Watch Your Wording

Tags

, , , , , ,

Ksena J. Court and Francis N. J. Taman

Lenders are cautioned to be very clear in the wording of their mortgages when it comes to how interest is to be calculated.  In Nussbaum v. Stoney,[1] the Alberta Court of Queen’s Bench applied a strict interpretation to the wording of the interest calculation in a mortgage.

The mortgage in question was a “tick the box” mortgage which stated that the interest rate was “to be calculated monthly”.  The issue was whether the lender was entitled to compound the interest monthly.

The Court held that the words of the mortgage are to be clear and unambiguous.  If there is ambiguity in a mortgage, then it should be resolved in favour of the mortgagor who did not draft the terms of the mortgage.  If the lender wanted the interest to be compounded on a monthly basis, then it should have stated so in the mortgage.  As such, the lender was only entitled to simple interest and it was directed to recalculate the amount owing under the mortgage.  Further, the lender was directed to repay any overpayment to the mortgagor.

In light of this decision, lenders may want to take a second look at the wording of their standard mortgage documents to ensure that the terms of their security actually reflect the interest calculation that they intend to apply.

[1] 2017 ABQB 774 (Alta. Master)

Advertisements

Legal Costs in Condominium Proceedings – A Province Divided

by Ksena J. Court and Francis N. J. Taman

In our blog article, Lending to Condo Owners – Risky Business?[1], we reviewed the decision of Master Schulz in Bank of Montreal v. Bala.[2]  In that decision, Master Schulz disagreed with prior decisions respecting the priority of legal fees paid by condominium corporations over mortgages.  That prior line of cases stemming from the King[3] decision states that if the bylaws permit legal fees incurred by the condominium corporation to be considered a “contribution” or “assessment”, then they will take priority over the mortgage.

Master Schulz’ ruling in Bala was appealed and the decision of Justice Feehan was released earlier this year.[4]

Justice Feehan reviewed a number of prior decisions respecting the priority positions, including the King line of cases.  It was held that the powers granted to a condominium corporation and the wording of the Condominium Property Act, (the “Act”)[5] are to be read strictly.

Section 42 of the Act provides that where a condominium corporation takes collection steps, it may recover legal expenses “from the person against whom the steps were taken”.[6]  If a caveat is registered, then it may recover “from the owner” all reasonable expenses with respect to the preparation, registration, enforcement and discharge of the caveat.

In this particular case, the condominium corporation brought an application to vary the Redemption Order granted in foreclosure proceedings brought by the Bank of Montreal.  Justice Feehan held that those legal expenses were properly payable by Bank of Montreal because that was an application brought “against” Bank of Montreal.  However, they did not become a “contribution” and did not attract statutory priority over the mortgage.

Further, any legal costs relating to the preparation, registration, enforcement and discharge of the caveat[7] are not to be equated to a “contribution” and given priority over a registered mortgage.  “Those charges remain recoverable only in personam ‘from the owner’”.[8]

We understand that a dichotomy has developed between the North and the South in the treatment of legal fees claimed by a condominium corporation.  In the Southern areas of the province, the King decision continues to be followed – ie. legal costs of the condominium corporation can gain priority over the mortgage if the bylaws permit them to be considered as a “contribution” or “assessment”.  In the North, the practice of the Court has been to disallow the condominium corporation’s claim for priority of its legal costs over the mortgage, unless the legal costs were incurred in an application specifically “against” the mortgagee.  It is likely that this dichotomy will continue to exist until such time as the issue is addressed by the Court of Appeal.

Ksena J. Court and Francis N.J. Taman practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

[1] https://albertaforeclosureblog.com/tag/foreclosure-alberta-condominium-fees-condominium-plan-no-0210034-v-king/

[2] 2015 ABQB 166 (Alta. Master) (“Bala”).

[3] Condominium Plan No. 8210034 v. King, 2012 ABQB 127 (Alta. Q.B.) (“King”); see also our blog on the King decision at https://albertaforeclosureblog.com/category/foreclosure/condominium-fees/

[4] 2017 ABQB 38 (Alta. Q.B.) (“Justice Decision”).

[5] R.S.A. 2000, c. C-22.

[6] Section 42(a) of the Act.

[7] Section 42(b) of the Act.

[8] Justice Decision at para. 82.

Too much reliance can be a bad thing

by Ksena J. Court and Francis N. J. Taman

Yet another mortgage fraud has raised its ugly head.  This time it involves fraud at the level of the mortgage broker.  In Toronto-Dominion Bank (TD Canada Trust) v. Currie[1], the Alberta Court of Appeal left the first lender holding the bag at the end of the day.[2]

Mr. Currie loaned the Craigs money.  The loan was secured by a mortgage (the “Currie Mortgage”) against two properties owned by the Craigs.  The financing and mortgage were negotiated by a licenced mortgage broker, Fuoco Holdings and Emilio Fuoco (collectively referred to as the “Broker”).  In the mortgage, the mortgagee was described as “Dan Currie c/o Fuoco Holdings”.  The mortgage matured and went into default.  The mortgage was foreclosed off of one of the two properties.  With respect to the second property, the Craigs applied for and were approved refinancing from Toronto-Dominion Bank (“TD”).  This refinancing was to be secured by a mortgage in first position (the “TD Mortgage”).  The lawyer retained to do the refinancing for the Craigs requested a payout statement from the Broker.  The Broker sent a payout statement to Mr. Currie for approximately $250,000 (the “First Payout Statement”) and requested that he sign it.  The Craigs did so.  Subsequently, the Broker sent a payout statement to the lawyer showing that the balance owing on the mortgage was $75,000 (the “Second Payout Statement”) and instructed the lawyer that the refinancing funds were to be made payable to Fuoco Holdings Ltd.  Neither the lawyer nor the Craigs were aware of the First Payout Statement, and Mr. Currie was not aware of the Second Payout Statement.

