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June 7th, 2003, Brandon, MB
Good morning—I appreciate the opportunity to come here and talk with you again.
Your executive sent me a list of questions that they wanted me to discuss and I’m going to move right into them. Let me say first of all that none of these are simple questions to answer.
Here they are:
These are all tough questions to answer--the answer to all the questions is “it depends”.
The first part of “it depends” is that all the answers depend on provincial law. I’m only qualified to practice in British Columbia. I therefore arranged to have my comments on these questions reviewed by lawyers in Alberta, Saskatchewan, and Manitoba—Laurie Gordon of Nanton, Alberta; Murray Acton of Moose Jaw, Saskatchewan, and Lionel Martens and Christine Klassen of Fillmore Riley of Winnipeg, Manitoba. I want publicly to thank them for their input, which was invaluable.
The second part of “it depends” is that the outcome will always depend on the exact facts of each case and that is particularly so with these issues. A small difference in facts may make a considerable difference in outcome. So if a situation like one of these arises in your business, report it to your insurer if there’s any prospect that you have insurance, and head off to your lawyer for immediate advice on your individual situation. My comments today are no substitute for legal advice--do not assume that anything I’m saying today necessarily applies to you and your particular circumstances.
First I need to outline for you the legal concept of a sale of goods, especially an auction sale, then move to strategies to improve your legal entitlement to extract payment.
The Sale of Goods Act in your province is what sets the ground rules about sale of livestock either by auctions or by direct sale, and whether by a livestock market, an order buyer, or an individual.
The general legal concept of an auction sale is that the owner of cattle, or someone properly authorized by him, consigns cattle for sale to the livestock market. “Property” or ownership and right of possession of the cattle is transferred to the purchaser when auctioneer says “sold” and the hammer falls—or whatever other procedure is recognized in your sale as clearly concluding the auction. Property in the cattle passes at that point to the purchaser. With property goes risk of loss and the right to possession.
In the classic historic auction model, the purchaser pays the seller directly, or the auction market pays the seller if and when it receives the purchaser’s money. Perhaps the purchaser is not allowed possession of the cattle until payment has been received. However these days the auction market pays the seller within a specific period of time of the sale, and tries to collect from the purchaser from the point of sale on. If the purchaser doesn’t pay, then the auction market is out, not the seller. Probably this payment arrangement has arisen by agreement between seller/consignor and auction market, and is a result of competitive pressures amongst auction markets.
Under sale of goods law, it is possible to reserve title to secure the unpaid purchase price, thus creating a “conditional sale”. In putting my comments together for today, I spent a lot of time trying to figure out a way for an auction market or dealer to try to reserve title automatically on cattle that it is selling. I thought about including conditional sale language in your sale documents—would that help to protect you?
The trouble is, the title reservation alone in your sale invoices will not work, without perfecting that security interest as required under your provincial Personal Property Security Act. Perfecting a security interest in livestock—generally considered to be inventory under PPSA legislation—requires a security agreement signed by the purchaser; filing a notice of your security interest in the Personal Property Registry; notifying other lenders with filed notices of security interest in that purchaser’s inventory about your charge; obtaining priority from other lenders who have filed a security interest in “proceeds”—all before the purchaser or his agent gets possession of the cattle.
Here are the problems I ran into in trying to imagine how this could work.
Who is the purchaser? It may be the person sitting in the ring who won the auction. It could be a company that he works for or owns. It could be one of a variety of clients of his, or it could be another dealer. You may not be able to identify the purchaser until you get invoicing instructions at some point in the sale.
So in PPSA terms, how on earth are you going to get your sales forms, which include the reservation of title and grant of security over the cattle, signed by a purchaser, and get notice of that security filed with appropriate notices and priorities, all before you part with possession of the cattle—if you can’t really tell who that purchaser is going to be until the order buyer figures it out?
When you add to those problems, the following:
I just think that the whole idea logistically cannot work.
What you’re left with, is the fact that legally the auction or sale process changes the seller’s ownership of the cattle into a claim for money owed. Title to and property in the cattle has passed to the purchaser, and the unpaid seller (or his agent) is NOT entitled to get the cattle back if the purchaser doesn’t pay.
