Creditors and CAIS payments

Government contributions under the former Canadian Agricultural Income Stabilization Program (CAIS) are not assignable to another party by agreement.  For that reason, a farmer entitled to payments under the program could not grant a security interest in a CAIS payment.  However, in PEI at least, it was standard practice where a farmer was indebted and wished to make use of his or her interest in a CAIS account to provide a Letter of Direction by which the government agency involved would forward to a creditor the funds otherwise payable to the farmer.

The Court of Appeal in PEI recently decided a case between two competing creditors looking to lay claim to CAIS payments owing to a potato farming corporation called Rural Realty.  A PEI Crown Corporation called P.E.I. Lending Agency loaned money to Rural Realty and, as a condition of the loan, required Rural Realty to execute a Letter of Direction requiring the proceeds of CAIS to be sent to it directly.  In 2004, Rural Realty owed its creditors over $2 million.  It was decided, however, that it was in the best interests of the Lending Agency and a crop input supplier called McCain Produce (also a creditor) that a crop be planted that year.  The three parties, the creditors and Rural Realty, entered into an agreement whereby the Lending Agency agreed, among other things, "that McCain shall rank in priority to the Lending Agency with respect to one-half (50%) of all receivables/proceeds generated by the 2004 potato crop". 

The question on appeal was whether the CAIS payment to be made to Rural Realty, which was to be directed to the Lending Agency, constituted a "receivable" or "proceeds" of the 2004 potato crop.  On application to a lower court, McCain had been successful in obtaining a 50% interest in the CAIS payment.  The Lending Agency appealed the decision to the Court of Appeal.  The 2004 CAIS payment to Rural Realty was $690,000.  Therefore, $345,000 was at stake in the appeal.

The judge hearing the original application decided that the CAIS payment did constitute proceeds of the 2004 crop because, but for the planting of the crop, no payment would have been made under CAIS.  However, the Court of Appeal did not agree that this relationship between the crop and the CAIS payment meant that the CAIS funds were proceeds of the crop.  The CAIS funds were not traceable to the proceeds of the sale of the potato crop, and were based on a formula for calculating income over a period of time. 

Also, the Court of Appeal found that the parties involved, the Lending Agency and McCain Produce, were sophisticated business entities and, if they had intended to split the CAIS proceeds, they would have done so explicitly in the agreement with Rural Realty.

For these reasons, the Court of Appeal allowed the appeal, giving the Lending Agency the full $690,000 CAIS payment.

Read the decision at: PEI Lending Agency v. McCain Produce Inc.