Archive for March, 2008

Documents from Third Parties

Friday, March 28th, 2008

The Supreme Court of Canada released today its decision in Telus Mobility dealing with the issue of criminal production orders.  In Telus the Toronto Police were investigating a murder and sought the production of cellular telephone records for the suspect.  Unfortunately, by the time that the police determined the person to be a suspect, the cell phone records had become old and had been removed from Telus’ system and sent to storage on backup tapes.  The police investigation would require Telus to retrieve the tapes from storage, reload them onto the system and sort through the data to determine which records related to the suspect’s telephone account.  This would require significant time and expense on Telus’ part.  As a result, Telus requested that the police provide compensation to Telus for its costs of retrieving and producing the information.  In the lower court Telus lost its request for costs and it lost again before the Supreme Court.

The Court has held that all citizens, private and corporate, should provide information to the police (subject to rights to protection against self-incrimination) where one of these production orders is obtained.  However, since the Criminal Code does not permit for compensation, and since such compensation would hinder or run contrary to the public’s interest in solving crimes, the person from whom the information is sought will have to suffer the expense of providing the information as a “cost of doing business” (especially for large corporations such as telephone companies or banks) or a cost of being part of society.

In the civil lawsuit context, such production orders are known as Norwich Pharmacal orders and usually arise in fraud cases.  In Ontario, there is one case that has touched on the issue of compensation and it appears to support the concept that the person producing the documentation should be compensated for that person’s time and expense.  I say “appears to support” because the wording of the one case is less than crystal clear and it is only one trial judge’s decision – the Ontario Court of Appeal, for example, has not discussed the issue as yet.  However, unlike in the criminal context, a request from a telephone company or a bank for production in a civil lawsuit does not bring into play issues of duties of corporate citizenship or duties to society as a whole.

If your business is provided with an Order of the Court requiring you to produce documents relating to, for example, one of your customers, you will have to comply (or face contempt of court).  If it is part of a criminal investigation, the expense will be a part of the cost of doing business.  However, if the Order for documents is for a civil lawsuit, you might be able to seek compensation for your time and trouble.  If nothing else, it never hurts to ask in either case and see what the other side says.

CALC

New York Limited Partnership Appraisal Remedies

Thursday, March 20th, 2008

Under New York’s Partnership Law, a limited partnership can merge with another partnership.  If one of the limited partners does not agree with the merger he/she can dissent and be paid out the fair value of his/her limited partnership interest.  The New York Court of Appeals determined this week the issue of whether the limited partners would also have a separate right to sue someone (usually the general partner or perhaps a third party such as the merged partnership) where the merger was the result of fraud.

In Appleton Acquisition, LLC the limited partnership was created as a tax shelter and purchased property in Manhattan that was used for low-cost housing.  When the limited partnership fell into financial difficulty, the parent corporation of the general partner made an offer to the limited partners to purchase their limited partnership interests and to merge the limited partnership with another partnership controlled by the parent corporation.  The limited partners accepted the offer.  Subsequently, a corporation came along and purchased the limited partners’ rights of action against the limited partnership and started a separate lawsuit to set aside the sale of the limited partnership interests and for damages because, it was alleged, the sale was due to fraud and other malfeasance.  The claims were, for example, that the general partner mismanaged the partnership and that was the result of the severe decline in value and that the limited partners had no choice but to accept the offer since they did not know any better.

The defendants sought to have the action dismissed on the grounds that the only remedy for a limited partner was to have his/her interest appraised for its fair value and could not otherwise challenge the merger.  This is clearly the wording of the appropriate provision in the legislation.  However, the corporate plaintiff responded by trying to argue that a long-standing exception in the corporate realm should also apply to partnerships.  If the limited partnership had been a corporation and the limited partners had been shareholders, then the shareholders could attack the merger on the basis of fraud.  So, it was argued, the same should apply even though the situation involved a limited partnership.

The Court split 4 to 3 with the majority deciding against the corporate plaintiff (and thus the limited partners’) position.  Justice Graffeo noted that the exception for objections to corporate mergers due to fraud had been expressly recognized and codified in the Business Corporation Law many years before the provisions of the Partnership Law had been last amended.  As such, Justice Graffeo and the majority held that there was a clear legislative intention to not grant such a free-standing remedy to limited partners. 

However, the Court clearly did not wish to leave future limited partners out in the cold.  As a result, limited partners will be required in future situations to seek to have the true value of their limited partnership interests determined at an appraisal hearing.  One of the factors, though, that can be taken into account in determining the true value is whether the merger occurred as a result of any fraud, misrepresentation or breach of fiduciary duties.

