Middleton et al. v. Farquharson et al.

In Maritime Liens, Mortgages & Priorities on (Updated )

In this matter the Defendant sold the vessel “Ocean Tribune” and her C licence to the Plaintiff for $135,000.00 payable $100,000 in cash and the balance by way of vendor financing for one year at 10%. The vendor financing arrangement was documented with a promissory note, a collateral marine mortgage and a registered marine mortgage. The Plaintiff failed to pay the amount owing on the due date and the Defendant seized the vessel. The parties then agreed that the Plaintiff would pay the Defendant $25,000 and would execute a second promissory note, collateral marine mortgage and registered marine mortgage for $35,000. This was done. The Plaintiff paid the $25,000 but failed to pay the amount due under the second note. The Defendant again seized the vessel. On the advice of the bailiff, the vessel was removed from the water which caused the wood planking to dry out and ultimately necessitated considerable repair work. The vessel was advertised for sale by the Defendant for 21 days. The only bid received was one by the Defendant himself for $75,000. His evidence, which was accepted by the trial Judge, was that his bid was a protective bid made because he was concerned the bids from others would be too low to recoup his losses. The Plaintiff subsequently brought this action. The first issue was whether the second note and second marine mortgage were invalid. The Plaintiff alleged that the $25,000 payment was made on account of the first note and first mortgage and that the second note and mortgage did therefore not properly reflect the amount owing. The Defendant replied that the $25,000 payment was intended to satisfy outstanding interest on the first note and the costs of effecting the seizure and to retire other debts owed by the Plaintiff to the Defendant. The trial judge preferred the Defendant’s evidence to that of the Plaintiff and held that the second note and mortgage were valid. The next issue was whether the Defendant as mortgagee in possession breached his duty to take reasonable care of the goods seized. This issue concerned the taking of the vessel out of the water. Again, the trial Judge sided with the Defendant finding that the Defendant acted reasonably in taking the vessel out of the water. The next issue was whether the sale of the vessel to a numbered company owned by the Defendant was improper. The Plaintiff argued that the value of the vessel and C licence were much more than $75,000. The trial judge noted that there were two lines of authority dealing with the duty owed by a mortgagee when realizing on security. The subjective test requires the mortgagee to exercise good faith and the avoidance of wilful default in selling the asset. The objective test involves an obligation to act reasonably to obtain the market value. Although the trial judge considered the subjective test was the test that was binding on him he held that under either test the Defendant had not acted improperly.