Careless Discharges Can Result in Chaos


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Ksena J. Court and Francis N. J. Taman

Crystal Wealth Management System Limited v. JC Food Services Ltd.,[1] provides a cautionary tale about how an inadvertent error can result in a lack of recovery for a mortgagee.  JC Food Services Ltd. (“JCF”) granted a first mortgage, which was ultimately transferred to Crystal Wealth Management System Limited (“Crystal”).  As collateral security, the principals of JCF also granted guarantees for the first mortgage debt.  JCF also granted a second mortgage to a third party. 

In 2012, Crystal inadvertently discharged the first mortgage.  Crystal did not tell JCF or the guarantors about the discharge but did register a caveat against the title once it discovered its error.  The caveat was registered subsequent to the second mortgage, which was now in first position on the title.  Crystal did nothing more to correct the title.  JCF continued to make payments to Crystal until 2017, when it defaulted and Crystal proceeded to file foreclosure proceedings.

In the foreclosure proceedings, Crystal applied for an Order for Sale to the Plaintiff and a deficiency judgment against JCF.  Crystal acknowledged that the second mortgage, which was now in first position, took priority over its caveat.  JCF disputed that Crystal was entitled to a deficiency judgment on the personal covenant to pay in the mortgage.

The Court of Appeal reviewed the principals of a mortgagor’s equity of redemption.  The equity of redemption is the mortgagor’s right of relief from the forfeiture of their title to the mortgaged lands upon payment of the mortgage debt.  This equity of redemption is given recognition in s. 73 of the Law of Property Act,[2] which states that upon the mortgagor making payment of the debt due under a mortgage, instead of discharging the mortgage, the mortgagee is obligated to transfer the mortgage as the mortgagor directs.  By way of example, the Court of Appeal stated that if Crystal’s mortgage hadn’t been discharged, and payment of the mortgage had been made, then JCF could have had the mortgage transferred to the guarantors rather than discharged.  The guarantors could have then proceeded with foreclosure proceedings and had their guarantees extinguished. 

In this case, however, because the mortgage was discharged, JCF was deprived of the right to this transfer.  As such, the Court of Appeal found that Crystal was “deemed to have elected to forego the debt in exchange for unilaterally taking away the mortgagor’s equity of redemption.”[3]  Accordingly, Crystal could not obtain judgment for the deficiency under the covenant to pay in the mortgage.

Crystal also argued that it should be entitled to judgment on the basis of unjust enrichment.  The Court of Appeal did not accept this argument.  It held that while Crystal suffered a deprivation due to the loss of the registered mortgage, JCF did not receive a corresponding benefit as it was not provided with the benefit of a registered mortgage that could be transferred to a third party.

Three major lessons for lenders to keep in mind:

  1. Take extra precaution when discharging.  Although it wasn’t clear from the written decision what events led to the discharge in this case, before submitting a discharge question and double check whether or not it is appropriate to be granting a discharge of the mortgage.  If the mortgage is collateral, are there any other debts that it secures?  If in doubt, seek legal advice.
  2. If a mortgage is accidentally discharged, deal with getting the title rectified as soon as possible.  In this case, the Court of Appeal left open whether there were other remedies under the Land Titles Act that could have been used by Crystal.  There are sections in the Land Titles Act that permit a title to be rectified when mistakes are made.
  3. Finally, where possible, lenders should take other security in addition to the mortgage.  In this case, although Crystal was not permitted to obtain judgment against JCF, the Court of Appeal chose not to make any comment on whether the guarantors remained liable under the terms of their guarantee.

[1] 2020 ABCA 369 (Alta. C.A.)

[2] R.S.A. 2000, c. L-7, s. 73

[3] Supra note 1 at para. 3


The Other Side of the Mirror


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We are used to commenting on other lawyers decisions, so it was interesting to have one of our decisions become the fodder for a case comment by The case was 2008570 Alberta Ltd. v. Cedar Peaks Mortgage Investments Inc. You can find the onpointlaw case comment and our counsel comment here.

As a postscript to the case comment, security was not posted and the Appeal was deemed abandoned.

COVID 19 UPDATE #3 – Alberta



Effective June 3, 2020, the Court of Queen’s Bench of Alberta will be resuming limited chambers sittings on a pre-booked basis.  The hearings are limited to those that are not able to be heard using the desk application process previously implemented by the Court.  This would include hearings where one or more of the Defendants are self-represented.  The hearings will be conducted remotely through the Webex platform. 

