G.M. Kraus QUEEN’S BENCH FOR SASKATCHEWAN Citation: 2012 SKQB 99 Date: 2012 03 05 Docket: Q.B.G. No. 256 of 2011 Judicial Centre: Saskatoon IN THE MATTER OF AN APPLICATION PURSUANT TO S. 11 OF THE SASKATCHEWAN FARM SECURITY ACT BETWEEN: FARM CREDIT CANADA, and TITAN VENTURES INC., RESPONDENT Docket: Q.B.G. No. 257 of 2011 Judicial Centre: Saskatoon BETWEEN: FARM CREDIT CANADA, and STOMP PORK FARM (2008) LTD., NATIONAL BANK OF CANADA and SINNETT PORK FARM LTD., Counsel: Joel A. Hesje, Q.C., and Anita Wandzura for the applicant plaintiff Jeffrey M. Lee for the respondent defendant, National Bank of Canada FIAT KOCH J. March 5, 2012 [1] In early 2008, Stomp Pork Farm Ltd., major Saskatchewan hog producer, came under creditor protection pursuant to the Companies Creditors’ Arrangement Act, R.S.C. 1985, c. C-36. In the resulting reorganization two new corporations, Stomp Pork Farms (2008) Ltd. (Stomp (2008)) and Titan Ventures Inc. (Titan), each acquired several pig barns formerly owned by Stomp Pork Farm Ltd. at various locations in Saskatchewan. These acquisitions were financed for the respective purchasers by Farm Credit Canada (“FCC”), as primary lender, and National Bank of Canada (“National”). There may have been other sources of acquisition funding. FCC and National financing is secured by mortgages against the titles to the pig barns. Within year both corporations were in default in their loan payments and the lenders took action. FCC gave notice of its intention to realize on its security. National arranged for the appointment of receiver. [2] In 2009, to alleviate serious economic distress in the pork industry, the federal government, Department of Agriculture, introduced subsidy, the Hog Farm Transition Program (“HTP”), administered by the Canadian Pork Council, federation of provincial pork industry associations. The purpose of the program was to try to save the hog industry overall by helping producers through difficult times. The subsidies were substantial, but producers had to meet stringent conditions in order to qualify for them. Significant amongst the HTP requirements was the necessity for the producer to empty its hog barns and keep them idle for three years. In the event of the sale, lease or transfer of barns during the three-year period the acquirer or user had to assume the HTP conditions, including keeping the barns idle, failing which the subsidies would become repayable with substantial administrative fees and interest. It appears that there was no reference in the HTP conditions to mortgagees. Stomp (2008) and Titan qualified for substantial subsidies. The proceeds are all or partly in trust with National’s solicitors while the parties and their creditors sort out the distribution of them. In the meantime FCC as first mortgagee has had to cover substantial ongoing expenses to maintain and attempt to preserve the value of the vacant barns. [3] In March 2011 the court granted an order to FCC pursuant to s. 9(1)(d) of The Saskatchewan Farm Security Act, S.S. 1988-89, c. S-17.1, providing that the Act does not apply to the FCC mortgages granted by Stomp (2008) and Titan. This enabled FCC to commence foreclosure actions, which it did immediately. To comply with Rule 436(2A) National is named as party defendant in each of the foreclosure actions because National is shown on the titles as subsequent mortgagee, thus having registered interest in the mortgager’s equity of redemption. As is common in such circumstances, FCC as plaintiff in these actions did not explicitly claim relief against National. However, National filed statements of defence alleging an agreement amongst the secured creditors and the owners, including another owner, Stomp Pork (USA) Inc., whereby each of the lenders subordinates its security to the security of the other lenders and holds its interest in the mortgage security on behalf of all lenders in accordance with the terms and conditions of the agreement. National also contends in its statements of defence that FCC is in breach of its covenants to act in commercially reasonable manner in the enforcement of its mortgage security. The foreclosure actions have created the possibility that the rights of the owners to retain for the benefit of the secured creditors the HTP subsidy payments already received and their rights to continue to receive HTP payments will be in jeopardy. [4] At the risk of over-simplification believe that the statements of defence can be summarized as follows: (1) FCC by bringing its foreclosure actions is in violation of the inter-lendor agreement, in particular, its covenant to National to act in commercially reasonable manner in the enforcement of FCC’s security rights. (2) The foreclosure actions may have jeopardized or will jeopardize the owners’ ability to continue their participation in the HTP, both as to the owners’ continuing entitlement to benefits, and as to the possibility of the owners being required to repay benefits already received with interest and penalties. (3) In the alternative, because