The lawyer prepared and registered the TD Mortgage and sent the $75,000 to the Broker as directed by the Second Payout Statement in trust for a discharge of the Currie Mortgage.  Unfortunately, the Broker absconded with the payout funds and the requested discharge of the Currie Mortgage was never sent.  The question arose as to whether the Currie Mortgage had priority over the TD Mortgage.  The answer lay in whether the Broker was Mr. Currie’s agent.  Mr. Currie argued that the Broker was not his agent and the Broker had no authority to issue the payout statement or to receive the payout funds.  Because the Broker exceeded his authority, according to Mr. Currie, he was not bound by the Broker’s actions and the Currie Mortgage remained a valid mortgage against the title to the property.

The general rule is that a principal is bound by the fraudulent acts of his or her agent if the agent had actual or ostensible authority to perform the particular actions at issue.  The general principles regarding ostensible authority are:

“(a) Representation about the authority of the agent must come from the principal; an agent cannot clothe himself or herself with authority…

(b)  The onus is on the person who is relying on the act of the agent to prove ostensible authority;

(c)  However, when the agent has actual authority, but that authority is subject to limitations, the onus is on the principal to prove that the limitations were conveyed to the third party who relied on the agent…

(d) These general principles apply to the specific situation where a debtor pays money to the agent, rather than directly to the principal, as happened in this appeal…”[3]

The Court of Appeal found that the Broker had extensive actual authority for a number of reasons:  (1) the Broker negotiated the Currie Mortgage; (2) Mr. Currie never had any direct communication with the Craigs; and most importantly (3) the Broker was referred to as the being the contact person for Mr. Currie on the face of the Currie Mortgage and third parties were entitled to take what is registered at the Land Titles Office at face value.

With respect to this last point, if the Broker was not to be acting on behalf of Mr. Currie, then it was up to Mr. Currie to make this clear to third parties.  It was appropriate for the lawyer to write to the Broker for the payout statement as this was the address that was on the title, and according to the terms of the mortgage the address where mortgage payments were to be made.  Mr. Currie was aware that the Broker was sending payout statements as he signed the First Payout Statement.  If he did not want the Broker acting in this regard, he ought to have admonished the Broker for exceeding his authority.  No such limitations on authority were ever communicated to either the Craigs, their lawyer or TD.  The Court of Appeal stated that at the very least the Broker also had ostensible authority to act as Mr. Currie’s agent.

Given that the Broker had authority to issue the payout statement, the Court of Appeal also found that the Broker had authority to decide what was to go in the payout statement.  In the absence of any circumstances that would put the recipient of the payout statement on notice that something was wrong, the recipient was entitled to rely upon the payout statement provided, and that the Broker was operating his business in accordance with the law.

“In conclusion, Currie has been defrauded by [the Broker], the agent of his own choosing” and ultimately “must bear the loss resulting from [the Broker’s] dishonesty”.[4]

It is unfortunate that the lender in this instance was taken advantage of by his agent.  Individual or smaller occasional lenders should do as much due diligence as possible if they are looking to hire an agent to represent them in negotiating and administering the loan.  There are a number of reputable Alberta based lenders out there that provide such services.  Additionally, if a lender intends to put limits on its agent’s authority, it should clearly state so in all public documents.

[1] 2017 ABCA 45 (Alta. C.A.)

[2] Patty Ko, an associate with our Edmonton office, represented TD in these proceedings.

[3] Supra, at para. 7

[4] Supra, at para. 20

WRITHOLDERS – The New Sandwich Generation

Francis N.J. Taman and Ksena J. Court

 

We’re going to continue our theme regarding writs and priorities.  While not technically a mortgage case, Singh v. Mangat[1] raises some interesting implications when considered together with our last blog post.

It is not unusual to find individuals in financial trouble who are also undergoing marital difficulties.  In Singh, Mr. Mangat was also involved in a matrimonial property dispute with his wife which began in 2007.  One of the assets of the marriage was a house which was jointly owned by the spouses and a third party (the “House”).  Each of the owners had a 1/3 interest in the house[2].

In 2012, some 5 years after the matrimonial property action had commenced, the plaintiff obtained a judgment against Mr. Mangat which was registered against Mr. Mangat’s interest in the House.  A second writ by a different creditor was also registered against the House.[3]  Finally, a civil enforcement agency (“CEA”), engaged by the plaintiff, registered a notice of intention to sell the House under the Civil Enforcement Act[4].

It was at this point that Mrs. Mangat realized that no Certificate of Lis Pendens (“CLP”) had been registered against the House with respect to her claim under the Matrimonial Property Act[5]. This was done in February 2013.  Five additional writs were registered after the CLP.  This created what was described as a “writ sandwich”.

Mr. Mangat’s 1/3 interest in the House was eventually sold by the civil enforcement agency to a relative of Mrs. Mangat. There was not enough money to pay out all the writs on title. The question arose as to how the proceeds of sale of the House should be distributed.  Everyone agreed that the CLP under the MPA did not have priority over the writs filed before the CLP.  The issue was whether the wife’s claim under the MPA had to be resolved before the writs were paid.

The Court canvassed two possible approaches.  First, one could pay the Prior Writholders their claims as if the CLP was not registered and then resolve the MPA  claim of the wife.  The idea here appears to be that between the writholders, the CLP doesn’t affect their respective entitlements.[6]  The Prior Writholders would get their proportionate share of the total of the writs.  The distribution of the balance would be dealt with once the amount, if any, of the husband’s interest in the house was determined.  The issue with this approach is that the amount received by the Prior Writholders could be delayed and they may actually receive less than they should considering their priority.

The second approach would be to pay the Prior Writholders 100% of their claim and then permit the MPA claim to be resolved.  If there was any amount left over after the MPA claim was settled, then that would be shared amongst the Subsequent Writholders pari passu.[7]  This would lead to the Prior Writholders being paid more than they should under the CEA.