Considerations in Negotiations


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Ksena J. Court and Francis N.J. Taman

Sometimes the race to negotiate pays off.  Servus Credit Union v. JRD Investments Inc.[1] demonstrates how lenders should be cautious when negotiating forbearance agreements with debtors.

JRD Investments Inc. (“JRD”) and Lurch Holdings Ltd. (“Lurch”) were in a joint venture respecting certain lands.  Each owned a 50% interest in the lands as tenants in common.  First and second mortgages were placed against the lands.  Craftex Builders (“Craftex”) was retained to perform renovations to the night club that was operated on the lands, but it wasn’t clear which entity it contracted with.

The joint venture fell behind in its mortgage payments and Craftex did not get paid for its work.  Craftex registered a builders’ lien.  Lurch entered into a forbearance agreement with Craftex, who then opted to carry on with the renovation work.  Craftex did not commence legal proceedings within the statutory requirements and its builders’ lien was discharged from title.  Some further payments were made to Craftex but ultimately it remained fully unpaid.  On August 26, 2016, Craftex commenced legal proceedings against JRD and Lurch for the indebtedness respecting the renovations and for breach of the forbearance agreement.

Meanwhile, Servus Credit Union Ltd. (“Servus”) demanded and commenced legal proceedings on its second mortgage.  It obtained a Redemption Order with a four month redemption period.  During the redemption period, JRD and Lurch agreed that they would each obtain refinancing for half of the mortgages.  JRD obtained its refinancing but Lurch did not.

In January 2017, Craftex brought a motion for summary judgment.  Lurch negotiated an agreement which allowed further time to pay.  As part of the deal, Lurch granted a mortgage to Craftex against its 50% interest in the lands (the “Craftex Mortgage”).  The Craftex Mortgage was signed March 29, 2017.

While Lurch was negotiating with Craftex, it was also negotiating with JRD.  JRD agreed to fully redeem the Servus mortgage with its refinancing.  In exchange, Lurch agreed that it would reimburse JRD for the arrears paid on behalf of Lurch and the legal costs.  Lurch also agreed to grant JRD a mortgage over Lurch’s 50% interest in the lands (the “JRD Mortgage”).  The JRD Mortgage was signed February 16, 2017.

The JRD Mortgage was registered on title on March 1, 2017.  The Craftex Mortgage was registered on March 31, 2017.

Ultimately, the Servus mortgage matured.  Neither party was able to obtain refinancing and the lands were sold in foreclosure proceedings.  After payment of the first and second mortgages, half of the net sale proceeds were paid to JRD as owner.  The issue was whether JRD was entitled to receive the other half of the net sale proceeds pursuant to the JRD Mortgage.  Craftex challenged the JRD Mortgage as being a fraudulent preference under the Fraudulent Preferences Act[2] (the “FPA”) and oppressive under the Business Corporations Act[3] (the “BCA”).

Transactions can be set aside under the FPA if a person makes a transfer knowing that they are insolvent or about to be become insolvent and the transfer is intended to prevent the person’s creditors from recovering their debts or has the effect of preferring one creditor over another.  Although Craftex was a creditor of Lurch at the time the JRD Mortgage was entered into, the Court found that it did not prove that Lurch was insolvent or on the eve of insolvency.  Just because Lurch was not paying its debt to Craftex did not mean that Lurch was insolvent.  The condition of insolvency depends upon an analysis of Lurch’s assets and liabilities, of which there wasn’t any evidence.  It is necessary to provide evidence of other creditors who aren’t paid.  Therefore, the test under the FPA was not met and the JRD Mortgage was not set aside by the Court.

The Court went on to give some guidance on whether there was an intent to prefer one creditor over the other in this instance.  The granting of security can itself be considered to be a preference.  Sometimes the Court will also look for factors which are referred to as “badges of fraud”.  Here, the Court held that the consideration given by JRD for the JRD Mortgage in the form of payment of the arrears was not “grossly inadequate”.  Both JRD and Lurch were acting in their own self-interest and there was no evidence that one entity was subject to pressure or undue influence from the other.  While the effect of the JRD Mortgage was to favour JRD over other creditors, it was not clear that this was the principal intent.  Additionally, the JRD Mortgage also fell within the exception in s. 6(b) of the FPA, which provides that where there is fresh consideration that is fair and reasonable, a transfer won’t be considered a preference.

