Third Party Liability Towards Mortgagee In Real Estate

CLEMENS is conducting an important case on the extent of a third party's liability to a mortgagee of real estate in connection with the redevelopment of a pig herd.

In a recent judgment, the court in Randers found that a mortgage credit institution could not hold a slaughterhouse liable for damages because the slaughterhouse had received a piglet producer's herd of sows and slaughter pigs for slaughter in connection with the piglet producer's reorganization of the herd.

CLEMENS acted for the slaughterhouse in this important case, which is a practically relevant contribution to understanding the framework of the rights and obligations of the farmer, the mortgagee and third parties in cases where a farmer chooses to reorganize his herd.

The facts of the case

The case revolved around a farmer's piglet production business, which the farmer had operated for a number of years. The farmer ran his piglet production from buildings owned by the farmer himself, which the farmer had mortgaged with a mortgage credit institution.

During the fall of 2018, the farmer's pig herd was hit by a number of diseases, including PRRS and pneumonia. The farmer then consulted a veterinarian, who after a visit sent a statement to the farmer with his assessment of the disease outbreaks in the farmer's herd.

The veterinarian concluded that from a veterinary point of view, the pig herd was generally well-run and productive, but that due to the health status of the herd, it would be unsustainable to continue the production of piglets. The veterinarian therefore recommended the farmer to consider a total sanitation of the herd, where the entire herd is sent for slaughter. In this connection, the veterinarian estimated that in the long term, a total sanitation could bring in approx. DKK 750,000 annually in saved expenses for medicine and vaccines as well as increased settlement prices.

Total sanitation means that the diseased herd is culled and delivered for slaughter, then the barns are cleaned and disinfected before a new, healthy herd is purchased and placed in the barns.

The farmer had previously discussed a possible reorganization with the mortgage credit institution, which at the time expressed that the mortgage credit institution considered a reorganization to be appropriate and that the mortgage credit institution would not stand in the way of a reorganization of the herd.

Subsequently, the farmer started a total sanitation of the herd, where the farmer over a period of 2 months delivered his entire herd for slaughter at the slaughterhouse. Prior to this, the farmer had informed the slaughterhouse about the upcoming sanitation to ensure that the slaughterhouse had the necessary slaughter capacity available, as it was a larger herd.

After the entire herd was sent to slaughter, the farmer was supposed to clean and disinfect the stables and then introduce a new herd.

However, due to lack of liquidity, the cleaning and disinfection of the stables was not initiated, and no new herd was purchased, as the mortgage credit institution and the farmer's bank informed the farmer in early 2019 that they did not want to support and finance the re-establishment of the herd. The farmer was then left without any pedigree herd in his piglet production and had no earnings base.

In the summer of 2019, reconstruction proceedings were initiated at the request of the mortgage credit institution, where the mortgage credit institution's Attorney was appointed as the administrator. After a short, but extremely costly reconstruction process, the Bankruptcy Court issued a bankruptcy decree against the farmer.

Approx. 11 months after the bankruptcy order and 1½ years after the completion of the reorganization, the mortgage credit institution raised a claim for damages of approx. DKK 1.2 million against the slaughterhouse to which the farmer had delivered his entire herd as part of the reorganization.

In this connection, the mortgage credit institution generally claimed that the farmer's deliveries of the pedigree herd for slaughter were neither part of the farmer's regular operation of the piglet production nor in connection with a responsible reorganization of the operation.

The mortgage credit institution believed that the farmer's deliveries of the herd for slaughter had therefore been made in violation of the mortgage credit institution's rights as mortgagee under section 37 of the Danish Land Registration Act, and that the slaughterhouse had acted in bad faith. On this basis, the mortgage credit claimed that the slaughterhouse, which had already paid the farmer for the pigs delivered for slaughter, should pay the mortgage credit institution a corresponding amount.

Section 37 of the Land Registration Act and the parties' views

Section 37 of the Danish Land Registration Act stipulates that a registered mortgage on a country property also includes the livestock belonging to the property, unless the livestock is separated as part of a regular operation of the country property.

The legal core of the case was whether the sows and slaughter pigs that the farmer had delivered to the slaughterhouse in connection with the reorganization had been separated from the herd as part of a regular operation of the farmer's production or as part of a responsible reorganization of the operation.

If this was not the case, the court had to decide whether the slaughterhouse was in good or bad faith about the regularity of the separation.

The mortgage bank's views

During the court case, the mortgage credit institution argued that the farmer's deliveries of the entire herd of sows and slaughter pigs for slaughter at the slaughterhouse did not constitute a regular separation, as there was subsequently no herd left on the farmer's property to continue production.

The mortgage credit institution also stated that the farmer had not taken steps to start cleaning and disinfecting the stables after delivering the livestock for slaughter, and that, according to the mortgage credit institution, the separation of the livestock was not part of a regular operation for this reason as well.