Well, if that won’t work, what will?
This is a very interesting statute which applies in Alberta. It defines “licensed livestock dealers” and “patrons”. A livestock dealer is someone who buys or sells livestock either live weight or dressed weight, or acts as agent in buying or selling livestock and in the course of that buying makes direct payment to a patron, or who assists in the buying or selling of livestock on a live or dressed basis by compiling or providing information on livestock that are for sale and who charges a fee or commission for compiling or providing the information—excludes someone who keeps title for at least 30 days, and a variety of other special exemptions.
A patron is someone who in the ordinary course of his or her farming operation, maintains livestock for the purpose of propagation or the production of livestock products (including meat), or maintains feeder livestock for the purpose of growing or finishing, or both, and includes a licensed livestock dealer. But note, that the licensed livestock dealer must still qualify under the rest of the definition.
Then section 7 of the Act says that money received by a licensed livestock dealer on account of the sale of livestock or livestock products constitutes a trust fund for the benefit of the patron who supplied the livestock. Section 8 says that title to and property in the livestock delivered to a licensed livestock dealer by a patron remains in the patron and doesn’t pass until the patron has been paid for the livestock. A security interest does not attach until the livestock have been paid for.
There is a limitation period for claims against the dealer’s bond, and a limitation period of 60 days from the date of delivery of the livestock, applies.
There is also the potential of making a claim to the Livestock Patrons’ Claims Review Tribunal for part of the losses.
Legislation like this would help you get the cattle back or fend off the claims of the purchaser’s creditors. There’s nothing like it in BC, and I have not been advised that anything similar exists in Saskatchewan or Manitoba. I was also unable to find cases referring to or interpreting the legislation.
Given that the PPSA legislation doesn’t help the livestock marketing system to work better or be safer, you may want to lobby in your respective provinces for similar legislation. This legislation has the potential to help considerably with a payment default situation, although I would like to see protection for licensed and bonded auction markets and dealers who are not farmers, growers, or feeders of cattle, included in the legislation.
If you have several larger buyers on your markets, you could—if you could get them to do it—actually authorize a line of credit and secure it against their purchases. You could even get personal guarantees. You’re lending thousands or hundreds of thousands of dollars to them every week—you are a bank, so act like it! You would have to go through the usual PPSA security procedure, but you would only have to do it once. You would need priorities from other lenders on proceeds, which might not be forthcoming. You can expect some pushback and competitive pressures if other markets do not do the same thing. Also this would only work for buyers active with one auction market company. However it is a strategy that is worth thinking about.
At a minimum, manage your buyers to the extent of establishing credit limits for each major buyer, monitor what he owes and keep on him for payment. Watch the trends—are the receivables from one buyer increasing or getting older? Be prepared to take someone off the market. Deal with a problem situation quickly before it gets out of hand--it’s just good management.
At some point which may not be far off, the banking system will help you to get paid. Your main buyers may now be able to set up arrangements so that all cattle which are sold and invoiced before a specific cut-off time, maybe noon or even 2 or 3 pm, can be paid for by electronic transfer that day. Cattle sold after the cut-off can be paid for by electronic transfer the next day. Under certain circumstances depending on how the credit is set up, you can receive guaranteed funds, i.e. no NSF transfers. I encourage each and every one of you to talk with your bank to see what is now possible and what will be possible in the near term future. Quick payments reduce risk. So does quick knowledge of a problem.
In my presentation to LMAC a couple of years ago, I talked briefly about creditor proofing. Again, that may be worth exploring with your professional advisors.
Going back to the list of questions, I’ve spent a lot of time trying to figure out some ways to get paid for the cattle because that’s your area of biggest risk, especially given the domino effect if one major cattle buyer goes down. Now I’ll try to field the other questions in a similar vein.
Q: What rights does a producer have against a sales agency that fails to pay? Apart from Alberta, where there may be a trust established and title to the cattle may not pass, the producer can sue the sales agency for monies owed. Where the sales agency is licensed and bonded, the producer can claim against the bond and perhaps make a complaint under the licensing. What the producer cannot lawfully do, except perhaps in Alberta, is go and get the cattle.