Limited partnerships are common vehicles used as tax shelters.  When times are tough limited partners can face a double-whammy: (a) the limited partnership itself may start to falter; and (b) the I.R.S. (and in Canada, Revenue Canada) can start to tighten the availability of certain tax shelters.  For those who have invested in New York limited partnerships and a proposal has been made to merge the limited partnership, it is important to realize that the only available remedy to seek redress for any potential malfeasance by the partnership is now to dissent on the merger and to seek an appraisal hearing.  If the dissent is not made, the limited partner(s) will be stuck with the merger and will not be able to bring a separate lawsuit to obtain a remedy – even if there has been fraud or misrepresentations that caused the merger to occur.

CALC

Psychological Damages

Thursday, March 20th, 2008

In the early 1900s, a lady decided to drink a bottle of ginger-beer.  When she drank near to the bottom of the bottle she happened to look in and saw that there were remnants of a snail’s shell in the bottle.  This discovery lead her to become sick and to sue the manufacturer of the ginger-beer.  This case, Donoghue v. Stevenson, is the classic modern starting point for the law of negligence and is on every first year law student’s reading list.  The English House of Lords established the concepts of duty of care and reasonable foreseeability.  As Lord Atking wrote:  “The rule that you are to love your neighbour becomes in law you must not injure your neighbour; and the lawyer’s question, Who is my neighbour? receives a restricted reply. … The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.”

Donoghue was decided in 1932 and set the law of negligence on a brave new path as lawyers tried to determine whether problems which had arisen were without the scope of whether the defendant reasonably ought to have foreseen that damage would arise.

The Supreme Court two days ago heard an interesting case in which the law of negligence might be taken on yet another brave new path.  In Mustapha, a gentleman received bottled water for his bottled water dispenser.  He noticed a fly in the bottle before he opened the water.  The sight of the fly made him sick but, more importantly, he subsequently became somewhat obsessed with the incident to the extent that it affected his sleep, his ability to shower and his ability to conduct his business.  So, he sued the bottled water supplier.  He won at trial, not so much for the physical illness, but for the “recognizable psychological injury” he suffered.  The Ontario Court of Appeal overturned the trial court and threw out the claim on the basis that what is reasonably foreseeable is to be determined on an objective basis and not looking solely at the gentleman’s situation.

The gentleman appealed to the Supreme Court and a former colleague of mine had the pleasure of arguing for the water bottler.  The court has reserved its decision and a decision will be released likely sometime in the next six months.

A knee-jerk reaction would be to say “this guy’s a nut and there’s no way the Court is going to recognize such a crazy claim.”  Funny thing is, though, that I’m sure most people in England in 1931 would have had similar thoughts about the Donoghue case.

The crucial question for the Supreme Court will be one of control.  I watched some of the hearing and the positions of the parties can be summarized as follows.  The water bottler argued that if the appeal is allowed, it would open the flood gates to all sorts of claims for psychological damage that couldn’t be effectively controlled.  The gentleman’s lawyer argued that there is an effective control mechanism – judges.  I take no issue with the latter’s approach.  The question is, though, one of further clogging the court system.  Yes, judges can get rid of unmeritorious cases, but if there are so many of them being brought, it’s going to take time, money and effort to do so.  The problem is that the court system is already short on time, money and effort by an overworked and overburdened court staff.

So what does this mean for you the small business owner?  For the moment, nothing – because we will have to wait for the Supreme Court’s decision.  But if the Court decides to go down another brave new path, this could mean everything from higher insurance costs generally to higher costs specifically for businesses such as restaurants or food industry suppliers.  Conceivably it could expand to all sorts of claims.  For example, if Lawyer A does not win his case for Client B, could Client B claim that, as a result of Lawyer A’s negligence, Client B has suffered all sorts of emotional and psychological damage because lawsuits can be stressful endeavours?  Maybe.  I wouldn’t put it past clever plaintiff’s lawyers to try and push for such a ruling.

It will be interesting to see what the Court decides.  If they do decide in favour of the gentleman, hang onto your hats, it could be a bumpy ride for a while as people try to figure out the new rules.

CALC

Effects of Bankruptcy

Friday, March 14th, 2008

As the economic forecast remains gloomy, at best, I am receiving some calls regarding what happens if someone goes bankrupt.  These questions are coming from both those who are contemplating suing someone else that might go bankrupt and those who have been sued and are considering using bankruptcy as a way of dealing with all of the creditors at the same time.