Ultimately, the Court followed neither of those approaches.  After a careful analysis of the MPA and CEA provisions that applied, Master Robertson determined that the writholders as a group took priority over the MPA claim.  The reasoning centred on the fact that writ proceedings to sell the house had begun prior to the registration of the CLP.

The MPA adjusts ownership between spouses.  However, the filing of the claim does not create an interest in land.  It is merely a claim that, after the matrimonial claim is resolved, may become an interest in land.  There is a priority for the CLP over the writs registered by the Subsequent Writholders because section 35 of the MPA creates that priority.  However, it does not affect the priority of prior writholders.

The CEA specifically states that where there is a subsequent interest in land, the lands which have a writ registered against the title are subject to writ enforcement proceedings as if that subordinate interest in land did not exist.[8]  Where an interest in land is sold under the writ proceedings pursuant to the CEA, a “distributable fund” is created.  Prior registered interests are paid out and the purchaser obtains title clear of all prior and subsequent financial registrations.[9]

Section 96 of the CEA states that money realized through writ proceedings must be dealt with in accordance with Part 11 of the CEA.[10]  Part 11 of the CEA puts an interesting twist on the situation.  It says that any money received to which Part 11 applies is a distributable fund when received by a Civil Enforcement Agency.[11]  It then goes on to note that all related writs that are in force have eligible claims against the distributable fund.[12]  Those funds are then paid pari passu among the eligible claims after paying expenses associated with the writ proceedings and the $2000 priority granted to the creditor who undertook the writ proceedings.[13]

Master Robertson also noted that the CEA only contemplates a single distributable fund being created, so the idea of splitting the amounts recovered from the sale of the lands into two separate funds and dealing with each separately goes against the scheme of the CEA.  As a result, Master Robertson, essentially sets out a two stage analysis.  First, it must be determined whether any of the writs have priority over the CLP.  If any of the writs do and if writ proceedings have commenced, then the amounts recovered will be distributed amoungst all eligible writholders regardless of whether they are registered before or after the MEP CLP.

The question that arises is whether this analysis will be extended to non-MEP CLPs and other intervening registrations.  One difference between an MEP CLP and many other CLPs is that the MEP CLP gives notice of what would essentially be a change in ownership of the land or, if you will, an interest that may arise. Most other CLPs give notice of litigation regarding either a registered[14] or unregistered[15] interest that already exists.  Caveats and other registrations also provide notice of existing interests.  The analysis, however, could apply to pre-existing interests as well.

At the end of the day, however, the takeaway for lenders is clear – if you have a writ registered, you should be doing a debtor name search and registering your writ against the title to any property that is identified as being owned by the debtor by that search.  Additionally, it is also likely in your best interest to commence proceedings to have the land sold under your writ.  One of the principles that has survived from the confusing array of case law under the prior Execution Creditors Act is that although a writ binds all of a debtor’s exigible land that it is registered against, it is not the same a seizure.  A seizure or writ proceedings require service and registration of a Notice of Intention to Sell..  Since some significance was placed on the fact that writ proceedings had been commenced when the CLP was filed in this instance, it would be prudent to place oneself in as favourable a position as possible.

Francis N.J. Taman and Ksena J. Court practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

 

[1] 2016 ABQB 349 (Master) (“Singh”).

[2] While it did not explicitly play a role in the decision, it would appear that they were tenants in common

[3] We will refer to Mr. Singh and the second writholder as the “Prior Writholders”.  The balance of the writholders will be referred to as the “Subsequent Writholders”.

[4] R.S.A. 2000, c. C-15 (“CEA”).

[5] R.S.A. 2000, c. M-8 (“MPA”).

[6] To use the language adopted later in the judgment, there would be no separation of writholder claims.

[7] This means in proportion to the amounts of their respective claims and is the approach set out in the CEA.  This approach was described as the separation of writholder claims.

[8] CEA,  section 34(2)(a)

[9] Non-financial registrations such utility rights of way and easements would generally remain on title.

[10] CEA, s. 96(1).

[11] CEA, s. 97.

[12] CEA, s. 99(1)(a).  Section 99(1)(b) notes that costs that the Court orders to be paid out of the fund under Section 103(2) also constitute an eligible claim.

[13] CEA, s. 99.

[14] In the case of a mortgage which is being foreclosed upon.

[15] For example, fraud.

WRITHOLDERS – NO LONGER BOTTOM OF THE BARREL

Tags

Ksena J. Court and Francis N.J. Taman

Occasionally when we are in Court, we hear novel arguments that attempt to challenge what was thought to be previously settled law.  On one such recent Court attendance, we heard such arguments being made in Classic Mortgage Corp. v. Bourgeois and Haylow,[1] which changes the way net sale proceeds in a foreclosure action are distributed to subsequent encumbrancers after the first mortgagee is paid out.

In this case, the defendants were owners of a home as joint tenants.  The home was sold through the foreclosure proceedings and the remaining equity of approximately $75,000 was paid into Court.  There were several writs filed against the property.  Canada Revenue Agency received the first $20,000 of the equity based upon its claim of priority under the Income Tax Act.  The remaining writholders had claims registered only against Mr. Bourgeois’ interest.  The largest writholder asked the Court to pay the all of the remaining proceeds out to the writholders pro-rata.  The issue before the Court was whether half of the remaining proceeds should be paid to Ms. Haylow, as a joint tenant, with the other half being paid pro-rata to the writholders.  We were in Court on February 2, 2016 when arguments were made, and Master Laycock reserved his decision.  As the decision has a large impact upon the advice that we give to many of our lender clients, we were interested in the outcome.

