Secured Creditors and Consents to Judgments: Be Careful What You Wish For

Consents to judgment are a regular part of a commercial and insolvency litigator’s arsenal. They are often used as part of a final settlement, granting the creditor with immediate rights of enforcement against the capitulating debtor, or are held in escrow to secure payment under a settlement, and are enforced against the debtor in the event of default. That said, in deploying a consent judgment as part of a settlement, secured creditors and mortgagees must be careful not to inadvertently compromise the quantum of their recovery.

Once the bargain is complete, and a consent judgment issues, it can only be set aside or varied in extraordinary circumstances.  As the Ontario Court of Appeal recognized in Monarch Construction Ltd. v. Buildevco Ltd.:

>…A consent judgment is final and binding and can only be amended when it does not express the real intentions of the parties or where there is fraud.  In other words, consent to judgment can only be rectified on the same grounds on which a contract can be rectified.

This principal was revisited by the Ontario Court of Appeal in McCowan v. McCowan.  In endorsing Monarch Construction, the court elaborated that: 

…it is well established that a consent judgment may be set aside on the same grounds as the agreement giving rise to the judgment.  These grounds go to the formation of the agreement, not to its subsequent performance.

Ordinarily, security instruments and mortgages grant the secured creditor/mortgagee with the right to recover all enforcement or carrying expenses, administrative fees, and all or substantially all their legal costs, in addition to principle and interest. 

While there may be a good reason for a secured creditor or mortgagee to compromise its claim, when negotiating consent judgments, it important that they are still mindful of all their contractual expenses, fees, cost, and post-judgment interest terms, in addition to the accrued balance outstanding of principle and interest. In light of the Court of Appeals comments in Monarch Construction, it may not open to the secured creditor to go behind items captured by a judgment, such as principle, interest, expenses, costs, and claim a higher amount on such items, when it ultimately comes time to sell their collateral or prove a claim in the debtor’s bankruptcy in the event of a shortfall. This concern is particularly pronounced where those items formed part of the secured creditor’s underlying action or application.  

For example, a mortgagee who expects to make a 100% recovery from the secured property, never wants to find itself in a situation wherein negotiating and issuing a consent judgment, it took for granted and lost out on the chance to recover significant repair or carrying costs.