The first issue is: what happens to my lawsuit when the other side goes bankrupt?  The simple answer is that your lawsuit is stayed – it cannot proceed.  This is the result of Section 69 of the Bankruptcy & Insolvency Act (the “BIA”).  The immediate result is that you will have to file a proof of claim and seek payment from the Trustee-in-Bankruptcy in accordance with the rules and procedures set out in the BIA.  This is not necessarily the end of your lawsuit, however.  If you have sufficient reasons and can convince a judge that the stay should not apply to your situation, an application can be made under Section 69.3 of the BIA.  These, however, are not commonly requested and are infrequently granted – but it is an option.  Another option may be to try and convince the Trustee to proceed with some part of your lawsuit (say, for example, a third party claim started by the bankrupt).  If the Trustee declines the request, you might be able to obtain permission to take over this aspect of the case through an Order made under Section 38 of the BIA.  Again, this is not likely to occur since the Trustee would usually agree to proceed with the claim if there is sufficient likelihood of success.

On the other side, if you are the bankrupt, will the lawsuits continue to hound you or will they be wiped out by the bankruptcy.  The general rule is that claims will not survive the bankruptcy.  So, if you owe $1,000 on your credit card, once the bankruptcy is at an end (at least one year after the date of bankruptcy), the credit card company cannot go after you for the $1,000.  (Note that this would not necessarily be the case for any credit you received AFTER you went bankrupt.)  However, there is a large list of items that are NOT discharged by a bankruptcy and will stick with you forever and ever.  These items are set out in Section 178(1) of the BIA The key ones are: child or spousal support, student loans, damages for personal injury and debts or liabilities arising out of a fraud or misappropriation committed while acting in a fiduciary capacity.  The full list can be found here.

I should note that many people seem to believe that all types of fraud survive bankruptcy.  That is not the case.  If Mr. A comes along out of the blue and convinces you to buy 1,000,000 shares of a company that is said to be worth millions when it’s actually worth pennies, and then Mr. A goes bankrupt, your claim against him may not survive his bankruptcy.  However, if Mr. A was the executor of your parent’s estate for which you were the sole beneficiary; or if Mr. A was your investment advisor of the past decade and you gave him primary authority to conduct investments on your behalf; etc., THEN there is a chance that your claim would survive Mr. A’s bankruptcy and thus not be affected by the bankruptcy.

One of the first questions I ask my clients is whether they know the financial shape of the other side they are about to sue.  As well, if my client is considering going bankrupt, I will ask right away the nature of the claims being made by their creditors.  For plaintiffs, there is always a risk that the defendant can go bankrupt – and the risk level is rising in today’s economic climate.  For defendants or potential defendants, the nature of the claims may not be wiped out by a bankruptcy, so if those are the larger claims, a bankruptcy is of little assistance to them.

CALC

What Do You Want?

Thursday, March 13th, 2008

When I meet with a client for the first time, the client usually launches into a description of what happened, who did what, etc., etc.  I always sit there and listen attentively and take notes and when the client is finished, one of my first questions is “OK, so what do you want?”

It’s a very simple question, with a far from simple answer.  The simple answer is “I want justice”.  The problem is that this begs the next question: “OK, what do you mean by justice?”  In order to answer this question, you need to determine what it is that’s really bugging you.  As I described it to a potential client recently with a human rights complaint: “What is it that’s sticking in your craw?”  Was the client bothered by the fact that the discrimination occurred at all?  By the way that the other party gave only half-hearted attempts to fix the problem?  Something else?

Once you have figured out what is “stuck in your craw”, you now know what it is that needs to be fixed and you can proceed to determine how you want to go about fixing the problem.

I was reminded of this issue today as I sat in court and came to realize that the other side clearly had no idea of what she wanted.  Since she didn’t know this answer, it was hard for myself, my client and the judge to try and determine if a settlement could be reached since we didn’t know how to approach the problem.

So, before you decide to start any type of litigation, ask yourself this simple question: at the end of the litigation or trial, what do you hope to achieve – what do you want?

CALC

False Economy

Thursday, March 13th, 2008

A friend of mine wanted to see a lawyer who practises law in an area different than mine.  He wanted to draft an intellectual property contract, but he also wanted to save money.  So, he decided to get one of the commercially available “do it yourself” template contracts.  The plan was that, rather than having the lawyer draft the contract from scratch, he would simply have the lawyer review the draft contract and provide the “finishing touches”.

