04 Friday Sep 2020
Posted in Foreclosure
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 onpointlaw.com. 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.
22 Wednesday Apr 2020
Posted in Foreclosure
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.
14 Tuesday Apr 2020
Posted in Foreclosure
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.
This post is shared with Michael’s permission and represents his opinion. But it is certainly food for thought.
Be well!
15 Wednesday Jan 2020
Posted in Foreclosure
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:
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.)
05 Monday Dec 2016
Posted in Civil Enforcement Act, Writs
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.
[9] Non-financial registrations such utility rights of way and easements would generally remain on title.
[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.
[14] In the case of a mortgage which is being foreclosed upon.
[15] For example, fraud.
16 Monday Nov 2015
Posted in Foreclosure
Tags
guarantees, Joint Obligations, mortgages, Re: Koska, release of joint debtors, settlements, Shoker v. Vollans, Williams, Zypherus Holdings Inc. v. Dorais Estate
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.
15 Wednesday Jul 2015
Posted in Foreclosure
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.
18 Thursday Dec 2014
Posted in Foreclosure
It seems that we are in fact presentient or at least ahead of the curve on current events. The ALERT team[1] laid charges against 4 people with respect to a multi-million dollar mortgage fraud being run by what media outlets are describing as a “Calgary-based organized crime group”. While it is important to note that the individuals in question are presumed innocent until proven guilty, it is alleged that the group falsified employment documents, bank statements, credit information and tax assessments in order to obtain mortgages on more than 20 homes in Calgary and Fort McMurray as well as a variety of locations in British Columbia. Police indicate that the perpetrators are believed to have used a variety of straw buyers to carry out their purchases. Indeed, based upon the limited information available, it appears that some of the methods parallel those we wrote about in our last blog entry. Police indicate that they are also in the process of seizing the alleged perpetrator’s assets and seeking to have the court declare them forfeit pursuant to proceeds of crime legislation. More charges and arrests are expected as part of the investigation.[2]
It has been an ongoing concern of the Calgary foreclosure Bar that the lack of criminal charges being laid against the organizers of these sorts of schemes was making such schemes appear to be safe. Hopefully additional investigations are underway and will act as a deterrent to straw buyer schemes.
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] ALERT stands for Alberta Law Enforcement Team. It is an integrated team set up by the Alberta Solicitor General’s office to tackle organized crime. It brings together police, RCMP and Sheriffs from different police forces through-out the province.
[2] The press release is available at http://www.alert-ab.ca/newsreleases/78-news-releases/2014/372-calgary-crime-group-implicated-in-multi-million-dollar-mortgage-frauds.
01 Monday Dec 2014
Posted in Foreclosure
Tags
Foreclosure, Foreclosure: Alberta, insured mortgage bankruptcy, mortgage fraud, R v. MacMullin, straw buyer
Francis N.J. Taman and Ksena J. Court
It has been a complaint of many members of the foreclosure bar that mortgage fraud rarely seems to get the level of attention from the police that it deserves in terms of the losses it generates. Prosecutions are rare, convictions even rarer. Indeed, we are only aware of two. The most recent conviction was in Red Deer.[1]
In MacMullin, the accused was charged with forty one counts of fraud. While the trial judge did not convict MacMullin of every count he was charged with, the Justice noted “I stress that even in those cases where I do not find him guilty that is only because the probability of his guilt or the suspicion of his guilt did not coalesce into proof beyond a reasonable doubt. I have no doubt he was the ringleader and a party to these frauds, either as a direct participant, or as aider, and abettor.[2]
Of greatest interest to lenders, however, is the Justice’s analysis of the various schemes. Indeed, the case highlights a number of red flags that lenders, mortgage brokers and other real estate professionals need to keep an eye out for. Justice Germain noted that, despite the number of transactions involved, the misleading statements and deceptive tactics involved really fell into 3 categories:
Manipulation of Real Estate Purchase Contract
MacMullin and his associates used both standard realtor’s contracts and what the Justice described as “self-help press” contracts. The first tactic, quite familiar to lenders, was the sale at an inflated price. The defendants found individuals who were willing to sell their property which was priced at a level which they suspected was less than the amount than might be accepted by lenders and mortgage insurers as the value of the property. MacMillan or his associate would agree to pay the full asking price but would have the sales contract written up for a higher value. A straw buyer would certify that they would be residing in the house to facilitate them arranging a high ratio mortgage with a 95% loan to value ratio. This allowed them not just to put no money down, but in some instances to actually take some additional cash out of the property.
