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.