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Equitable Receiver: Exhausting All Normal Remedies Can Be An Exhausting Process

Posted on April 16, 2018 | Posted in Collections

To collect a judgment debt through the legal process, a creditor ferrets out the debtor’s assets and income and then either has the sheriff seize and sell the assets or garnishes income or both. However, at times, although the assets are tantalizingly close, the creditor cannot get at them through normal means. The creditor then has a choice: give up or move for the appointment of an equitable receiver. The equitable receiver has far more power than a creditor and can take control of a debtor’s assets and income. The creditor in Luu v Abuomar, a 2017 Superior Court of Justice decision, moved for such a receivership.

A magnifying glass held above a fifty dollar bill.

Runaround

The debt arose from an application that was commenced about 14 years before the receivership motion. The debtor had operated a grocery store in a strip mall contrary to restrictive covenants. Ultimately, the creditor obtained an injunction and costs orders. These costs orders, including interest, amounted to approximately $82,000. Further, the creditor had obtained an order stating that the debtor was to pay for all enforcement costs, which now exceed $50,000.

The debtor had only one asset, a joint tenancy interest with his spouse in an unencumbered, very nice Oakville house worth approximately $1.5 million. The creditor attempted to have the sheriff seize and sell the debtor’s interest in the house. Note that we said it was the debtor’s interest being sold, not the house itself. So the question becomes, “Who wants to buy a debtor’s 50% interest in this house to become a tenant in common with the debtor’s spouse?” Put another way, “How much money will someone pay for a 50% interest and the lawsuit that will inevitably follow to obtain an order for partition and sale of the house?”

At least, in this case, there was no mortgage. However, the very fact of buying a lawsuit can scare away most people. As we said in our June 2016 newsletter:

“As an owner of an interest in property, the purchaser has the right to bring an application for partition and sale of the property. The purchaser may or may not be successful in this application. If the purchaser is successful, the court will order that the property be sold and the net proceeds be divided according to the parties’ proportionate interests in the property. If the purchaser is not successful, the purchaser will have an interest in the property that will only be saleable in the future when circumstances change. Not a great scenario. No wonder a purchaser tries to snap up the debtor’s interest at a very low price. The purchase involves real risk.”

In this case, the creditor attempted to sell the house four different times. On the first attempt, the debtor attended at the sheriff’s sale and attempted to interfere with the sale. A prospective purchaser actually put in an acceptable offer and paid a deposit of $26,000. However, for unexplained reasons, the purchaser got cold feet, resiled from the agreement, and forfeited her deposit. The creditor discovered that, just before the sheriff’s sale, the debtor had allowed his son to obtain a $700,000 judgment against him. Accordingly, the son claimed the lion’s share of the $26,000 deposit because, proportionately, his judgment far outweighed the creditor’s judgment.

The creditor, suspecting that the judgment was a ruse, brought an application to set aside the judgment and was wholly successful in that regard. The application judge held that the judgment was fraudulent and void as against the creditor and ordered that the sheriff ignore the judgment in distributing the $26,000. Unfortunately, in the same decision, the application judge rejected a request for a judicial sale of the property. He declined to follow a previous Superior Court decision doing just that and refused to order an equitable remedy because he thought that a seizure under the Execution Act might still suffice.

Try Again

The creditor then made three more unsuccessful attempts to sell the debtor’s interest in the house.

1. The creditor instructed the sheriff to sell the interest by way of an MLS listing of the property. Ultimately, the sheriff reported that only one realtor had expressed interest in listing the property and, since this realtor was a professional acquaintance of one of the creditor’s lawyers, the sheriff deemed the realtor ineligible. Since no eligible real estate agents would undertake the listing, the sheriff decided that the sale would not proceed.

2. The creditor then instructed the sheriff to sell the interest by way of a sheriff’s sale under sealed bid. The sheriff reported that only one bid was tendered in response to the advertisement for sale and that the bid amount was the grand sum of $10,000. The sheriff refused to accept the bid.

3. The creditor then instructed the sheriff to again attempt to sell the interest by way of a sale under auction. It was a great auction – with no bids.

Finally, the creditor attempted to examine the debtor by way of a judgment debtor examination. The debtor showed up with his adviser and when the adviser was informed that he would not be allowed to be present at the examination, the adviser and the debtor walked out.

Enough Already

Why did the creditor continue to hit her head against the wall? She did so because she knew that she had to demonstrate that she had exhausted all normal remedies before she could seek the appointment of a receiver as an equitable remedy.

Coincidentally, the judge who heard the motion for the equitable receivership was the same judge who had set aside the fraudulent judgment in favour of the son, but who had declined to order a judicial sale.

The debtor argued that the judge’s reasons for decision in the first application, which seemed to indicate that it would be inappropriate to allow equitable remedies, were res judicata of the issue. In essence, the debtor argued that the judge had already decided the issue and therefore the creditor could not come back to the court and ask for another equitable remedy. The judge gave that argument short shrift. He stated that the comments he made in his first decision regarding equitable remedies were not necessary for the decision itself. That decision merely dealt with whether he would order a judicial sale.

Decision

The judge acknowledged that the creditor had satisfied the criteria necessary for an equitable receiver:

1. The creditor had obtain writs of seizure and sale and filed them with the sheriff.

2. The creditor had requested the sheriff to attempt to levy execution and the sheriff was unable to do so.

3.  The debtor had an interest in the house and that interest was not exigible at common law.

4. There was a legal or practical impediment to seizure at common law.

The judge understood that, technically, the interest was exigible because theoretically it could be sold under the Execution Act. However, the practical ability to sell it was severely circumscribed and, to make matters worse, the debtor had placed roadblocks in the way of selling the asset. The judge concluded that the asset was not really exigible in practical terms.

Accordingly, the judge appointed an equitable receiver and gave him the following powers: receive all property and income due to the debtor and commence proceedings under the Partition Act for the partition or sale of any jointly held property in which the debtor has an interest. The judge still had doubts whether a receiver had a right to apply under the Partition Act for the sale of jointly owned property, but left that issue for the motion that the receiver was going to bring.

The judge ordered that the debtor pay costs of the motion of $10,000, one more costs award to add to the growing list.

 

Image courtesy of Penywise.

Jonathan Speigel

 

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.

 

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