A second methodology was to arrange a fictional sale to permit a homeowner to take all of the equity out of their house. A straw buyer was arranged and the sale price again was set to allow all the equity to be taken out of the house. The idea was that the original owners would remain the equitable owners of the property. Although not mentioned in the analysis, presumably at some time down the road, the property would be transferred back to the original owners. MacMullin would get a fee or a portion of the equity. [3]
Straw Buyers[4]
The majority of the deals done by MacMullin involved straw buyers. In some instances, MacMullin would arrange for a straw buyer to obtain a mortgage and purchase a property owned by MacMullin or one of his associates at a price set by MacMullin. MacMullin would receive all of the mortgage proceeds and would retain beneficial ownership of the property.
MacMullin would also enter into deals with third party vendors to purchase their property. He would then arrange for a straw buyer to purchase the same property from him at a higher price. In some instances, MacMullin would take title to the property and then transfer it to the straw buyer. In others, MacMullin would have the transfer from the third party vendor put in the name of the straw buyer, a process commonly called a skip transfer.
Normally, in these straw buyer deals, the straw buyer is paid a fee. That is the incentive for them to allow their name and good credit to be used in the scheme. In addition, they are generally promised that the organizers of the straw man deal will provide them with the mortgage payments until the property is transferred out of the name of the straw buyer. Interestingly, in many instances, MacMullin never paid the promised fee nor did he provide the money for the mortgage payments.
In some instances, the straw buyer already owned a home. In order to be able to maximize the amount of the loan, MacMullin would create an imaginary sale of the straw buyer’s existing home. A real estate purchase contract would be signed documenting the imaginary sale. The sale also explained the source of the down payment of the “new house”, which simplified the approval process.
A similar approach was used to recycle willing straw buyers. MacMullin would use his company or one of his associates to purchase the property that the straw buyer had originally pretended to buy. The “recycled” straw buyer would then enter into a new purchase and obtain a new mortgage for a different property.
Instead of selling a straw buyer’s existing residence, in at least one instance, the lender was advised that the straw buyer would be keeping the existing residence to use as a rental property. MacMullin created a lease to reinforce this story and it was provided to the lender.
Manipulation of background information in the Mortgage Application
In addition to creating false transactions, MacMullin “improved” his straw buyers in order to allow them to qualify for the mortgages they were applying for. Since income is important, one of the improvements that MacMullin employed was to create employment letters and bonus letters. In one instance, MacMullin created an employment letter for a straw buyer’s wife to hide the fact she was receiving payments under the Alberta Income for the Severely Handcapped. He also provided her with a bonus letter to “cover” some of the additional costs associated with the fictional deal.
Other straw buyers had generally good credit, but were saddled with unacceptable levels of debt. Where this was a barrier, the problematic debts, such as credit cards, were paid off by MacMillian. Sometimes the proceeds from the mortgage advance that the straw buyer had qualified for were used to pay this debt post funding. The paid credit card voucher would then be provided to the lender to establish that the payout had been made.
Down payments were another area of concern for MacMullin. Lenders generally wanted to know where the down payment was coming from. As noted earlier, in some instances a false sale was documented. Gift letters were a second strategy. Straw buyer’s parents were asked to sign off promising fictitious gifts of cash for down payments. Where the lender would not accept a gift letter, a ficitious investment account, sometimes with one of MacMullin’s companies, would be used as the source of the down payment.