Counsel for the writholder argued that because the defendants were joint tenants at the time that the writ was registered, the writ attached to the whole of the net sale proceeds, not just half.  This argument is based upon the principles of joint tenancy.  “Although as between themselves the joint tenants have separate rights, as against everyone else they are in the position of a single owner…Each joint tenant holds the whole and holds nothing.  That is he holds the whole jointly and nothing separately.”[2]

On February 5, 2016, Master Laycock rendered his decision and did not deviate from what he considered to be prior similar decisions.  In La France[3] and Re: Finley[4], the Court had held that writs registered against the interest of only one joint tenant did not affect the other joint tenant’s entitlement to half of the net sale proceeds.  Notwithstanding that the case before Master Laycock was a forced sale through foreclosure proceedings rather than a voluntary sale by the owners, he felt bound to follow these decisions.  As such, Master Laycock held that Ms. Haylow was entitled to half of the remaining net sale proceeds and the writholders shared the remaining half pro-rata.

The decision of Master Laycock was appealed, and Justice Anderson overturned the decision.  Justice Anderson found that Canadian Imperial Bank of Commerce v. 3L Trucking Ltd.[5] was a case on point.  In that case, the Court referred to the above quoted principle that joint tenants are in the position of a single owner.

Counsel for the primary writholder also argued that under s. 100 of the Civil Enforcement Act,[6] a distributable fund (which would include excess proceeds in a foreclosure sale) first goes to pay eligible claims and it is only after those eligible claims are paid that the remaining balance gets paid “to the enforcement debtor or to any other person who is entitled to the money”. [emphasis added]

The Court also noted that Ms. Haylow took no steps to protect her interest by seeking formal severance of the joint tenancy.  Thus, the Court concluded that the full amount of the remaining sale proceeds should be distributed to the writholders on a pro-rata basis.

In our view, the arguments made by the writholder make sense.  Under the Civil Enforcement Act, a writ attaches and binds the interest in the property of the debtor at the time that the writ is filed.  If the debtor is a joint tenant, he has an interest in the whole of the property.  If the writ is filed before the joint tenancy is severed in the foreclosure proceedings or otherwise, then the writ should attach to the debtor’s whole interest, not just half.  When lenders lend to joint tenants, they lend based upon the whole of the equity in a property, not just half.  While this creates some risk to the non-debtor joint tenant that they could be “made liable” for a debt that they didn’t incur, often the non-debtor joint tenant is related in some fashion to the debtor, and if the non-debtor receives some of the equity, it could be funnelled back to the debtor through this relationship.  It will be interesting to see how the Court responds to this balancing of interests between the non-debtor joint tenant and the writholder.

Ksena J. Court and Francis N.J. Taman practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

 

[1] Action No. 1401-08766, February 2, 2016, Alta. Master (unreported), appealed April 5, 2016, Alta. Q.B. (unreported).

[2] Ibid. as quoted by Master Laycock from Megarry and Wade’s The Law of Real Property, 7th Ed. And J.G. Riddall’s Land Law, 7th Ed.

[3] [1983] 1 W.W.R. 168 (Alta. Q.B.)

[4] [1977] 7 A.R. 26 (Alta. Dist. Ct.)

[5] [1996] 2 W.W.R. 637 (Alta. Q.B.)

[6] R.S.A. 2000, c. C-15.

The Boundaries of the Interest Act

Tags

, , , , , ,

Ksena J. Court and Francis N. J. Taman

In foreclosure proceedings, we are often asked by lenders why certain default fees, other charges or interest rate changes that are clearly chargeable based upon the terms of the mortgage are not collectable through the Court proceedings.  Our answer has been that in part it is because some Masters or Justices feel that such fees, charges or interest rate changes are a “penalty” under the Interest Act[1].  The Supreme Court of Canada recently released its decision confirming what fees and interest can and cannot be charged in mortgages.

In Krayzel Corp. v. Equitable Trust Co.,[2] which is commonly referred to by the Calgary Bar as the “Lougheed Block” case, Lougheed Block Inc. (“Lougheed”) granted a mortgage to Equitable Trust Company (“Equitable”) to secure a $27 million loan.  The initial interest rate in the mortgage was 2.875% per annum.  When the mortgage matured, Lougheed and Equitable agreed to a renewal for a 7 month term.  The interest rate in the renewal was prime plus 3.125% for the first 6 months and then 25% for the 7th month.  The term of the first renewal expired on March 1, 2009.

On April 28, 2009, the parties entered into a second renewal agreement which was made effective as of February 1, 2009 (a month before the expiration of the first renewal period).  Under the second renewal agreement, the interest rate was 25% per annum.  Lougheed was required to make monthly interest payments.  However, the monthly “pay rate” was not at the 25% rate of interest.  Rather, the “pay rate” was set at 7.5%, or prime plus 5.25%, whichever was greater.  The difference between the stated rate of 25% and the “pay rate” was to accrue to the loan, and if Lougheed did not default then the accrued interest would be forgiven.

As one might guess, since the matter was being litigated, Lougheed defaulted (in its first payment) under the second renewal agreement and Equitable sought payment at the 25% interest rate.  Lougheed claimed that the interest rate changes infringed the Interest Act.

Section 2 of the Interest Act states that a person can contract for any rate of interest that is agreed upon, except of course if it violates anything else stated in the Interest Act, or any other piece of legislation.  Section 8 of the Interest Act is one of those limiting sections.  It states:

No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property…that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

One of the purposes of s. 8 is to “protect landowners from charges ‘that would make it impossible for [them] to redeem, or to protect their equity’”.[3]  Essentially, if the borrower is already in default, the legislators felt that it was unfair for the mortgagee to be able to put the borrower further in the hole by charging a default fee or higher rate of interest on default.

