Transcript Part 5.I & II - Unsecured Creditors Post

Part 5 I&II
Unsecured Creditors
Post-Judgment Remedies
Priorities
Terminology
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“Bound” JC has interest in property of the
debtor which is effective against third parties
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Corresponds to “perfection” in PPSA
“Judgment” the order of the court that the
defendant pay $ to the plaintiff: Form 60A
“Memorial of judgment” evidence of the
judgment which can then be registered in the
land registry to bind land
“Notice of judgment” notice of judgment which
is registered in PPR to bind personal property
Terminology
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Enforcement orders: order of the court addressed to
the sheriff ordering the sheriff to seize and sell assets of
the debtor.
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Traditionally called “writs of execution”
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“writ of fi.fa. for personalty, “elegit” for land
Now “order for seizure and sale” for land and real property
(Form 61A)
Garnishment – ‘execution’ against debt owing by
account debtor to judgment debtor
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Corresponds to right to collect on intangibles under PPSA
“Attaching order” is order prohibiting AD for paying JD
Relevant Acts
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Nfld and Alta have reformed judgment enforcement system
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Judgment/Civil Enforcement Acts
Unreformed jurisdictions
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Creditors Relief Act
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PPSA/Registry Act/Land Titles Act
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Binding of property of judgment debtor
Memorials and Executions Act
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Priorities among unsecured creditors
Binding of property of judgment debtor, ie priority between JC & third
parties (in conjunction w PPSA etc.)
Mini-bankruptcy – obsolete & prob. unconstitutional
Enforcement against land and personal property
Garnishee Act
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Enforcement against debts owing to JD
Priorities
Binding
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Once the property is bound by the judgment any third
party taking an interest in the property takes subject to
the judgment creditor’s right to execute
E.g. N.B. Creditors Relief Act 2.3(10)
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Where an interest acquired in personal property that is
bound by registration of a notice of judgment is subordinate
to the interest of a judgment creditor,
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(a) the property is subject to enforcement proceedings to the same
extent as if the subordinate interest did not exist, and
(b) a person who acquires the property as a result of enforcement
proceedings obtains title free of the subordinate interest.
Binding
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Problem
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Conflict of interests between
JC
 Third parties dealing with the collateral
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Balance
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Easy and effective binding
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Against
Adequate protection for third parties
History of Binding
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Originally the judgment of the court was binding
when judgment was delivered or when writ was
issued
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Harsh against third parties – effective even against a
BFPFV without notice of the writ
First modification – not binding until judgment
entered on rolls
Statute of Frauds 1677 provided that a writ was
not binding until delivered to the sheriff
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Still harsh absent an effective system of notice
History of Binding
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Judicial response was to circumscribe the
binding effect of the writ
Binding effective of the writ only applies to goods
exigible at common law, e.g. tangible goods and
chattels
 Personalty made exigible by legislation is bound only
on actual seizure
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History of Binding
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Land
Writ against land (”elegit”) is still binding on delivery
to the sheriff unless legislation provides otherwise
 This is still the case in Ontario
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Problem
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This requires an additional search to verify title
Most other jurisdictions require registration in
the land registry
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E.g. NB
Land – N.B.
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Memorials and Executions Act
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Registration binds land
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5 A memorial of a judgment . . . registered in the
registry office of the county in which the lands are
situated, binds the lands of the person against whom
the judgment was recovered, decree made or
execution issued. . .
. . . but no writ of fieri facias issued on such
judgment or decree, and delivered to the sheriff to
be executed shall bind such lands.
Delivery to sheriff does not
Land – NB
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Registration of judgment has limited life
Memorials and Executions Act
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6 Every judgment or decree of which a memorial is so
registered binds the lands of the person against whom the
judgment or decree was recovered for five years from the
registry, and after that period, if the judgment or decree
remains unsatisfied, the memorial may be renewed for a
further period of five years with like effect, and so on as
often as required by registering it again in accordance with
this Act.
Overall limit of 20 years due to Limitations Act
History of Binding
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Legislative Response – Goods & Chattels
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U.K. Mercantile Law Amendment Act 1856 and adopted
in most provinces, but not NB, NS or PEI:
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No writ of fi fa would affect the right of a BFPFV
without notice from execution debtor or seizure.
