Secured creditor must give reasonable notice before seizing defaulted assets: Court of Appeal

In the event of a default, a secured creditor is required to give a debtor reasonable notice of its intention to seize the assets and an opportunity to remedy the default, the Court of Appeal has found.  

The Court’s decision in 1758704 Ontario Inc. v. Priest, 2021 ONCA 588 overturned a Superior Court ruling, which found the assets at issue were spared the notice requirement by a provision of the Personal Property Security Act (PPSA).

“This is a reminder to lawyers for secured creditors to advise their clients to provide proper, reasonable notice to debtors and an opportunity to cure the default prior to taking enforcement proceedings,” says Maanit Zemel, partner at Zemel van Kampen LLP, who acted for the appellants.

“The failure to do so can result in protracted, expensive litigation.”

The dispute occurred between two business owners: Carl Priest and Martin Donkers and their numbered companies. The pair made a deal whereby Priest acquired certain assets held by two of Donkers’ companies. The arrangement was made via an asset purchase agreement, which involved two stages. First, Priest paid for the assets with a $558,740 promissory note, plus seven-per-cent annual interest and a personal guarantee. Second, he agreed to take over the leases of a John Deere excavator, a truck and a trailer. For the excavator, Priest would make monthly payments to Donkers, who would remit the funds to John Deere. For the truck and trailer, Priest would pay the lessor directly.

Their companies then executed a general security agreement, protecting the promissory note and leases, which was registered under the PPSA.

The defaults began with the excavator. After Priest’s company failed to make their payments, Donkers eventually sent notice that $115,399 was owed in arrears and he considered them in default, which meant the amount outstanding on the other equipment, plus the promissory note, would become due in full.

Priest made payments on the promissory note for two years until he stopped and informed Donkers he was “in the final stages” of obtaining funding to cover the remaining seven payments.   

A month later, Donkers’ companies seized the purchased assets and leased equipment. A few days after that, Priest got a notice from Lloyd’s Bailiff Services that it had the seized the property and would be charging $900 per day or $27,000 to store it at Call Service Towing. Lloyd’s also informed Priest he owed Donkers $132,634 in late payments.

“This litigation has been lengthy, rancorous and messy,” said Justice Gary Trotter, who wrote the reasons on behalf of the Court of Appeal’s panel which also included Justices Mary Lou Benotto and Bradley Miller.

Donkers sued for the remainder of the money owed. Priest counterclaimed that seizing the property without notice amounted to breach of contract, intentional interference with economic relations and conversion.

At trial, Priest and company had argued that under the duty of good faith in performance of contracts, they were owed notice that Donkers considered the missed payment on the promissory note a default and intended to seize the equipment. But Superior Court Justice Annette Casullo found that, under the PPSA, notice was not required, dismissed the counterclaim and awarded judgment in favour of Donkers in the main action.

But the Court of Appeal was of the view that notice was required under common law and the asset purchase agreement.

While a 15-day notice is obligatory under s. 63(4) of the PPSA, Justice Casullo had found the property at issue fell under an exemption from s. 63(7)(c), which allows goods “of a type customarily sold on a recognized market” to be seized without a notice requirement.

But s. 63(7)(c) of the PPSA did not eliminate the common law and contractual obligations to give notice, said Trotter. The Court also found s. 63 applied to goods already repossessed and to be disposed, with “no application to the pre-seizure stage.”

Para 3.03 of the asset purchase agreement states that in the event of a default, “the vendor” must provide notice of the default by fax or email and 15 days after the notice, the vendor is then entitled to take ownership of the assets. Justice Casullo did not address this provision, said Trotter.

Determining the appellants were entitled notice, Trotter said it was unnecessary to engage with their argument notice was required by the duty of good faith in the performance of contracts. The Court set aside Justice Casullo’s order dismissing the counterclaim and remitted the matter back to the Superior Court for assessment of damages.

“In this case, the failure to give notice was particularly egregious because the appellants were in the process of obtaining financing to pay the purchase price on an accelerated basis when the assets were seized,” says Zemel. “Had the respondents given proper notice to the appellants, years of costly litigation could have been avoided.”