The Court then addressed whether the JRD Mortgage was “oppressive” under the BCA.  In determining whether there has been fair treatment of stakeholders, the Court will look at what those stakeholders are entitled to reasonably expect.  Directors of a corporation have to consider a variety of interests and the Court should generally have deference to their decisions.  Here, the Court was not satisfied that the reasonable expectations of Craftex as a creditor were violated.  It was a reasonable commercial decision for the JRD Mortgage to have been granted.

This case demonstrates that care should be taken in negotiating forbearance agreements to ensure that the lender is getting what they are bargaining for.  It is reasonable to assume that if the debtor is negotiating with one creditor, it may also be negotiating with others.  In drafting its forbearance terms, it would have been prudent for Craftex to have specified that its mortgage was to be in third position directly behind the Servus second mortgage.  If such forbearance terms had been concluded quickly enough, this may have avoided the granting of the JRD Mortgage.

Additionally, lenders who are advancing funds to a borrower who is in questionable financial circumstances will want to make sure that security taken is fair and reasonable, and that the consideration is fresh consideration for the transfer or granting of security, as JRD did in this case.

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] 2020 ABQB 249 (Alta. Q.B.)

[2] R.S.A. 2000, c. F-24

[3] R.S.A. 2000, c. B-9

COVID 19 UPDATE #2 – Alberta

Yesterday, the Court of Queen’s Bench of Alberta announced that it will extending its current policy of hearing only emergency and urgent matters to May 31, 2020. This means that all matters set down for May 2020 will be adjourned to no fixed date and will be rescheduled when the Courts resume their normal sittings.

A View From Ontario

COVID-19 is obviously not limited to just Alberta – its effects have been global. So it has been interesting to take an opportunity to consider and digest the thoughts of practioners in other jurisdictions. We recently came across an interest blog post from Papazian Heisey Myers in Ontario. Michael S. Meyers is experienced enforcement counsel with a broad clientele, which includes both institutional and private lenders. Michael provides his thoughts on the impact COVID-19 will have on private lenders and reviews the concept of default under a mortgage.–private-mortgage-lenders-rights-and-remedies—part-iii-of-a-series—mortgage-default

This post is shared with Michael’s permission and represents his opinion. But it is certainly food for thought.

Be well!

COVID-19 UPDATE – Alberta



With all the uncertainty surrounding closures under the COVID 19 crisis, we wanted to provide you with information on the impact that this will have on Alberta enforcement matters.  Until May 1, 2020, all applications, except on an emergency basis and desk applications, have been adjourned without a return date.  That date may be extended.

Demands and Claims

It is still possible to issue demands, communicate with borrowers, and issue commencement documents such as Statements of Claim.  Documents, such as Statements of Claim are still able to be served. 


Lawyers continue to be able to order appraisals for properties.   The appraisers advise that they are taking extra precautions when doing interior appraisals.  Interior appraisals are unlikely to be available for  residences where the occupants are in quarantine or are awaiting test results for COVID-19.  Appraisers are exploring more innovative ways to carry out more robust appraisals in those instances.   It is uncertain the extent that COVID-19 will have on the market.  As such, and due to the restrictions placed by the Court on the hearing of applications, lenders may want to consider whether they wish to wait to order the appraisal until the Court reopens for hearings.  The advantage of ordering now is that lenders will have all information necessary to proceed with the application once the Court reopens for hearings.  However, there is a chance that the market value will have changed by the time the Court reopens.  If that happens, it may be necessary for lenders to order updated appraisals.


As noted above, the Court has adjourned all existing hearings up to May 1, 2020 without a return date. Lawyers can file new applications, but those applications generally have to be filed without a return date at this time.  Emergency and urgent, non-emergency applications are still being heard with permission from the Court.  This would include applications for Preservation Orders and in the proper circumstances may also include Receivership, and CCAA proceedings.  The Court is also accepting desk applications for matters such as Substitutional Service Orders, and Consent Orders. 

Commissioning of Affidavits

Temporary measures have also been put into place in the Court of Queen’s Bench and Court of Appeal to permit the Commissioning of Affidavits remotely rather than in person.  There are certain specific steps required in order to properly have Affidavits sworn and identification checked. 