Finally, in relation to the slaughterhouse's alleged liability for damages, the mortgage bank stated that the slaughterhouse, as an experienced player, was well placed to know about the farmer's pledging of the herd. The mortgage credit institution believed that the slaughterhouse therefore could not, without further investigation, assume that the farmer's deliveries of the entire herd of cattle on a property for slaughter were part of a regular operation of the property.

The slaughterhouse's views

The slaughterhouse argued that a delivery of the herd for slaughter as part of a reorganization, where a new herd was subsequently to be added, constituted a separation as part of a regular operation, which is why the slaughtered herd was not covered by the mortgage credit institution's lien.

In this connection, the slaughterhouse emphasized that a sanitation of a herd and a subsequent disinfection of the stables is an effective and recognized tool to ensure that diseases in a herd are eradicated in the future, so that the herd can again achieve a high health status with higher settlement prices and significantly reduced veterinary and medical expenses as a result.

The slaughterhouse had been informed of the impending reorganization, but had no other knowledge of the preceding or subsequent proceedings until the mortgage credit institution, more than 1½ years after the reorganization, raised a claim for damages against the slaughterhouse without warning.

The slaughterhouse had received and slaughtered the deliveries of sows and slaughter pigs from the farmer's farm in the usual manner, and the slaughter proceeds were settled on the operating account designated by the farmer in the same way as previous deliveries of slaughter pigs had been settled.

The slaughterhouse had no specific reason to ask further questions about the ongoing reorganization, among other things because the settlement was carried out as before. In addition, the slaughterhouse had no further knowledge of the underlying considerations and future plans for the farmer's farm, as a reorganization is assessed, planned, decided and implemented without any other involvement from the slaughterhouse than the slaughterhouse slaughtering the herd in the usual way and subsequently paying the proceeds to the farmer's bank account as the herd is slaughtered.

On this basis, the slaughterhouse stated that the slaughterhouse - regardless of whether the separation of the farmer's herd was regular or not - was in good faith.

The court's decision

The District Court found that the farmer's pig herd was basically covered by the mortgage credit institution's mortgage in the farmer's property. The District Court then considered whether the slaughter of the farmer's entire pig herd in connection with the reorganization could be considered a separation according to a regular operation of the farmer's property.

The District Court stated that based on the veterinarian's statement and the explanation from the veterinarian during the main hearing, it could be assumed that the farmer's herd was affected by disease to a significant extent. The District Court also found that the farmer had been advised by the veterinarian that it could be economically and operationally expedient to carry out a total decontamination of the herd.

The district court generally stated that a reorganization - if the process is carried out - will not impair the value of the mortgage. Therefore, a reorganization that is commercially justified can be a separation as part of a regular operation. In this connection, the District Court emphasized that the reorganization of entire herds is not unusual and is often seen in periods of recession, which is supported by the fact that actual guidelines have been prepared centrally in agricultural circles on how to plan and organize a reorganization.

Specifically, the District Court found that after the deliveries of the herd's sows and slaughter pigs for slaughter, the farmer did not initiate either cleaning or disinfection of the stables or prepare the purchase and running-in of a new herd. The District Court also found that immediately after the slaughter of the herd in early 2019, the farmer became aware that there was no liquidity to purchase a new herd and that the lack of liquidity was not justified by suddenly arising new circumstances.

For these reasons , the district court found that the reorganization did not constitute a separation of the livestock from the mortgage bank's lien as part of a regular operation of the farmer's property.

At the same time, the District Court concluded that the slaughterhouse was acting in good faith. In this connection, the District Court emphasized that the settlement of the proceeds from the slaughter of the herd was paid in the usual manner and to the same operating account as before. The District Court also emphasized that neither the mortgage credit institution nor the farmer himself had informed the slaughterhouse that there were or could be financial challenges in connection with the reorganization, and the slaughterhouse was not otherwise aware of such financial challenges for the farmer.

As a result, the slaughterhouse was acquitted of the claim for damages raised by the mortgage credit institution. The judgment was not appealed.

The significance of the verdict

The District Court's judgment is a practically relevant contribution to the understanding of the limits of the Land Registration Act's section 37 rule on the separation of livestock from land as part of a regular operation, including which specific transactions a farmer may be entitled to make for financial and operational reasons.

The judgment's specific position on the reorganization as a tool helps to create more clarity for farmers, mortgage holders, slaughterhouses and other actors in a reorganization situation, as the judgment states that a reorganization that is commercially justified, despite the extensive eviction of the herd, can be a separation according to regular operations.

Finally, the judgment reiterates the already known fact that a third party - specifically a slaughterhouse - cannot be held liable for damages if they are acting in good faith.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.