FCC is acting in contravention of representations to National that FCC would act in commercially reasonable manner in the enforcement of its security, which representations National has acted upon to its detriment, the FCC action is barred during the respective three-year periods of barn use restriction by the doctrine of equitable estoppel. (4) The present FCC claims for foreclosure should be dismissed or the court should declare that FCC is estopped from foreclosing or taking possession of secured property until the expiration of the respective three‑year HTP periods (in the case of Titan in May 2012 and in the case of Stomp (2008) in June 2013). [5] In the present motions FCC seeks orders pursuant to Rule 173(a) and (e) and the court’s inherent jurisdiction to strike the entire statements of defence on the following grounds:(a) the statements of defence filed by the defendant fail to disclose reasonable defences to the plaintiff’s foreclosure proceedings;(b) the claims asserted on statements of defence should be advanced in separate actions; and(c) the statements of defence are otherwise an abuse of the process of this Honourable Court. [6] FCC submits: (a) The statements of defence do not contain allegations which challenge the enforceability of the FCC mortgages or of the foreclosure actions. (b) National has only been added as party defendant to the foreclosure actions required by Rule 436(2A) because of National’s interest in the equity of redemption (subject to the rights of FCC), as disclosed in the Land Titles records. (c) The obvious primary purpose of the statements of defence is to delay the FCC foreclosure actions. (d) National is in effect seeking to enjoin the foreclosure actions without having to meet the more stringent requirements for injunctive relief. [7] National submits: (a) FCC has not met the threshold for Rule 173 relief which requires that the jurisdiction of the court to strike pleadings must be exercised sparingly and only in exceptional cases. (b) The authorities do not support the FCC contention that because the statements of defence do not challenge either the mortgage contract or the amounts owing on the secured indebtedness, National has not raised any reasonable defence. (c) National has raised reasonable defences including: (i) breach by FCC of collateral contracts which are clearly connected to the mortgages, together with the doctrine of equitable estoppel which precludes enforcement in circumstances such as the present; (ii) National has the right to defend the actions because of its interest in the equity of redemption. (d) The purpose of the statements of defence is to protect the interests of National pursuant to the collateral agreements; there is no basis to imply improper motives. [8] The authorities are clear that pleadings should only be struck pursuant to Rule 173 in cases where it is obvious that the claim or defence is devoid of all merit or cannot possibly succeed. Such jurisdiction should be very sparingly exercised, only in very exceptional cases, and where the court is satisfied that the claim or defence is devoid of all merit. See: Odgers’ Principles of Pleading and Practice, 20th ed.; Canada (Attorney General) v. Inuit Tapirisat, 1980 CanLII 21 (SCC), [1980] S.C.R. 735; Sagon v. Royal Bank (1992), 1992 CanLII 8287 (SK CA), 105 Sask. R. 133 (C.A.). [9] Arguably the Supreme Court of Canada has in the recent case of R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42 (CanLII), [2011] S.C.R. 45, prescribed more robust approach to striking pleadings. The words “beyond doubt” from the Inuit case are no longer included in the prescribed criteria. have already commented on the Imperial Tobacco case in my decision in Battiste v. First Nations Bank, 2011 SKQB 473 (CanLII), [2011] S.J. No. 806 (QL), so it is unnecessary to repeat that discussion here. In any event, find that if the Imperial Tobacco case changes the law, the change has no impact on the present decision. [10] Although many of the Rule 173 cases involve allegations in statements of claim it is clear that the same criteria are applicable to statements of defence. See Canada Trustco Mortgage Co. v. Vaidya (1993), 1993 CanLII 6779 (SK QB), 112 Sask. R. 237 (Q.B.); Southwest Credit Union v. Prairie Meadows Farming, 2005 SKQB 405 (CanLII), 270 Sask. R. 100. [11] It is not in dispute that in an application pursuant to Rule 173(a) the court may only consider the pleadings, further particulars thereof, and any document referred to therein, but on an application pursuant to Rule 173(e) the court may assess the merits of the pleading and the motives of the party in presenting it. See Sagon v. Royal Bank, supra; Bank of Montreal v. Schmidt (1989), 1989 CanLII 4749 (SK CA), 75 Sask. R. 157 (C.A.). [12] Of particular note is the case of CIBC v. Sylvester, 2002 SKCA 52 (CanLII), 219 Sask. R. 138. In that case the court struck defence to foreclosure action because it did not challenge the alleged balance owing. The court held that an allegation of breach of fiduciary