Land Titles

The Land Titles Office online registration remains open and we are able to submit documents in the usual course.  The Land Titles Office is now also accepting Affidavits that are commissioned using video or teleconferencing.  However, these Affidavits must be commissioned by a lawyer who is practicing in Alberta.  Additionally, Land Titles will still require the original signatures for registration.

Suspension of Filing Deadlines

Although the Court remains open for the filing of documents and is now also accepting filing of documents by email, as of March 20, 2020 all filing deadlines have been suspended.  This means that the time for filing documents, such as Statements of Defence, is on hold until the suspension is lifted.  Accordingly, lawyers are not able to obtain Default Judgment against any defendant at this time, nor are we able to file a Noting in Default.

The exception to this is the Court of Appeal.  Where an appeal has been set for appeal and no adjournment has been obtained, all filing deadlines remain in effect.  If an appeal has not been set for appeal and deadlines for filing of documents fall on or before May 4, 2020, those deadlines are extended by 2 months.  In all other cases, including applications before the Court of Appeal, the filing deadlines remain unaltered.  Filing deadlines for Notices of Appeal, Applications for Permission to Appeal and other documents commencing an appeal remain unaltered.

Judgments and Enforcement

The taking of enforcement steps with respect to commercial properties are also affected.  Assets, including land, can still be seized. However, objection, notice and waiting periods with respect to a seizure are suspended. That means that any objection period which started prior to March 16, 2020 would be suspended and not restart until June 2, 2020. Seizures made after March 16, 2020 would not have the objection period begin until June 2, 2020. The same would apply to sale notices on both personal property and land, and seizures under the Personal Property Security Act. Distributions of proceeds will also be delayed in many cases. The suspension may also be extended by the government.

It is uncertain the extent to which COVID-19 will affect seizures of non-commercial personal property, though there appears to be some civil enforcement agencies who are not undertaking these sorts of seizures. Additionally, the suspension of waiting periods noted above would also apply to non-commercial personal property and evictions.

If a debtor agrees to waive notice periods, it may be possible to continue with enforcement notwithstanding these new rules. You should speak to your counsel to determine whether such a waiver would be effective.

Suspension of Limitation Periods

On March 30, 2020, the Alberta Government signed a Ministerial Order suspending the limitation periods under a number of pieces of legislation, including the Limitations Act.  The suspension runs from March 17, 2020 until June 1, 2020.  This means that the usual 2 year “limitations clock” stopped on March 17, 2020 and will start up again on June 1, 2020.  Please note that the Government does have the ability to terminate the suspension sooner.

Although there is this suspension in place, we are still recommending that where there is a pending claim, you may wish to still have a Statement of Claim or Originating Notice filed within the usual 2 year time period.  This would avoid any possible calculation issues or arguments that could arise due to the suspension period.  The Rules of Court permit up to a year to serve a Statement of Claim after it has been filed.

We wish you all the best during these challenging times.

Who's Responsible for This?



Clients from other jurisdictions are often surprised that notwithstanding the fact that Alberta mortgages, like the mortgages from their jurisdiction, contain provisions giving the lender the power to sell the mortgaged property, these sales are actually conducted by the Court.  This has been the case since the 1930s and is so firmly established in the Alberta legal firmament, it is difficult to imagine it changing. It provides protection for debtors by having the sale process controlled by the Courts and is part of a larger web of mortgagor protection legislation from that time period.  While often seen by lenders as creating delay and expense, it also provides some protection for the lender in that it is the Court, not the lender, who makes the final decision with respect to a sale.

In a recent appearance in chambers, one of our associates had the case of Chief Construction Company Ltd. v. Royal Bank of Canada[1] cited to him by the Court.  We were not aware of it and thought it raised some interesting issues for lenders regarding some of the limitations to these protections.

Chief Construction Company Ltd. (“Chief Construction”) purchased 2 houses on 32 acres of lands in a judicial sale in a foreclosure filed by Royal Bank of Canada (“RBC”).  Between the date that Chief Construction’s offer was accepted by the Court and the closing, there was a flood on the property, causing $200,000 in damage to the houses on the property.  Chief Construction sued RBC for the $200,000 damages suffered.  Chief Construction applied for summary judgment against RBC.  RBC cross applied for summary dismissal.