Result was that JC had to seize in order to “perfect”
at least as against BFPFV
This remains the position in Ont., B.C.,
Manitoba
Personal Property – Ontario
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Execution Act
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10.(1) Subject to the Land Titles Act and to section 11 a writ of execution
binds the goods and lands against which it is issued from the time it has
been received for execution and recorded by the sheriff.
(2) Despite subsection (1), no writ of execution against goods other than
bills of sale and instruments in the nature of chattel mortgages prejudices
the title to such goods acquired by a person in good faith and for valuable
consideration unless such person at the time of acquiring title had notice
that such writ or any other writ by virtue of which the goods of the
execution debtor might be seized or attached has been delivered to the
sheriff and remains in the sheriff's hands unexecuted.
“Notice” in subsection (2) means actual notice
History of Binding
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Requiring seizure was good for BFPFV, but could be a
problem for JC since
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1) A JC ranked behind a secured creditor whose interest was
subsequently created but registered prior to seizure
2) Prior debtor could prefer other creditors btw time of
judgment and seizure by giving them a security interest
before seizure (so long as the other creditors were not aware
of the preference and subject to Fraudulent Preferences Act).
3) 2) is particularly a problem with respect to new assets,
since if new assets were acquired the enforcement process
had to be recommenced
Personal Property – New Rule
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General rule
 Property not bound except by registration
 Registration in PPR binds property
 In Nfld registration is in Judgment Enforcement
Registry
Personal Property – New Rule
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E.g. NB Creditors Relief Act
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2.3(1) Personal property of a judgment debtor shall not
be bound except by registration of a notice of judgment
in accordance with subsection 2.2(1) [in PPR].
2.3(2) Registration of a notice of judgment binds all of
the judgment debtor's non-exempt exigible personal
property on registration and all non-exempt exigible
personal property acquired by the judgment debtor
after registration from the time of its acquisition.
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Personal Property – New Rule
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Expiry
Creditor may select period of time for which
registration of notice of judgment in PPR is to be
effective, up to a maximum of 20 years
 After 20 years recovery is barred by Limitations Act
s.47.1
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Modern Position
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Personal Property
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Old Rule – Ontario, Manitoba, B.C.
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New Rule – Other provinces, with some variation in details
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Personal property bound on seizure of goods
Personal property bound on registration of notice of judgment in the
PPR
Land
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Old Rule – Ontario Registry Act
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Land bound on delivery of writ to sheriff
New Rule – Atlantic Provinces, Ont Land Titles Act
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Land bound on registration of memorial of judgment in land registry
Binding by Registration
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When property can be bound by registration,
person dealing with the property of the debtor
must search the registry for a notice of
judgment, as for a financing statement
Why should a JC be able to bind property by
registration?
Subsequent Interest Holders
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Once the property is bound, subsequent interest
holders (e.g. purchasers or secured parties) take
subject to the JC’s interest
Exceptions:
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Land
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No exceptions until the registration expires
Personal Property
Registered judgment is like registered security interest
 Exceptions for transferees
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Also pmsi, repairer’s lien (not covered in this course)
Subsequent Transferee
Personal Property
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Ordinary course, yard sale and serial number
equipment rules apply to judgments as they do
to security interests.
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(JC may register by serial number)
Why?
Thus the JC must register by serial # to protect
interest against purchasers
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This is different from the question of whether
registration against equipment without serial # is
effective against JC
Subsequent Transferee – Personal
Property – Why?
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Creditors Relief Act 2.3(6) A person to whom personal
property bound by a notice of judgment is transferred
has priority as against the persons referred to in
subsection (5) in the same circumstances that a
transferee of personal property subject to a security
interest perfected by registration has priority as against
the secured party under subsections 30(1) to 30(4)
[ordinary course and “yard-sale”], subsections 30(6) and
30(8) [equipment] and section 31 of the Personal
Property Security Act [reified intangibles], and those
provisions apply with the necessary modifications.