What is wrong with that?  It’s false economy.  You think that you are saving money when, in fact, you could be creating more cost for you.  Why is that the case?  Well, it’s because the drafting of an agreement is based upon three factors.  The first is the initial (and sometimes subsequent) meeting(s) with the client.  Templates (even those created by the lawyers) will only go so far.  Each client is different and some will want certain areas emphasized while others will want different areas emphasized.  For example, let’s suppose my friend’s agreement was a trademark licensing agreement.  If he has a start-up business, his focus may be more on protecting the trademark generally.  For example, he needs to ensure strict usage of the trademark to ensure that it becomes a household name (such as, few people say “please pass the box of facial tissues”, but lots of people say “please pass the box of Kleenexes” – even if it’s actually a box of another brand).  However, if the business is well established, he may want to emphasize other factors because he is safe in the knowledge that his name is directly associated with the particular product.  A lawyer will not know this until he/she has spoken with the client.  This exercise will occur no matter who has drafted the agreement since templates tend to be “one size fits all” solutions when what you usually need (and want) is something tailored to your specific situation.

The second factor is that lawyers get used to their particular forms of documents.  There is nothing that says that a particular document has to be written in a set format.  If you wanted, a “shotgun buy-sell” clause could exist at the beginning, middle or end of a shareholders’ agreement.  However, most lawyers will put their clause in the same place each time because that is what they know and what flows for them.  If you were to present me with a shareholders’ agreement with the buy-sell clause at the very beginning, it would be like someone scratching the needle across the record.  It doesn’t follow either mine or the usual flow of such documents.  The result is that the lawyer then has to try and figure out if anything is missing since the clauses of the contract are “out of place”.

The third factor is that lawyers will revise their contracts.  For example, if I see a case that says that certain wording will be, or will not be, accepted by the courts, I will revise my wording accordingly.  Through this process, I am comfortable with the wording that I am using for each clause.  The same cannot be said for a draft agreement.  Not only do I have to focus on ensuring that nothing is missing, but I also have to spend extra time ensuring that the wording used does not resemble (or copy) wording that has since been disapproved of by the courts.

The end result is that there is no savings of time or money on the first factor and the second and third factors often result in more time being taken than would otherwise be the case.  This is something to think about when you are trying to “save a buck”.

CALC

Lessons from Spitzer and Black

Wednesday, March 12th, 2008

As I’m sure was the case throughout New York State today, on the front page of most Toronto newspapers was the picture of (soon to be former?) New York Governor Eliot Spitzer.  If you believe the newspaper reports, Mr. Spitzer was caught in a sting involving a prostitution ring with “high end” (up to $5,500 per hour) prostitutes and at least one liaison occurring in Washington (on the day before Valentine’s Day no less – I’m sure his wife thinks he’s quite the romantic fellow!)

In the meantime, the Canadian papers have just had their own field day in reporting on the incarceration in U.S. federal prison in Florida of Canadian former media baron Conrad Black (or as the English call him, the soon to be former Lord Black of Crossharbour).

The word “hubris” has been used to describe both men’s downfalls.  However, I would like to focus on what we can learn from both gentlemen for the world of small business: both of their problems arose from assumptions.  In Mr. Spitzer’s case, it would appear that the assumptions were that either he would not be recognized outside of his home state or else that by using very expensive call girl agencies he would somehow be “above” the fate he dealt by prosecuting other prostitution rings in New York.  In Mr. Black’s case, he made the assumptions that (a) a long-time broken security camera would remain in that condition and not catch him in the act of removing documents for shredding; (b) that his long-time associate, David Radler, would not “rat him out” in exchange for a more lenient sentence; and (c) that those darned pesky shareholders would remain quiet and let him run his company as he saw fit.

The old saying still seems to apply: “What happens when we assume?  We make an ass out of u and me.”  I had a small business client who came to see me recently on a matter and while the client was here the client said, “I’ve just obtained a new loan from the bank and I would like you to check something – here are the papers.”  I was looking for point X, but the first document dealt with point Y.  I asked the client about the document and the client gave me an explanation that clearly showed that the banker had absolutely no idea what he was talking about when he explained the document to the client (I will give the banker the benefit of the doubt on this issue).  The client did not bother to read what the document said but simply trusted the banker and signed away.  When I explained to the client that the document had the effect of potentially costing the client $100,000, then the client was VERY interested in reading the document.