Q: The livestock market accepts cattle for sale from a sheriff on behalf of a creditor of the owner. The cattle are sold, but the seizure turns out to have been improper. What is the liability of the livestock market? Can the producer get the cattle back? Well, clearly the producer can sue the sheriff and likely the creditor for whom the sheriff acted, for damages for improper seizure and possibly for return of the cattle. The producer may also be able to sue the livestock inspection service which cleared the cattle for sale. While the producer may also elect to sue the auction market, it is not clear that the auction market has any responsibility for the wrong-doing, i.e. the improper seizure. The auction market may have some limited responsibility to establish that the seller has the right to sell the cattle, but my view is that responsibility is very limited. In British Columbia the main action would be against the livestock inspection service and the creditor/sheriff. If the auction market were sued, it would want to take the required legal steps to throw the blame on all the other people involved in the sale.
Q: With respect to the producer getting the cattle back, that question is impossible to answer without knowing all of the facts and circumstances. I can only give a definite “it depends” on this one—Laurie Gordon in Alberta mentioned a situation where he got a court order to recover some livestock, with his client buying and filing a bond for their value, which was eventually returned. Just to illustrate the differences among the provinces, in British Columbia, our Sale of Goods Act includes a “market overt” provision, so that a purchaser of goods in an open public market usually gets good title to them. In Manitoba, the reverse is true and the buyer gets no better title than the seller had. BC may be unique in having a market overt provision. If that is so, then a seller may be able to sue to recover possession of the improperly seized and sold cattle.
Q: What potential is there for auction market liability for selling bred cattle where the veterinarian has incorrectly suggested an earlier calving date? This is a little easier question. The conditions of sale both written and announced before the bred cattle sale, should clearly state that the auction market itself makes no representations about the cattle and will not be responsible for any of the information provided by the seller or veterinarian. If there are problems with the cattle, the purchaser has to deal with the seller or the vet or both, not the auction market.
Q: What about the purchaser who tries to return cattle which have become sick after they left the yards, for a stress-related illness? In the absence of a representation or promise by the auction market about the condition and health of the cattle, the purchaser does not have the right to return the cattle to the auction market, although it is possible that he might be able to return them to the original vendor. Again, this is a situation where you can provide some protection to yourselves by your posted, written and announced conditions of sale—“the auction market takes no responsibility for the health status of the cattle; any representations about health or condition of the cattle are made by the seller only” or something similar.
I would also say, however, that under the Sale of Goods Act, if a purchaser needs cattle for a particular purpose which is known to the seller or the seller’s agent, and the purchaser relies on the expertise of the seller or the seller’s agent, then the cattle have to be reasonably fit for the purchaser’s purpose. Also, cattle that are bought on description (for example TEAM sale cattle) must correspond with the description, and that is one situation where there will be a right of return.
Q: What about a cattle owner putting cattle with a ranch operator on a share basis. The operator sells the cattle but doesn’t pay the owner his share. What are the liabilities for the market or the buyer of the cattle? Do conversion laws apply?
Well, if the owner is prudent, he or she will have a written agreement about the deal which includes a grant of security in the cattle from the operator to the owner, and the owner will have registered with the provincial Personal Property Registry the required notice of security interest covering the cattle under the operator’s care, and obtained any necessary priorities from his other creditors. When the operator sells the cattle, the owner’s security interest rolls over onto the proceeds of the money and, yes, this is a situation where the person paying the money, either the auction market or the buyer, could get tagged with a conversion action for paying money to the wrong person (i.e. the operator, not the owner). The buyer’s title is clear of the owner’s security interest. However in a non-market-overt province, does the buyer get title to the cattle, clear of the owner’s ownership claim? The livestock inspection service could also have some responsibility here, depending whether or how the cattle are branded.