In this instance, the Redemption Order had been granted September 30, 2011. It appears to have been in the usual form, which attached a judicial listing agreement and a schedule (“Schedule “A”) which was to be attached to any offer submitted to the Court for acceptance.  Among the notable terms of the Order were:

  • Realtor was given authority to list the property as an officer of the Court;
  • Any offers received would be subject to
    • Court approval; and
    • the terms and conditions set out in Schedule “A”;
  • Schedule “A” stated, among other things:
    • the seller of the property was the Court of Queen’s Bench of Alberta;
    • the property was sold “as is-where is”;
    • neither the seller or its agent had made any representations and warranties with respect to the property, including with respect to the condition of any buildings or improvements on the property;
    • if there was an inconsistency between the purchase agreement and Schedule “A”, Schedule “A” prevailed; and
    • the offer may only be accepted by an Order of the Court.

On March 15, 2012, a Preservation Order was granted, permitting RBC to enter the property, take over the utilities and do whatever was necessary to preserve the property.  This is a standard Order, usually granted when properties are abandoned.

Chief Construction hired their own realtor and viewed the property with that realtor.  They read and understood Schedule “A” and were aware this was a foreclosure sale.  Their representative never spoke to RBC or the realtor appointed by the Court.

An offer to purchase the property (the “Offer”) was made by Chief Construction on May 22, 2012. Section 6 of the Offer made a variety of representations and warranties by both the buyer and seller, including representations regarding the condition of the property.  There was also a provision that the property would be in substantially the same condition on possession as it was when the Contract was accepted.  Additionally, there was to be a Real Property Report (“RPR”) provided by the Seller.  Schedule “A” was attached to the Offer.  The version attached did not exclude the RPR requirement. The Offer was never signed by RBC but was accepted by the Court on June 1, 2012.  The closing date of the sale was June 29, 2012.

In April 2012, the property flooded and the buildings on the property were damaged.  RBC remediated the property and added those expenses to the amount owing under the mortgage.  Chief Construction was aware of the flood and the flood damage.

On June 20, 2012, a representative of Chief Construction and its realtor inspected the property.  The property was undamaged at that time.  The property was not inspected again by either party until July 3, 2012.  At that time, Chief Construction discovered that the buildings had been damaged by flooding.  It was alleged that the flood was due to the sump pump not working because RBC had not maintained the electricity to the property.  It was not possible to determine whether the damage occurred before or after the closing date.  RBC first became aware of the damage on July 17, 2012.

Chief Construction sued RBC in breach of contract and in negligence.  The suit was commenced nearly two years after the purchase closed.

The Master held that Chief Construction did not have a claim in contract against RBC.  However, he did not dismiss that claim against RBC.  Master Prowse held that Chief Construction had rights which arose from the Offer.  The Court had the ability to uphold the rights provided to Chief Construction under the Offer by ordering RBC to pay some of the proceeds it received as part of the foreclosure process to Chief Construction.  He did this with respect to the value of the RPR.

With respect to the rest of the claims in breach of contract and tort, he gave Chief Construction leave to amend their Statement of Claim to seek compensation for the rights under the contract that were violated by redistribution of the mortgage proceeds from RBC to Chief Construction.  This, the Master indicated, was the proper cause of action and remedy rather than a claim in contract or negligence.

The Court also ruled that the evidence with respect to the violation of those rights was not clear based upon the evidence before the Court.  There was also insufficient evidence to establish that RBC was negligent with regard to the failure of the sump pump.  As such, the rest of the claims had to proceed to trial.

The Court noted that the proper way to have dealt with these claims would have been an immediate application for advice and direction with respect to these losses.  However, the Court did not deny Chief Construction their relief on that basis or on the basis of the delay in filing their claim.

This is a surprising case in many ways.  It would appear that the Court interpreted Schedule “A” very narrowly.  This sort of narrow construction usually is reserved for standard form contracts, which are contracts where the terms are imposed by one party on the other.  Arguably, Schedule “A” is just that sort of document.

However, this sort of restrictive interpretation of a document generally is argued in the context of a claim of either breach of contract or negligence against one of the parties.  This is because documents like Schedule “A” usually are designed to protect the person who created them, which, in this case, is the Court.  In the case of breach of contract, the idea is that the party who is being sued has violated the rights of the person suing.  If the breach of contract is made out, the party being sued compensates the person suing for their loss.