The majority of the Court held that the substance of the clause will determine whether it violates the Interest Act, not the labels used.  It matters not whether the mortgage terms are described as a “bonus”, “penalty”, “discount”, or “benefit”.  “If its effect is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended”. [emphasis added][4]

The majority of the Court made it clear that an interest rate increase due solely to the passage of time, and not due to a default, does not offend the Interest Act.  As such, the terms of the first renewal agreement were fine.  However, the terms of the second renewal agreement were not.  The effect of the second renewal agreement was “to reserve a higher charge on arrears (25 percent) than that imposed on principal money not in arrears (7.5 percent, or the prime interest rate plus 5.25 percent).”[5]  Essentially, the higher interest rate only came into effect in the event there was a default and therefore imposed a penalty.  It mattered not that the terms described as a discount or that the higher interest rate would be “forgiven” if there was not default.  The Court allowed interest at the higher of 7.5% and prime plus 5.25%.

In light of this decision, lenders should review their mortgage paper and may wish to reconsider the effect that certain mortgage terms have and whether or not certain fees, charges or interest will be collectible.

 Ksena J. Court and Francis N.J. Taman practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

[1] R.S.C. 1985, c. I-15, ss. 2 and 8.  Fees and charges are also disallowed by the Court as penalty under Section 10 of the Judicature Act, R.S.A. 2000, c. J-1, which allows relief from forfeiture for all “penalties and forfeitures”.

[2] 2016 SCC 18 (S.C.C.)

[3] Ibid. at paragraph 21

[4] Ibid. at paragraph 25

[5] Ibid. at paragraph 35

Please Release Me!

Tags

, , , , , , , ,

Francis N.J. Taman and Ksena J. Court

It is interesting how a bit of time can change one’s perspective. We review a number of current services trying to keep current on new foreclosure and insolvency decisions.  When Zypherus Holdings Inc. v. Dorais Estate[1] was reported by one of the current services recently, we looked at it with some interest. Court of Appeal cases dealing with foreclosure issues are uncommon.  When we pulled it up, it turned out to be a 2013 case that Francis had looked at as a possible blog topic when it first came out.  Rereading it, it became evident that the case was far more significant than it had appeared to be at first glance in that it contained a bit of obscure law that had the potential to significantly impact lenders who are trying to do workouts with clients.

The facts of Zypherus are a bit unusual.  S and D were co-owners of equal undivided interests in two properties.  D needed some funds and got S to agree to take out a second mortgage on the properties to obtain those funds.  The debt under the mortgage was joint and several.  To protect S, who received no real benefit from the loan, D executed an indemnity agreement in favour of S guaranteeing payment of the entire debt under the mortgage.  When the mortgage matured, D couldn’t repay.

Rather than repay the mortgage himself, S bought the debt and mortgage through a holding company called Zypherus.  A writholder of D’s registered their writ against the title to the properties, making it impossible for D to transfer his interest to S unencumbered.  D passed away and his estate declared bankruptcy.  S had Zepherus release him and then tried to foreclose solely on D’s joint interest in the properties.

The Master refused to grant the foreclosure order on the basis of marshalling, a legal doctrine relating to the order in which a creditor can recover its debt when it has security on multiple properties.  At the Justice and Court of Appeal levels, the argument surrounded the release of S by Zypherus.

The interesting part of the decision at the Court of Appeal surrounds its discussion of the law relating to the release of a co-debtor (or co-obligor).  The basic rule of law is that if two debtors are jointly or jointly and severally liable to another person (the “Releasing Party”), and the Releasing Party signs a release with one of the debtors, the effect of that release is to release both debtors.  It is irrelevant that it may not have been the intention of the Releasing Party to do so.  Over time, the Courts recognized that this is perhaps somewhat harsh and developed some exceptions.  One exception is where there is clear wording in the release that shows the Releasing Party intended to reserve their rights against the other joint or joint and several debtor.[2] In this particular instance, the majority of the Court of Appeal presumed such wording existed in the release because the release was not put into evidence and the appellant had acknowledged in their factum that it was not defective.[3]

It’s quite alarming that it is possible for a Mortgagee’s decision to settle with one of two joint debtors could effectively eliminate the right of recovery against the other.[4]  The saving grace is that normally one is more likely to release a guarantor than a joint debtor.  Those are unconnected obligations, so the principle does not apply.  But even then, there remains the potential for a lender, if there is a joint and several guarantee, to inadvertently release the deep pocketed guarantors when settling with a guarantor who has very little in the line of wealth.  Thankfully, most guarantees include wording that permits one guarantor to be released without the other guarantor also being released.   While the traditional common law rule did not permit one to look outside the release, it appears at least in Alberta,[5] that such wording in other documents can be considered, at least with respect to guarantees.[6]  Those looking to rely upon documents other than guarantees may face various public policy arguments as to whether such rights can be waived.[7]

The takeaway for lenders is that caution is necessary when settling with some debtors but not others.  The nature of the debt and of the obligations needs to be analyzed as do the various pieces of security granted to the lender. If it is potentially joint or joint and several liable, a great deal of care needs to be taken in drafting any settlement documents.  Otherwise, you risk giving up more than you bargained for.

[1] 2013 ABCA 287 (“Zypherus”).  Leave for appeal to the Supreme Court of Canada has been denied so we will not have their perspective on the issue, which is unfortunate for lenders engaging in inter-jurisdictional loans.

[2] Another exception is where instead of releasing the one joint debtor, you enter into an agreement not to sue the joint debtor who you wanted to release.  Since an agreement not to sue is not technically a release, the law regarding release of joint debts does not apply.  For more on this odd bit of law, see G.L. Williams, Joint Obligations (London: Butterworth, 1949).

[3] Interestingly, the wording in the mortgage permitting release of the Mortgagor was not discussed by the majority, though the dissenting Justice held that the wording in the mortgage did not support the release of just one of the Mortgagors.

