Part 5 I&II Unsecured Creditors Post-Judgment Remedies Priorities

Part 5 I&IIUnsecured CreditorsPost-Judgment RemediesPriorities

Terminology • “Bound” JC has interest in property of the debtor which is effective against third parties • 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 • Enforcement orders: order of the court addressed to the sheriff ordering the sheriff to seize and sell assets of the debtor. • Traditionally called “writs of execution” • “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 • Corresponds to right to collect on intangibles under PPSA • “Attaching order” is order prohibiting AD for paying JD

Relevant Acts • Nfld and Alta have reformed judgment enforcement system • Judgment/Civil Enforcement Acts • Unreformed jurisdictions • Creditors Relief Act • 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 • PPSA/Registry Act/Land Titles Act • Binding of property of judgment debtor • Memorials and Executions Act • Enforcement against land and personal property • Garnishee Act • Enforcement against debts owing to JD

Priorities

Binding • 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) • 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, • (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 • Problem • Conflict of interests between • JC • Third parties dealing with the collateral • Balance • Easy and effective binding • Against • Adequate protection for third parties

History of Binding • Originally the judgment of the court was binding when judgment was delivered or when writ was issued • 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 • Still harsh absent an effective system of notice

History of Binding • 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

History of Binding • Land • Writ against land (”elegit”) is still binding on delivery to the sheriff unless legislation provides otherwise • This is still the case in Ontario • Problem • This requires an additional search to verify title • Most other jurisdictions require registration in the land registry • E.g. NB

Land – N.B. • Memorials and Executions Act • 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. . . • Registration binds land • . . . but no writ of fierifacias 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 • Registration of judgment has limited life • Memorials and Executions Act • 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 • Legislative Response – Goods & Chattels • U.K. Mercantile Law Amendment Act 1856 and adopted in most provinces, but not NB, NS or PEI: • No writ of fifa 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 • Execution Act • 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 • Requiring seizure was good for BFPFV, but could be a problem for JC since • 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 • 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 E.g. NB Creditors Relief Act 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.

Personal Property – New Rule • 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

Modern Position • Personal Property • Old Rule – Ontario, Manitoba, B.C. • Personal property bound on seizure of goods • New Rule – Other provinces, with some variation in details • Personal property bound on registration of notice of judgment in the PPR • Land • Old Rule – Ontario Registry Act • Land bound on delivery of writ to sheriff • New Rule – Atlantic Provinces, OntLand Titles Act • Land bound on registration of memorial of judgment in land registry

Binding by Registration • 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 • Once the property is bound, subsequent interest holders (e.g. purchasers or secured parties) take subject to the JC’s interest • Exceptions: • Land • No exceptions until the registration expires • Personal Property • Registered judgment is like registered security interest • Exceptions for transferees • Also pmsi, repairer’s lien (not covered in this course)

Subsequent TransfereePersonal Property • Ordinary course, yard sale and serial number equipment rules apply to judgments as they do to security interests. • (JC may register by serial number) • Why? • Thus the JC must register by serial # to protect interest against purchasers • This is different from the question of whether registration against equipment without serial # is effective against JC

Subsequent Transferee – Personal Property – Why? 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 InterestsPersonal Property • PMSI (if registered in timely manner) and repairer’s lien have priority over prior registered JC • PPSA s.22 & 32 • Exceptions may arise for other statutory liens

Prior Interests • To what extent is a prior interest affected by a binding judgment? • Prior unregistered interests • Future advances

Prior Interests – Common Law • Starting point: • You can’t grant a security interest in someone else’s property • A judgment debtor can’t bind someone else property • So, common law • The JC steps into the shoes of the debtor

Prior Interests – Common Law • 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-to-register wins”

Prior Interests – Land • Interest of JC with registered memorial of judgment is of course subordinate to prior registered interests in the property • 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

Prior Interests – Land • The rule in Jellett and Wilkie applies in most jurisdictions • Including land titles jurisdictions • Including NB Land Titles Act • Can only be changed by clear language • Modified by NB Registry Act • 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 • Why should JC who registers be treated differently from secured party who registers? • JC is different from secured party in that JC does not rely on register, so why prejudice bona fide purchaser who failed to register? • But what about successor in title to JC, namely purchaser from sheriff? • 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...” • Jellett v Wilkie • But that is too late for purchaser, who has already purchased

Prior Interests – Land • Consider problem of fraudulent conveyances • 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 • 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

Prior Interests – Land • 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? • Consider: • Prejudice to purchaser from sheriff • Prejudice to prior unregistered interest holder • Burden on prior unregistered interest holder • Problem of fraudulent conveyances

Prior Interests – Personal Property • 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 • (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, • This rule applies even to prior unperfected security interests • Note: In Ontario the JC must actually seize to get priority over a prior unregistered security interest

Prior Interests – Personal Property • Rule in Jellett v Wilkie does apply to prior ownership interests • 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 • Where debtor conveyed property prior to binding in order to defeat judgment creditor

Future Advances – Personal Property • 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 • (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 AdvancesPersonal Property • Why is JC treated differently from SP in respect of future advances under the PPSA?

Future AdvancesLand • In land, the rule regarding the priority of JC with respect to future advances is not clear. • What should it be?

Priorities as between JCs

Common-Law • First writ delivered to the sheriff has priority • 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 • What is wrong with this rule? • Still the law in PEI

Pro-Rata Sharing • The common law was modified by Creditors Relief Acts near the turn of the century • Unsecured creditors share pro-rata • That is, in proportion to their share of the total debt • E.g. D owes $30,000 to Unsecured Creditor 1, $10,000 to UC2 • D’s total assets are $1000 • UC1 gets $750, UC2 gets $250 • E.g. NB Creditors Relief Act • 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 • 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 • 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 • 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 • 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 • That certificate was then equivalent to a judgment • If objections were raised, they would be dealt with by a court

Establishing a Claim • 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 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 • In NB, NS & BC, Creditors Relief Act does not apply to garnishment, only to execution • Apparently a drafting error • Is CRA redundant in light of bankruptcy?

Defects of CRA • Recall CRA s.4(1) • Where a sheriff levies money upon an execution . . . the money shall thereafter be distributed rateably amongst all execution creditors

Defects of CRA 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.

Part 5 I&II Unsecured Creditors Post-Judgment Remedies Priorities