duty against the plaintiff was not properly included as defence and should only be advanced by way of counterclaim or in separate action. This follows previous decisions of the Saskatchewan Court of Appeal in the cases of Agricultural Credit Corp. v. Lozinski (1994), 1994 CanLII 4540 (SK CA), 123 Sask. R. 157 (C.A.), and Agricultural Credit Corp. v. Reid (1993), 1993 CanLII 6617 (SK CA), 113 Sask. R. 315 (C.A.). [13] The case of 663073 Alberta Ltd. v. Big Mountain Development Corp., 2010 SKQB 274 (CanLII), 357 Sask. R. 292 is of interest. In that case the plaintiff applied to strike portions of the statement of defence in foreclosure action. Specifically in issue was whether the defendant was entitled to plead equitable set-off. The court referred to Rule 104A(1)(c) relating to set-off and dismissed the application on the basis that the defendant’s cross-claim was so closely connected with the plaintiff’s demand that it would be manifestly unjust for the plaintiff to proceed without taking the defendant’s cross-claim into consideration. To like effect is the case of CIBC Mortgage Corp. v. Rowatt (2002), 2002 CanLII 45110 (ON CA), 220 D.L.R. (4th) 139 (Ont. C.A.). [14] Also relevant is the case of Marciano v. Landa, 2005 SKQB 58 (CanLII), B.L.R. (4th) 281. Although this was case seeking relief under The Business Corporations Act, R.S.S. 1978, c. B-10, not foreclosure action, it merits consideration here because Chicoine J. of this court specifically addressed the criteria applicable to an application to strike pursuant to Rule 173(e) as distinct from Rule 173(a). Chicoine J. at para. 44 quoted from Bullen Leake Jacob’s Precedents of Pleadings, 12th ed. as follows: The term “abuse of the process of the court” is term of great significance. It connotes that the process of the court must be carried out properly, honestly and in good faith; and it means that the court will not allow its function as court of law to be misused but will in proper case, prevent its machinery from being used as means of vexation or oppression in the process of litigation. It follows that where an abuse of process has taken place, the intervention of the court by the stay or even dismissal of proceedings, “although it should not be lightly done, yet it may often be required by the very essence of justice to be done.” The term “abuse of process” is often used interchangeably with the terms “frivolous” or “vexatious” either separately or more usually in conjunction. ... In determining the reasonableness of the cause of action, Chicoine J. applied the plain and obvious test. [15] In my opinion this application turns on the interpretation of the impact of the Court of Appeal decision in the CIBC v. Sylvester case, supra. Clearly the court held in that case, and in those which preceded it, that neither plea of set-off based on breach of fiduciary duty or plea of lack of procedural fairness can be defence to foreclosure action and such pleas can only be advanced by way of set‑off or in separate action. But does this mean, as FCC contends, that defendant cannot ever challenge foreclosure action on grounds other than the validity of the security or on the balance owing on the secured debt? do not see that in rejecting the proffered defences in the Sylvester case the Court of Appeal has necessarily circumscribed the pleadable defences in the manner that FCC contends. am unable to accept the submission that these cases serve to preclude the defences advanced by National in the present cases, arising, as they do, specifically from the express provisions of an alleged inter-creditor agreement. I accept that such pleading can serve to delay, but not defeat, FCC, or prevent FCC from proceeding with its foreclosure actions. [16] The defences advanced by National are, as was the situation in the 663073 Alberta Ltd. case, supra, so closely connected with FCC’s demands that it would be manifestly unjust for FCC to proceed without taking National’s defences into consideration. CONCLUSION [17] Both applications are accordingly dismissed. Although the facts and circumstances in each case are virtually identical, the complexity of them makes it appropriate that each defendant recover separate costs on the appropriate tariff.
FIAT: The plaintiff sought orders pursuant to Rule 173(a) and (e)of the Queen's Bench Rules and the Court's inherent jurisdiction to strike the entire statements of defence as they failed to disclose reasonable defences; the claims asserted on statements of defence should be advanced in separate actions; and the statements of defence were abuse of the Court's process. HELD: The applications were dismissed with each defendant to recover separate costs on the appropriate tariff. Although the defendants' pleading may delay but not defeat or prevent the plaintiff from proceeding with its foreclosure action, the defences were so closely connected with the plaintiff's demands that it would be manifestly unjust for the plaintiff to proceed without taking the defendant's defences into consideration.