[4] To be clear, this applies regardless of the number of joint debtors.  The idea is that there is a single debt owed by all the debtors collectively, so to release the debt for one releases it for all, unless the right to sue is somehow preserved.

[5] Other jurisdictions need to be approached with some caution.  In Ontario, for example, it appears that the common law rule regarding the release of joint obligors has been abolished by statute – see Courts of Justice Act, R.S.O. 1990, c. C.43, s. 139(1).  In British Columbia, Shoker v. Vollans, 110 B.C.A.C. 225 suggests that, at least where a co-guarantor has paid their proportionate share of their obligation under a guarantee, they may be separately released without affecting the obligation of the other joint or joint and several guarantors.

[6] Re: Koska, 2003 ABCA 87.  This appears to be the sole Alberta Court of Appeal decision on the issue. Interestingly enough,  Re: Koska, was not cited in Zypherus.

[7] See the dissenting decision in Zypherus at 62.

Lending to Condo Owners – Risky Business?

Tags

, ,

Ksena J. Court and Francis N.J. Taman

In our initial blog article, Not All Condo Fees Are Created Equally[1], we reviewed the decision of Master Prowse in King.[2]  In that decision, Master Prowse decided whether certain charges, such as legal costs incurred by the condominium corporation for enforcement of condominium fees, should be given priority over a mortgagee’s security interest in the condominium.  In the end, Master Prowse found that if the condominium bylaws stated that such charges constitute and form part of an “assessment” or “contribution” then they would be given priority over the mortgagee.

The unfortunate aspect of this decision is that it has, in some instances, given the condominium owner a “pot of money” to play with to the detriment of the mortgagee.  Consider the following actual fact scenario:

  • The lender holds a first mortgage against the condominium unit.
  • The security is a home equity type of collateral security, and as such it is questionable whether the lender will be able to obtain a deficiency judgment (for further discussion on this topic, refer to our blog post Are Lenders Giving Up Too Much?[3]).
  • The condominium corporation renders a special assessment for repairs to fix leaks in the condominium building envelope.
  • The condominium owner disputes the special assessment and there is extensive litigation between the condominium corporation and the condominium owner.
  • The lender is given information from the condominium owner that there is good cause to dispute the special assessment.
  • Years later the dispute between the condominium corporation and the condominium owner is resolved in favour of the condominium corporation.
  • The condominium bylaws state that the condominium corporation is entitled to solicitor and client legal costs, and the condominium corporation is awarded these costs.
  • The legal costs claimed by the condominium corporation are approximately $80,000.
  • The owner still doesn’t pay the special assessment and is therefore in breach of the mortgage.

In this instance, the amount of the special assessment essentially eats up any equity there is in the property.  If the legal costs also take priority over the mortgage, the lender is in a significant deficiency position.  But for the condominium owner’s actions of disputing the special assessment, the lender would not have been in such a deficiency position.

Since King, the Court of Queen’s Bench has approved its rationale of looking to the bylaws to determine priorities in two Justice level decisions, Rajakaruna[4] and Seehra[5].  Is this fair to the lender to be put into a deficiency position where it may have no ability to obtain a deficiency judgment against the condominium owner, or even if it could, collect on such deficiency judgment from the owner?  Is it fair that the condominium owner gets to use the property’s equity to fight a losing battle?

In the most recent decision, Bank of Montreal v. Bala[6], Master Schulz disagrees with the approach in King, Rajakaruna and Seehra.  Rather, Master Schulz finds that the Francis principle[7] of interpretation applies.

The Francis principle states that the condominium corporation does not have the same powers of a natural person.  Nor does it have the same powers as a corporation incorporated under the Business Corporations Act.  A condominium corporation is a creature of statute and as such only has the powers that it is given under the Condominium Property Act (the “CPA”).  If the CPA doesn’t state that an act can be done, the condominium corporation can’t give itself powers to do such an act in the bylaws.

Section 42(a) of the CPA states that a condominium corporation can collect solicitor and client costs from the condominium owner.  However, this is a collection remedy only against the condominium owner as a person, not against the condominium unit itself.  Section 42(b) of the CPA gives the condominium corporation the right to collect certain legal expenses against the condominium unit, but these are legal expenses incurred only for the preparation, registration, enforcement and discharge of a caveat for condominium arrears.  According to Master Schulz, this does not give the condominium corporation a blanket power to be able to collect all legal costs incurred by deeming them to be an “assessment” or “contribution” under the bylaws.

In the fact scenario above, if the condominium corporation had registered a caveat for the special assessment, arguably the legal costs incurred by the condominium corporation related to the enforcement of that caveat.  This would put the condominium corporation in a priority position over the lender for its legal costs.

Whether it be the Court interpreting the bylaws or applying the strict wording of the CPA, lenders should be aware that they face a significant risk in lending to condominium owners.  Lenders’ equity in the property can be eroded by the condominium owner entering into a dispute with the condominium corporation, with the lender essentially indirectly financing the dispute.  Lenders may wish to consider lobbying for changes to be made to the CPA in order to ensure that they have priority over legal costs incurred by the condominium corporation.

Ksena J. Court and Francis N.J. Taman practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

[1] https://albertaforeclosureblog.com/category/foreclosure/condominium-fees/

[2] Condominium Plan No. 8210034 v. King, 2012 ABQB 127 (Alta. Q.B.) (“King”).

[3] https://albertaforeclosureblog.com/2015/03/16/are-lenders-giving-up-too-much/

[4] Bank of Montreal v. Rajakaruna, 2014 ABQB 415 (Alta.Q.B.) (“Rajakaruna”).

[5] Condominium Plan No. 0526233 v. Seehra, 2014 ABQB 588 (Alta. Q.B.) (“Seehra”)

[6] 2015 ABQB 166 (Alta. Master).

[7] Taken from Francis v. Condominium Plan No. 8222909, 2003 ABCA 234 (Alta. C.A.) (“Francis”).