If the owner is like many producers, he may not even have a written agreement with the operator, or it may not include a grant of security from the operator to the owner, or the owner may not file the required notice of security interest with the PPR. In that case, the auction market and buyer, assuming they do not have actual knowledge of the share deal, should not be responsible to the owner for paying the money to the operator. Again, the livestock inspection service has to clear the operator’s sale of the cattle and could have some responsibility if the cattle bear the owner’s brand, to require evidence of transfer of ownership from the owner to the operator. The buyer may get good title, although that is less likely in Alberta, Saskatchewan and Manitoba; and more likely in British Columbia because of our “market overt” section in the Sale of Goods Act.
Third Party Demands are issued by CCRA. The duration of the third party demand is stated on the demand document, about half way down on the left hand side.
Garnishee orders are issued under provincial statute, in British Columbia the Court Order Enforcement Act and in British Columbia, catch money due or coming due within 7 days of the date that the garnishee affidavit is sworn.
Note that in British Columbia, where a creditor wants to attach sale proceeds of some asset that the debtor intends to sell at a sale on a certain date, the creditor must wait to swear, issue and serve the garnishee proceedings on the day of the sale, because until the debtor actually sells the asset at the sale, there are no moneys due or accruing due. I do not know how other provinces see this issue.
In Saskatchewan, the attachment period is 5 days. In Alberta the garnishee expires 1 year from the date of issuance, unless issued against a “deposit account”, in which case it expires in 60 days. In Manitoba there is no limit unless the garnishee is of wages, in which case it expires in a year.
If documents for the attachment of sale proceeds show up, read the document carefully as it may state the length of time for which it must be observed, and if not, phone your lawyer.
I am not going to say much about accidents on your premises. This is a hazard for which you can insure. You should work with your insurance agent to make sure that you have insurance for injury or death as a result of events in your yards.
If there are a series of accidents, either Workers Compensation or your insurer or both may require you to improve safety in certain respects in your yards, perhaps as a condition of continuing to carry insurance or, in the case of WCB, threatening increased premiums.
The specific question asked is whether or not signage or notices can improve your liability position. The answer is “perhaps”—but if you have rules for safety which are honoured more in the breach than the observance, you won’t be able to rely on signs and notices to get you out of your responsibility.
There are two lines of thought about the legal protection that signs provide. One line of thought says that where there is a risk, if you do warn people of the risk you reduce the likelihood of an accident and may also pass some of the liability off onto the person using the property. Another line of thought says that the sign is some kind of admission that a risk exists, and your legal position would be improved without it. My preference is to try and use a variety of means, including signage, to reduce the likelihood of an accident.
Rather than simply using signage, a better approach is to sit down with staff and safety advisors to find ways to make the yards a safer place to work, and in that process consider whether you will give producers access to the yards or any part of them, and if so you will manage producer access.
A liability waiver document signed by the producer before he or she enters the yards, could work from the legal perspective, but is unlikely to be a practical solution. In British Columbia, a liability waiver is only effective if the person giving the waiver is warned of the dangers which await him or her, understands that the waiver is required before the dangerous activity is undertaken, has an opportunity to review the waiver before signing it and an opportunity not to go ahead with the activity, and voluntarily signs the waiver before undertaking the activity. I don’t know a lot of producers or yard staff that would be happy trying to carry out the correct liability waiver procedure.
There is no magic bullet on this one—design and maintenance of premises with an eye to safety, removal or isolation of producers to a particular area, and well-trained staff are likely to serve you best in the long run to reduce the potential for accidents, along with insurance to take care of the disasters.
The attraction of the Packers and Stockyards Act is that it sets up a trust not dissimilar to the Alberta legislation I mentioned before. I can’t give a definitive answer as to whether a Canadian seller will qualify under this legislation. On the face of it, there is no reason why a foreign seller cannot benefit. It may depend on things like your legal ability to do business in the state to which you have shipped cattle and have not been paid—do you have to register your corporation in the jurisdiction where default has occurred, for example? Regrettably I was unable to identify a US attorney who could answer the Packers and Stockyards Act question.
That concludes my presentation this morning. Again, I want to emphasize that this is very general legal information and that the outcome in any particular instance depends on the specifics of provincial law and the exact facts of the case.
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