How can creditors defend against claims of improvident realization?
The plaintiff sought summary judgment against the defendants with respect to various loans and guarantees in the amount of $185,000. The defendants did not contest their obligations under the loan facilities or guarantees. However, they argued that the plaintiff, through its Receiver, failed in its duty to make a sufficient effort to get the best possible value for its secured assets (i.e. a Hiller helicopter). In other words, the defendants raised the defence of improvident realization.
The Receiver obtained listing proposals and valuations for the helicopter from two sources. One of them recommended a starting list price between $200,000 and $250,000 USD with a market exposure of 90 days. The other (NDAS) provided a “Market Valuation Report” that provided the Receiver with three potential values:
- “Full Market Value” of between $390,000 and $410,000 CAD, which would require holding and marketing the helicopter for an “indefinite” period of time;
- “Orderly Liquidated Value” of between $250,000 and $305,000 CAD, which would involve disassembling the helicopter and selling its components to various third party purchasers. This process was expected to take 6 to 10 months and carried the risk that certain components would not sell; and
- “Distressed, Quick Sale Value” of between $170,000 and $220,000 CAD, which would involve a call for offers by a stipulated date for the “as is” sale of the helicopter.
The Receiver proposed to market and sell the aircraft through NDAS. NDAS recommended that they try to sell the aircraft within a 1-1.5 month time period as is where is (i.e. the third option) with the goal of recovering $275,000 – $300,000, but that the market would ultimately determine the value. The defendants did not advise the Receiver of any comments or concerns regarding the above proposed sale process.
NDAS marketed the aircraft online through various industry-related sites and through direct correspondence with parties who operated or previously expressed interest in purchasing a Hiller aircraft. Weeks later, NDAS had received an offer for the purchase price of $205,000 USD. Based on the then-prevailing Bank of Canada exchange rate, the sum converted to $266,377 CAD. The purchase price was thus within the range of value NDAS had hoped to achieve if the Hiller was disassembled and sold as parts, and more than was estimated for an as is where is “quick sale.”
The plaintiff received sale proceeds totaling $210,000 CAD. The balance of the sale proceeds paid GST on the sale as well as the Receiver’s fees, and a sum was also held back to cover tax liabilities. The sale proceeds retired one of the loans in full. The balance of sale proceeds, were applied to the indebtedness owing under the operating line of credit. The outstanding amount due on the line of credit, after the sale of the Hiller, was $184,361.98.
The burden of proving improvident realization lies with the defendants. In order to make out that defence the defendants must prove both:
- that the manner of selling the collateral was improvident; and
- that failure resulted in a lower recovery than would otherwise be the case. The onus of proof requires the debtor to establish both that the secured party departed from industry norms, and that a higher price would have been obtained if the secured party had done what is considered to be reasonable in that particular sector or industry. The assessment cannot be undertaken through the prism of hindsight.
The defendants did not tender any evidence to support the contention that the Receiver fell short of the industry standard for the sale the Hiller. To the contrary, two appraisals were obtained from industry sources whose qualifications were not contested. The sale was within the range of both appraisals. Although the market exposure was less than the 90 days suggested by one broker, it was within the 1-1.5 months suggested by the other. The shorter time frame for the sale would also have provided some carrying cost saving advantages to the parties.
There is no case law that requires a Receiver to obtain the highest price regardless of expenses, carrying costs or time. The defendants could provide no cases where a sale was found to be improvident when it was made in an amount within the appraised value. The sale was above the appraised amount for a quick liquidation sale and within the appraised value for an orderly liquidation sale. The Court concluded that the defendants had not made out their defence of improvident realization.
Counsel: S. Stephens for the Plaintiff, Canadian Western Bank and T. Boyd for the Defendants
Judge: The Honourable Madam Justice Marzari