Subsequent Security Interests
Personal Property
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PMSI (if registered in timely manner) and
repairer’s lien have priority over prior registered
JC
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PPSA s.22 & 32
Exceptions may arise for other statutory liens
Prior Interests
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To what extent is a prior interest affected by a
binding judgment?
Prior unregistered interests
 Future advances
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Prior Interests – Common Law
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Starting point:
You can’t grant a security interest in someone else’s
property
 A judgment debtor can’t bind someone else property
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So, common law
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The JC steps into the shoes of the debtor
Prior Interests – Common Law
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The rule in Jellett v Wilkie
". . .an execution creditor can only sell the
property of his debtor subject to all such
charges, liens and equities as the same was
subject to in the hands of his debtor”
Jellett v Wilkie (1896) 26 S.C.R. 282
The rule in Jellett v Wilkie is simply a statement of nemo
dat in the judgment enforcement context
The alternative to Jellett v Wilkie is some form “first-toregister wins”
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Prior Interests – Land
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Interest of JC with registered memorial of
judgment is of course subordinate to prior
registered interests in the property
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Same as secured party
Interest of JC is also subordinate to prior
unregistered interests: Jellett v Wilkie
Different from security interests
 Any unregistered interest is void as against a prior
registered security interest
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Prior Interests – Land
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The rule in Jellett and Wilkie applies in most
jurisdictions
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Including land titles jurisdictions
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Including NB Land Titles Act
Can only be changed by clear language
Modified by NB Registry Act
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19(2) Subject to subsections (3), (4) and (5), all instruments
shall, if not registered within three months of the date of
their execution, be deemed fraudulent and void as against any
bona fide -judgment creditor, when, prior to the registry of
such conveyance, a memorial of the judgment has been
registered.
Prior Interests – Land
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Why should JC who registers be treated differently
from secured party who registers?
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JC is different from secured party in that JC does not rely on register, so
why prejudice bona fide purchaser who failed to register?
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But what about successor in title to JC, namely purchaser
from sheriff?
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Must be able to give clear title to get best price
“No doubt if the sheriff had sold and the purchaser had registered his
transfer, the Act would apply, and would in that case invalidate prior
unregistered transfers made by the execution debtor before the
registry of the execution...”
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Jellett v Wilkie
But that is too late for purchaser, who has already purchased
Prior Interests – Land
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Consider problem of fraudulent conveyances
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Conveyances intended to defeat judgment creditor
“Better that my spouse gets the land rather than my
creditor”
 After registration of judgment JD executes conveyance to
spouse and backdates it
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Fraudulent conveyances can be attacked under
fraudulent preferences Acts (Assignments and
Preferences Act in NB), but these require showing
Intent to defraud, and
 That D was insolvent at time of the transfer
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Prior Interests – Land
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Should rule in Jellett v Wilkie be abolished in
respect of land in favour of a rule that JC with
registered memorial of judgment has priority
over prior unregistered interests?
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Consider:
Prejudice to purchaser from sheriff
 Prejudice to prior unregistered interest holder
 Burden on prior unregistered interest holder
 Problem of fraudulent conveyances
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Prior Interests – Personal
Property
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Rule in Jellett v Wilkie does not apply to prior security
interests
PPSA 20(1) An unperfected security interest in
collateral is subordinate to the interest of
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(a) a judgment creditor who has registered a notice of
judgment in the Registry pursuant to subsection 2.2(1) of the
Creditors Relief Act if the security interest is unperfected
when the notice is registered,
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This rule applies even to prior unperfected security
interests
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Note: In Ontario the JC must actually seize to get priority over a
prior unregistered security interest
Prior Interests – Personal
Property
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Rule in Jellett v Wilkie does apply to prior ownership
interests
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This is simply to say that a judgment creditor cannot attach
property that does not belong to the debtor
We cannot say that a prior unregistered ownership
interest is subordinate to a registered JC because there
is no ownership registry – an owner could never protect
themselves
Note that there are mechanisms to deal with fraudulent
conveyances
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Where debtor conveyed property prior to binding in order to
defeat judgment creditor
Future Advances – Personal
Property
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PPSA rule for future advances is different for JC than for SP2
35(6) A perfected security interest has priority over the interest
of a judgment creditor referred to in paragraph 20(1)(a) [with
registered notice of judgment] only to the extent of
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(a) advances made before the judgment creditor registers the notice of
judgment referred to in paragraph 20(1)(a), [and]
(b) advances made before the secured party has knowledge of the
registration of the notice of judgment referred to in paragraph 20(1)(a),
Like Hopkinson v Rolt – JC who registers and gives actual notice
has priority over future advances
Future Advances
Personal Property
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Why is JC treated differently from SP in respect
of future advances under the PPSA?