Why did this situation arise for my client?  Because the client assumed that the banker knew what he was talking about and assumed that the document reflected what the banker described.  Both assumptions were incorrect.  Fortunately, the client had enough time to get out of the situation – but the client might not have been able to do so if I hadn’t reviewed the document before it was too late.  (This is not me saying how wonderful I am that I caught this, but rather a reminder to read what you sign before you sign – although I do think I’m wonderful, and I’m told my mother still thinks that.)

In my experience, disputes arise for several reasons: (a) one side cannot, or will not, honour its obligations for whatever reason (lack of funds, other side is a jerk for some reason, etc.); (b) there are no written terms to the agreement or arrangement so neither side can hold the other to strict obligations; and (c) either or both sides have certain expectations or assumptions that are either unknown to the other side or are not reflected in the deal.  There is not much you can do about the first situation.  You can do something about the second and third situations.  For the third situation, we can all take a lesson from Messrs. Black and Spitzer and do well to remember what happens when we assume and make sure that our agreements and documents accurately reflect everything we expect from the deal or transaction.

CALC

Firing for Cause

Saturday, March 8th, 2008

I read an article today in the March 3 issue of Law Times.  It dealt with the question of the amount of detail that employers should put into the termination letter given to an employee who is fired for cause (or just cause).  The article sets out the two lines of thinking on the subject.

One approach is to put a significant amount of detail into the letter.  The lawyer advocating this approach took the position that the employee was likely to be going to a lawyer in any event, so the employer may as well set out its position right away.  As is often the case, the employee goes to the lawyer, the lawyer fires off a demand letter claiming wrongful dismissal, and the employer’s lawyer fires back a letter setting out all the reasons for the termination for cause.  The employee’s lawyer is then left scratching his/her head at what appears to be two different stories.  By setting out the details in the termination letter, the employer may be able to avoid the demand letter because the employee’s lawyer would be less willing to send a demand letter after reading the termination letter.

The opposite approach, put forward by a partner at my old law firm, is that less detail should be set out in the termination letter.  The concern is that by specifying details the employer is then “stuck” with the version of events set out in the letter.

I have problems with the second approach for two reasons.  The first is that an employee can only be properly fired for cause if there are substantial problems and if the employee has been warned to “shape up or ship out” (although there are some exceptions, such as where the employee is caught stealing from the employer).  If the employee is being fired for cause, it should not be a problem that the employer might become “stuck” to its version of events as set out in the termination letter since that version of events is the basis for the firing for cause and something on which the employer will later rely if a wrongful dismissal claim ever arises.  Second, there is the concept of “after acquired cause”.  If the employee is fired for doing A and it is later discovered that the employee was also doing B, assuming that B is sufficient cause for dismissal, then the employee is not likely to succeed in a wrongful dismissal suit – even if A was not a valid reason for dismissal.

That said, I also have problems with the first approach to the extent that it suggests that all of the reasons should be given at the outset.  When I’m playing poker, I don’t show all of my cards.  Similarly, an employer shouldn’t show everything at the outset since it then gives the employee time to come up with reasons to rebut the allegations.

I would recommend a mid-way position.  Rather than a simple letter saying to the employee “for the reasons we discussed and for which you were warned previously, we have no choice but to termination your position with the company”, there should be some details given.  The employer does not have to go into great detail but should set out the basics.  So, for example, “As we have discussed today, you have previously been warned about your chronic absenteeism.  We have made alternate arrangements to try to accommodate you including various shift changes as well as discussions with our human resources people to try and identify the problems.  Despite these efforts on our part, and our recent warnings that if your attendance did not improve you could be fired, you still have failed to come to work when scheduled and have caused the company significant hardship in having to impose upon other employees to cover your absences.  As a result, we have no alternative but to advise that your employment with the company is terminated effective immediately.”

Under this mid-way approach, no real specifics have been given, so the employer hasn’t “shown all his cards” yet and isn’t tied to a particular position.  However, the letter does tell the employee (and thus any lawyer(s) to whom the letter is shown) the reason for the dismissal, the fact that the employer has tried to accommodate the employee and the fact that the employee was warned prior to termination that if he/she did not improve his/her attendance there could be consequences including termination of employment.  It is this last factor that is usually the biggest hurdle to dismissals for cause – yes, the employee was constantly late or absent; and yes, the employer probably told the employee to come in at the scheduled time; but unless the employer actually says “if you don’t come in on time and when scheduled one more time, you’ll be fired”, then it becomes more difficult for the employer to successfully defend a wrongful dismissal action on the basis of just cause. 