What makes this situation unique is that the party who is being made to compensate the person suing is not a party to the contract.  In essence, what appears to be happening, but is not made explicit, is that the Court is finding itself in breach of contract.

The relief against RBC is equally unique.  The funds have already been paid in accordance with a prior Order of the Court.  It is likely that Order did not indicate that Chief Construction would receive any portion of the sale proceeds.  That Order has been filed and carried out.  Normally, one would have to set aside the earlier Order or appeal it and have it overturned in order to change the payment provisions.  Neither of these things have happened.

On a practical basis, this highlights for lenders and their counsel the importance of providing a form of real estate purchase contract and having the realtor request that all purchasers use that form.  If an offer is provided on another format, amendments should be requested to the offer to remove all representations and warranties along with any covenants stating the property will be in the same condition on closing as on the acceptance of the contract.  In most cases, purchasers are willing to do so because they are generally offering less than they would otherwise pay for the property due to the fact that it is being sold through a foreclosure.

[1] 2017 ABQB 589 (Alta. Q.B.)

Collateral Mortgages – A Trap for Those Who Aren’t Careful


A recent case has demonstrated what can happen if a collateral mortgage and the associated documents that need to go along with it are not properly prepared.

Re: 667402 Alberta Ltd.[1] arose out of proceedings commenced under the Companies’ Creditors Arrangement Act[2] brought by the Canada North Group of companies.  “Weslease” was a company and partnership that did business with 1919209 Alberta Ltd. (“191”), one of the Canada North Group of companies, by leasing certain equipment to it.  The principal of the Canada North Group, Mr. McCracken, approached the principal of Weslease, Mr. Talbot, about a proposed sale and lease back transaction in relation to a wastewater treatment plant that was owned by 191.  Mr. Talbot took the position that Weslease would need personal guarantees from Mr. McCracken and his wife, along with mortgage security from them, as part of the transaction.  Mr. McCracken instead proposed that the transaction would be guaranteed and mortgage security would be provided by two other companies within the Canada North Group, 1371047 Alberta Ltd. (“137”) and Canada North Camps Inc. (“CNC”).

The following documents formed part of the transaction:

  • Approval of Lease and Lease – where the lessees were 191 and Mr. McCracken
  • General Security Agreement – where the debtors were 191 and Mr. McCracken
  • Promissory Note – where the borrowers were 191 and Mr. McCracken
  • Collateral Mortgage – from 137
  • Collateral Mortgage – from CNC

The issue was that the collateral mortgages stated that 137 and CNC were securing the indebtedness that they owed to Weslease under the “Lease Agreements”, however 137 and CNC were not parties to those Lease Agreements.  Weslease argued that even though there was the absence of the word “guarantee” in the collateral mortgages, it was intended and understood that 137 and CNC would be guaranteeing the obligations of 191 and therefore the mortgages should be construed so that this guarantee existed.

Section 4 of the Statute of Frauds[3] still applies in Alberta.  When a person guarantees the debt of another, the Statute of Frauds requires that this promise be in writing.

The wording of the collateral mortgages did not create a debt.  The wording only acted as security for a debt that otherwise existed.  Neither 137 nor CNC were listed as co-lessees or guarantors.  As such, there was no underlying debt that the collateral mortgages secured.  Further, neither 137 nor CNC received any consideration for granting the collateral mortgages and they were not executed under seal, which constitutes consideration at law.  A finding that 137 or CNC granted an enforceable guarantee would require the Court to rewrite the written agreements between the parties, which is not something that the Court does.  The documents clearly stated that the collateral mortgages were given to secure the debts of 137 and CNC, not the debts of 191 and Mr. McCracken.

Weslease argued that the Statute of Frauds was avoided because of the doctrine of part performance.  “Part performance is an equitable doctrine that grew out of concern from common law judges that the application of the Statute of Frauds may lead to injustice in situations where contracts had been partly performed”[4] but the contract was not in writing as required by the statute.  The Court held that the doctrine of part performance does not apply to guarantees.

Because the alleged guarantees were not in writing and there was no underlying debt instrument to the collateral mortgages, the Court directed that the mortgages be discharged from title.

This case confirms that lenders will want to be cautious when using collateral mortgages.  Lenders need to ensure not only that there is a mortgage from the borrower, but also that there is an underlying debt instrument whereby the borrower is making its promise to pay to the lender.  Without this underlying debt instrument, the lender will have no security or claim against the borrower.