Future Advances
Land
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In land, the rule regarding the priority of JC with
respect to future advances is not clear.
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What should it be?
Priorities as between JCs
Common-Law
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First writ delivered to the sheriff has priority
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Regardless of the time at which the debt was
incurred to the judgment obtained
That is,
Sheriff has several writs of execution
 Sheriff executes the first writ delivered to him
 When that writ is satisfied in full, sheriff turns to the
second writ
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What is wrong with this rule?
Still the law in PEI
Pro-Rata Sharing
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The common law was modified by Creditors Relief
Acts near the turn of the century
Unsecured creditors share pro-rata
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That is, in proportion to their share of the total debt
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E.g. D owes $30,000 to Unsecured Creditor 1, $10,000 to UC2
D’s total assets are $1000
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UC1 gets $750, UC2 gets $250
E.g. NB Creditors Relief Act
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3 Subject to the provisions hereinafter contained, there is no
priority among creditors by execution from The Court of
Queen's Bench of New Brunswick.
Pro-rata Sharing
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Pro-rata sharing is “subject, . . . to the payment
of the costs of the creditor under whose
execution the money was levied.” CRA s.4(1)
Why?
Implementation of Pro-rata
Sharing
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CRA s.4(1) Where a sheriff levies money upon an
execution against the property of a debtor . . .he shall
forthwith enter in a book to be kept in his office, open
to public inspection without charge, a notice stating
that the levy has been made, and the amount thereof,
and the money shall thereafter be distributed rateably amongst all
execution creditors and other creditors whose writs, or certificates
given under this Act, were in the sheriff's hands at the time of the
levy, or who delivered their writs or certificates to the sheriff within
one month from the entry of notice; . . .
Establishing a Claim
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Creditor must establish a claim to be entitled to share in
the distribution: CRA s.5
Traditionally, it was not necessary to have obtained a
judgment
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Although the initiating creditor had to have obtained a
judgment in order that a writ of execution would issue
“Certificate system” allowed creditors to obtain a
certificate through a summary administrative procedure
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That certificate was then equivalent to a judgment
If objections were raised, they would be dealt with by a court
Establishing a Claim
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The certificate system is was abolished in NB
with PPSA
CRA 2.3(13) A judgment creditor is not entitled
to share in the proceeds of a levy by the sheriff
against the personal property of the judgment
debtor under this Act unless the creditor has
registered a notice of judgment under subsection
2.2(1).
Establishing a Claim
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2.3(14) In applying the provisions of this Act for
the purposes of determining the entitlement of
creditors to share in the proceeds of a levy by
the sheriff, a reference to an execution or
certificate or the delivery of an execution or
certificate to the sheriff shall be construed as a
reference to a registered notice of judgment or
the registration of a notice of judgment, unless
the context otherwise requires.
Defects of CRA
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In NB, NS & BC, Creditors Relief Act does not
apply to garnishment, only to execution
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Apparently a drafting error
Is CRA redundant in light of bankruptcy?
Defects of CRA
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Recall CRA s.4(1)
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Where a sheriff levies money upon an execution . . .
the money shall thereafter be distributed rateably
amongst all execution creditors
Defects of CRA
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What about where SP distributes surplus funds?
PPSA s. 60(2) Surplus distributed in order of priority
 JC1 gets paid out before JC2 because sheriff is not
distributing
 What about CRA s. 3?
 S. 3 Subject to the provisions hereinafter contained,
there is no priority among creditors by execution
from The Court of Queen's Bench of New
Brunswick.
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