation.
Although the trial judge in Priest rejected the buyers’ argument that the duty of good faith in the performance of contracts obliged the sellers to tell the buyers that they considered a missed payment a default on the promissory note and that they intended to seize the equipment, the raising of good faith arguments generally in future creditor enforcement litigation remains a possibility. It seems that the effects of Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, and C.M. Callow Inc. v. Zollinger, 2020 SCC 45, 452 D.L.R. (4th) 44, will continue to be felt.
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