It’s Not Over ‘Til It’s Over

Francis N.J. Taman and Ksena J. Court

While much of the angst regarding the recent election of an NDP government in Alberta is largely ideological rather than based upon experience, there is, arguably, some historical basis in Alberta for concern about the potential for fairly radical, anti-business legislation arising from the election of a populist government with a ideologically specific economic and social agenda.  In 1935, the Social Credit Party swept to power in Alberta.  While far to the right on the ideological spectrum, its underlying economic agenda arguably had more in common with Rachel Notley’s NDP than Jim Prentice’s Conservatives.

The Social Credit government passed more than 50 acts or amendments to acts aimed at restricting the rights of creditors and lenders to recover their debts.  Much of that legislation was overturned in the Courts.[1]  However, the legacy of that activism remains alive today in the restrictions regarding foreclosure in the Law of Property Act[2].  The most familiar provision, and the one encountered most commonly by lenders, is sections 40 and 44 of the LPA, which has the effect of restricting recovery for lenders under a conventional mortgage to the land and prohibits the lender from obtaining a judgment against the borrower for any shortfall.

Less familiar to most individuals and indeed even to many lawyers is section 48 of the LPA.  Section 48 states that when a lender obtains a Final Order for Foreclosure[3], the order acts as “full satisfaction of the debt secured by the mortgage or encumbrance”[4].    Put in plain English, the Final Order has the effect of repaying the debt.

This somewhat odd little provision was at the centre of an interesting mortgage fraud action recently.[5]  In Benchmark, Royal Bank of Canada (“RBC”) obtained a Final Order for Foreclosure in a foreclosure action.  The bank was owed approximately $800,000.00 and the property was worth only $640,000.00.  After the Final Order was obtained, RBC became aware of the fact they had been a victim of mortgage fraud.  Apparently the individuals behind the scheme had inflated the price by flipping a property they had acquired.  In addition, the borrower had not sold his existing residence to obtain the cash difference between the mortgage and the sale price as RBC had been lead to believe.

Rather than appealing their own Order and setting it aside, it began two separate actions.  The first was against the borrower for misrepresentation, breach of contract and negligence.[6]  The second was against the appraisers and lawyers (the “Professionals”) who had been involved in the mortgage transaction for negligence and breach of contract.  In each instance, RBC claimed $400,000.00 in damages.

The borrower’s defence was interesting.  He admitted to having been involved in a prior mortgage fraud with the same group of individuals.  Apparently he had not been caught.  However, in this instance, he alleged that those same individuals had stolen his identity and used it to carry out this mortgage fraud without his involvement.[7]  He stated that he became aware of the fraud when he began to receive correspondence from RBC.  Rather than advising RBC of the fraud, he contacted the individuals behind the scheme and was given a lump sum of money to make mortgage payments to RBC.  When that money ran out, the mortgage went into default.  He did not defend the mortgage action as he was aware no deficiency judgment was available against him because it was a conventional mortgage.

Both the borrower and the Professionals applied for summary dismissal of RBC’s claim.  The Master declined to grant summary dismissal.  The Borrower and the Professionals appealed.

Both sets of defendants argued that section 48 of the LPA satisfied and extinguished the mortgage debt such that no deficiency judgment was available.  They also argued that because the Final Order had the effect of satisfying the debt, RBC was unable to establish any loss.  As such, there was nothing to claim against either the borrower or the Professionals.  It was also argued that RBC was in essence attempting to obtain a deficiency judgment indirectly and that the action was a collateral attack on the Final Order.[8]

RBC argued that while section 48 prohibited it from being able to sue the borrower in debt, it did not prohibit it from suing him in misrepresentation, negligence or breach of contract.  Their investigations established, they argued, that the borrower had misled the bank about the mortgage transaction and his role in the process.  Had the borrower not misled them, they would not have made the loan and suffered the losses that occurred.

The essence of the argument revolved around the technical issue of how damages are calculated for each different cause of action.  In a mortgage or other debt action, the damages are based upon how much is still owed by the borrower.  However, in negligence and breach of contract, the damages are determined differently.  In a breach of contract action, the damages are based upon where the plaintiff would be economically if the defendant hadn’t breached the contract.  In negligence and misrepresentation, the damages are calculated to put the plaintiff in the same position they would have been if the defendant hadn’t been negligent.   While in many instances, these numbers may well be the same, it is entirely possible for the three amounts to vary widely.  That is why RBC had claimed $400,000.00 as damages in each action rather than simply the amount of the deficiency.  Arguably there were other costs it incurred, including perhaps the investigation, which might not have been recovered in the debt action but may be recoverable in negligence.  Each type of loss was distinct and the fact that one cause of action was not available to the bank didn’t automatically exclude the others.

Similarly, the claims against the Professionals were also in breach of contract and negligence.  The claims, too, were separate and distinct types of loss and had to be considered and argued separately.  This was all the more true with the Professionals as they were not party to the mortgage at all.  The calculation of the loss was not the amount of the debt still owing to RBC.  It was the amount needed to put the Bank into the position it would have been in had the breach of contract or negligence not taken place.  Indeed, although His Lordship didn’t specifically cite this as being a factor, it probably did not hurt RBS’s position that the Bank was not aware of the fraud at the time of the original foreclosure action.

Justice Park, in a well written and thoughtful decision, dismissed the appeal.  In doing so he endorsed the Master’s reasoning behind dismissing the application.

There are a couple of key takeaways from this case.  The first is that, while it is important that a lender investigate potential mortgage frauds as soon as they become aware of the possibility, if evidence comes into the lender’s hands late in the game, it may still be possible to obtain a recovery from those who were involved in the scheme and any professionals who did not appropriately protect the lender’s interests.  The second is to seek sound legal advice regarding alternative strategies and causes of action that may be available beyond the standard debt/foreclosure approach usually pursued in these matters.