[1] 2018 ABQB 1048 (Alta. Q.B.)

[2] R.S.C. 1985, c. C-36

[3] (1676), 29 Car II, c. 3

[4] Supra, note 1 at para. 42

Bankruptcy STILL is not the end!

In our blog post Bankruptcy – it’s not the end! Posted on August 21, 2013[1] we discussed case law which permitted a lender to obtain a deficiency judgment against a mortgagor notwithstanding that the mortgagor had filed for bankruptcy.  In CIBC Mortgage Corp. v. Stenerson,[2] the Court permitted the deficiency judgment even though the mortgagor was bankrupt because the mortgagor had made payments under the mortgage post-bankruptcy.  The Court held that by making the payments, the mortgagor had affirmed the mortgage contract and therefore continued to be liable.

However, other cases disputed imposing such liability on the mere basis of payment and a divergent line of authority developed.[3]  “These cases hold that mere possession and continued payment is insufficient to warrant liability on a personal promise to pay.  Rather, there must be a clear acknowledgement of the continuing obligation…some Courts impose the additional requirement of fresh consideration.”[4]

The conflicting line of cases was recently considered by Justice Topolniski of the Alberta Court of Queen’s Bench in Servus Credit Union v. Sulyok (“Sulyok”).[5]  In Sulyok, the debtor granted a high ratio mortgage to Servus Credit Union (“Servus”).  Years later the debtor filed for bankruptcy.  Servus filed a proof of claim as a secured creditor in the bankruptcy.  The debtor was separated from his spouse during the bankruptcy period and she continued to make the payments on the mortgage.  After the debtor was discharged from bankruptcy, the debtor’s wife stopped paying the mortgage.  The debtor notified Servus that he intended to move back into the property and make the payments.  The debtor made partial payment of the arrears and cured the default on payment of the condominium arrears.  Servus started foreclosure proceedings once the debtor advised that he could not make any more payments.  Servus obtained an Order – Sale to the Plaintiff.  The issue was whether the debtor was still liable for the deficiency given his prior bankruptcy.

At the initial hearing, the Master refused to grant the deficiency judgment.  The Master stated that further consideration was required and that there needed to be evidence that the parties had turned their minds to the continuation of personal liability.  Servus appealed.

On the appeal, Justice Topolniski reviewed the provisions of the Bankruptcy and Insolvency Act (“BIA”).[6]  She made particular note that when the BIA was amended in 2009, the issue of reaffirmation of contracts was considered in the Senate Reports.  The reports specifically recommended that reaffirmation of contracts post-bankruptcy be prohibited for unsecured transactions and that a principled approach be adopted for the reaffirmation of secured transactions.  Parliament chose not to follow these recommendations.

The Justice found that the requirement of fresh consideration or an express reaffirmation failed to adequately balance the rights of all stakeholders involved in these situations.  The Court quoted, “The rehabilitative purpose of s. 178(2) [of the BIA] is not meant to give the debtors a fresh start in all aspects of their lives.  Bankruptcy does not purport to erase all the consequences of a bankrupt’s past conduct.”[7]

The Court found that where a debtor remains in possession of property after bankruptcy and continues to make payments due under the contract then the debtor has affirmed the contract, including the covenant to pay.

Lenders should be particularly happy with this decision as they do not have to turn their mind to whether new consideration is provided or take any extra steps to get the borrower to reaffirm their contractual obligations subsequent to bankruptcy.  At least in Alberta, all the lender has to do is carry on with the contract in the normal course if the debtor is also prepared to do so.


[2] 1998 CarswellAlta 388 (Alta. Q.B.)

[3] Scotia Mortgage Corp. v. Winchester, (1997) 205 A.R. 147 (Alta. Q.B.); Day c. Banque Laurentienne du Canada, 2014 QCCA 449 (Que. C.A.); Scotia Mortgage Corporation v. Berkers, 2016 NSSC 12 (N.S.S.C)

[4] Servus Credit Union v. Sulyok, 2018 ABQB 860 (Alta. Q.B.) at 62

[5] Ibid.

[6] R.S.C. 1985, c. B-3

[7] Quoting from Alberta (Attorney General) v. Moloney, [2015] 3 S.C.R. 327 at 83