I don’t think it is fair to say that any of the first approach, the second approach, or my hybrid third approach is the definitively correct approach.  It may be that in some circumstances one approach is to be preferred while in other circumstances one of the other approaches is to be preferred.  In any event, these are three different approaches for employers to consider before they have to write the termination letter for an employee to be dismissed for cause.

CALC

Mortgage Enforcement – Aftermath

Thursday, March 6th, 2008

Once the lender has taken the property and sold it the biggest question is: “now what?”  The best way to answer this question is with a question: were the creditors paid off?  If the answer is yes, then the only remaining issues are how much the borrower will get from the sale of the property and when the money will be distributed.  If, however, the answer is no, then one must examine the type of enforcement method used.

The primary concern of any borrower or guarantor is whether they still remain indebted to the lender after the property has been sold.  If the lender proceeded under a mortgage, it is possible but unlikely that there will be claims for a shortfall.  This is because if the lender were to pursue those claims, it could permit the borrower to pay off the arrears and take back the property.  The advantage of a foreclosure is that it permits the lender to deal with the property as it sees fit.  If the lender has sold the property and then it goes after the borrower for any shortfall, the borrower might be able to pay the full amount owing on the mortgage plus an amount for legal fees and then say “OK, I want my property back” – which the lender cannot give because it has already sold the property to someone else.

On the other hand, under a power of sale or a judicial sale situation, the lender can go after the borrower or a guarantor for any balance that remains owing on the loan.  You may recall stories from the early 1990s when the last real estate meltdown occurred when borrowers were simply taking their belongings out of their homes, leaving the keys in the front hall and walking away from the houses to let the banks deal with the homes.  According to the latest press reports this is happening again in California.  This is all well and good, but borrowers should realize that this will not necessarily protect them from any subsequent claims.  As well, if there are other creditors whose claims were wiped out by the mortgage enforcement but they were not paid in full, they will still have all of their rights to go after the borrowers / guarantors (except, of course, any rights they had against the property).

The other aspect to keep in consideration is the fact that mortgages (and most loan documents for other creditors) always contain provisions that any costs of enforcing  payment on the loan will be added to the mortgage (or other creditor’s) debt.  So, if the mortgage debt is $100,000 and the house sells for $100,000, but the lender had to pay $15,000 to take possession and sell the house, there is still a shortfall of $15,000.  Borrowers tend to overlook these enforcement costs.  More importantly, they fail to realize that the more of a fight that it put up against the lender, the higher the lender’s costs and, ultimately, the higher the amount that the borrower has to pay – either from any surplus sale proceeds (thus reducing what is left for the borrower) or from an action to collect on the shortfall.  If the borrower does not have a valid defence and is simply trying to drag things out, he or she does so at his/her own peril.  It should also be remembered that judgments in Ontario are good forever, so even if the borrower has no other assets today, thirty years from now the lender might be back knocking on the door once the borrower has re-established herself and forgotten all about that old debt.  Not a pleasant surprise.

 CALC

Mortgage Enforcement – Judicial Sales

Thursday, March 6th, 2008

As its name suggests, a judicial sale is the sale of property authorized by the courts.  Like foreclosure actions, the judicial sale starts through litigation.  The lender can sue for the property to be sold and also to seek payment for any shortfalls and to obtain possession.

Judicial sales are not as often utilized as powers of sale or foreclosures.  They may be more frequently used, for example, where there is some defect in the mortgage that might prevent a foreclosure from occurring.  A more common example would be where the value of the property is insufficient to pay off the mortgage but there is a good chance that any shortfall can be obtained from either the borrower or a guarantor.  Another example is where a borrower has requested that a foreclosure proceeding be converted into a sale proceeding.

As with foreclosures, a judicial sale can be suspended if the borrower puts the mortgage back into good standing and pays the lender’s legal costs prior to the sale occurring.  At this point it is important to note that a “sale” is not just the actual sale or closing of a purchase arrangement for the property.  It occurs when an agreement of purchase and sale is entered into between the lender and a third party.  So, if the lender and a third party sign an agreement of purchase and sale, and that agreement is subsequently approved by the court, it is too late for the borrower to “save the house” – even if the actual transfer of the property from the lender to the third party does not occur until months later.

Once an order is made for a judicial sale then various logistical rules come into play for the sale to occur.  These are all overseen by a “referee” who determines such issues as whether a public auction or private sale can occur, what forms of advertising of the property should be used, etc.  Ultimately, a new buyer is found for the property and the referee will determine if the sale is appropriate in the circumstances.  If appropriate, then the lender has been given the court’s blessing and will have a certain level of protection from any later claims by the borrower that the sale was unfair.

CALC