[1] For an interesting overview of the history of Foreclosure Law in Alberta, see Alberta Law Reform Institute, Mortgage Remedies in Alberta (Edmonton: Alberta Law Reform Institute, 1994), at 15-40.

[2] RSA 2000, c. L-7 (the “LPA”), Part 5.

[3] As opposed to selling the land via a Court appointed realtor or through an Order – Sale to Plaintiff which sells the property to the lender at its appraised fair market value.

[4] LPA, s. 48(a).

[5] Royal Bank of Canada v. Benchmark Real Estate Appraisals Ltd., 2015 ABAQ 288 (“Benchmark”).  We express our gratitude to Tara Peterson, counsel for RBC in this matter, for letting us know about this interesting appeal.

[6] Fraud was not plead.

[7] This is not the first time we’ve encountered this sort of defence.  We had a similar defence in a lawsuit with one of our clients.  That action did not go to trial.

[8] The Borrower also argued two technical defences surrounding the legal doctrines of merger and res judicata.  There was also an argument that the Master had erred in considering some of the case law surrounding section 40 of the LPA in interpreting section 48.  We will not discuss any of this analysis in this blog post but would note that the arguments are thoroughly canvassed by His Lordship in the decision.

Are Lenders Giving Up Too Much?

Tags

Ksena J. Court and Francis N.J. Taman

HELOCs[1], STEPs[2], EPMs[3]…these are just some of names for the new wave collateral mortgages that are being offered by the major lenders these days.  In fact, some lenders do not even offer a standard conventional mortgage any more (much to our dismay).  The collateral mortgage is marketed as an easy way for borrowers to access their home equity and other credit without having to go through the hassle of signing mortgage document after mortgage document every time they need more money from the bank.  But are the lenders in Alberta giving up too much by using this method of financing?

In our blog post “Line of Credit Mortgages – Once More into the Breach!”, we reported on the Bank of Nova Scotia v. Mawer[4] case which involved an application for a deficiency judgment on a Scotiabank STEP mortgage.  At that point in time, there were several Masters level decisions from the Alberta Court of Queen’s Bench, some of which (like Mawer) denied the bank’s application for a deficiency judgment, and others where judgment for the deficiency was allowed.[5]

The decision in Mawer was appealed.  It is this Justice level decision[6] that may have put a nail in the coffin for lenders wanting to obtain deficiency judgments on their collateral mortgages that secure various credit facilities.

The problem for lenders in Alberta is s. 40(1) of the Law of Property Act, which prohibits an action on the covenant to pay contained in a mortgage.  It is because of this section that lenders seeking to enforce their mortgage are generally limited to recovery of the mortgaged lands.  As Master Smart noted in Mawer, the concept of a mortgage that encompassed a variety of loan facilities was not “contemplated or even conceivable” when s. 40(1) was enacted.[7]

There are a few exceptions to this general rule.  A specific exception was created for high ratio insured mortgages in the Law of Property Act.  There is also case law which creates exceptions for collateral mortgages where there is evidence that in advancing credit the bank is relying solely on the borrower’s ability to pay and not the property, where the collateral mortgage is taken as part of a debt consolidation plan, or the collateral mortgage is taken where the loan was for business purposes.  In these instances, the bank isn’t seen as trying to “end run” s. 40(1).

In Mawer, the collateral mortgages initially involved debt incurred for the purchase of the properties.  Subsequently, the bank extended credit by way of Visa accounts.  Under the STEP financing, these Visa debts were also secured by the collateral mortgages.  In affirming the Master’s decision not to allow the bank a deficiency judgment against the borrowers, the Justice found that the mortgages were at the centre of the financing arrangements.  This was not a situation where financing arrangements were entered into and the mortgages were registered later to shore up the debt.  Essentially, where a lender is at all times looking to the mortgage as security for the indebtedness, it will be caught by s. 40(1) and the lender will be prohibited from claiming any deficiency judgment against the borrower.  One wonders in what circumstance a lender won’t be looking to its security!

This result is problematic for lenders in Alberta who choose to extend credit under various loan facilities that are secured by a collateral mortgage.  Unless the lender is able to clearly demonstrate to the Court that the loan falls within one of the limited exceptions, lenders who offer this type of mortgage facility will be at risk for taking a loss where the property value ends up being insufficient to cover the total debt.  By securing a Visa debt, for example, the lender may be prohibiting its ability to collect on that debt from other sources, such as the borrower’s wages through garnishment proceedings.  One may argue that if the borrower is in default, recovery of an unsecured debt is doubtful in any event.  However, judgments in Alberta are good for 10 years and can be renewed.  The borrower’s financial circumstances could certainly change over the course of time to make full recovery possible.

Exceptions to s. 40(1) have been made to the Law of Property Act in the past.  Lenders should seriously consider lobbying for another change.  Until then, it will be difficult for lenders to recover anything but the property when they are enforcing their collateral mortgages which secure various loan facilities that are traditionally unsecured debt.

Francis N.J. Taman and Ksena J. Court practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

[1] “Home Equity Line of Credit” is the generic term for referring to a line of credit secured by a collateral mortgage.

[2] “Scotia Total Equity Plan” is the form of collateral mortgage offered by ScotiaBank.

[3] “Equity Power Mortgage” is the form of collateral mortgage offered by HSBC Bank Canada.

[4] 2013 ABQB 587 (Master).

[5] See for example Chinook Credit Union Ltd. v. Clarke, Alberta Court of Queen’s Bench action no. 1201-10614 (unreported) and HSBC Bank Canada v. Pleskie, Alberta Court of Queen’s Bench action no. 1108-00291 (unreported).

[6] 2014 ABQB 462 (Alta. Q.B.).

[7] Supra, note 4 at para. 15.