MacMullin even went so far as to create engagements and same sex relationships to backstop the application. The fact that a straw buyer might be married to someone else was not a deterrent. In one instance, MacMullin stole the identity of one proposed straw buyer who refused to participate in a false relationship.[5]
Incorrect statements regarding the borrower’s principal residence
In order to maximize the amount being borrowed, many of the transactions involved straw buyers claiming that they would be moving into the new property. This allowed them to qualify for high ratio mortgages with minimal down payments. Straw buyers even signed statutory declarations or certificates stating the new property was going to be their principal residence. This, of course, was never going to be the case.
The MacMullin case is not notable because of any originality by the defendant and his associates. Most of the schemes they engaged in have been seen in hundreds of other mortgage fraud cases during this last down turn of the business cycle. However, it provides a compendium of many of the methodologies of the 2006-2009 boom/bust cycle – the “Strawman Cycle”. While we are indeed now wiser to these schemes and are putting systems into place to better identify and thwart them, those of you with perhaps a bit more grey hair will remember the 1980s cycle – the time of the dollar dealers. The more things change….
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] R. v. MacMullin, 2014 ABQB 476, 2014 CarswellAlta 1391, [2014] A.W.L.D. 3866, [2014] A.W.L.D. 3867 (“McMullin”).
[2] Ibid. at para. 143. Italics in original.
[3] One of the saddest features of this case is that the defendant apparently was not content simply to take a large portion of the extra cash – in one instance, he apparently told the owners that the cash that they gave him would be invested and the proceeds would be used to pay the mortgage. In actuality, the “straw buyers”, who presumably thought that they were investing in the house, made the payments. The original owners, who had agreed to the idea because they were cash strapped, ended up paying thousands to the straw buyers to buy their house back.
[4] Although the Justice used the label, “Sale of a MacMullin Property to a Straw Buyer”, the description makes it clear that we are dealing the classic straw man tactic of flipping a property or arranging a skip transfer of the property.
[5] Apparently MacMullin would sometimes use the same straw buyer on a second transaction without getting them to agree or even to sign any documents. All of the documents and information were forwarded to a second mortgage broker for a different deal.
10 Monday Feb 2014
Posted in Foreclosure, Line of Credit
Sometimes the law seems to be something of a pendulum – becoming more or less restrictive as it seeks to find a middle ground that correctly respresents the proper interpretation of the law. The law respecting mortgages which are collateral to lines of credit (“LOC Mortgages”) and other agreements is one area that has experienced such ebb and flow over the last few years.
Bank of Nova Scotia v. Mawer[1] is a recent decision of the Court of Queen’s Bench of Alberta that reflects a more restrictive approach with respect to the enforcement of LOC Mortgages. In Mawer, the Defendants applied for a conventional mortgage from the Bank of Nova Scotia (the “Bank”) in December, 2006 for a conventional mortgage for a revenue property. They provided proof of employment income. The property was appraised at $375,000.00 and the Defendants were approved for a loan that was 75% of the purchase price.
The Bank and Defendants entered into a Scotia Total Equity Plan (“STEP”) agreement which allowed for a variety of different types of loans to be made by the Bank to the Defendants, all secured by the mortgage. A separate agreement was to be signed for each loan.
The mortgage loan of $235,000.00 under the STEP was documented by a Personal Credit Agreement (the “First PCA”) and an initial collateral mortgage registered for the same amount (the “Original LOC Mortgage”).
In May, 2007, the Defendants applied to have their STEP limit increased to include a Scotialine Visa. The Bank considered their employment income and property ownership over 3 properties. The Bank’s underwriting notes indicated that an appraisal of the mortgaged lands would be completed and that that the Defendants’ would have a monthly surplus of rental income.
The property securing the STEP was appraised at $445,000.00 and the STEP limit was increased to $356,000.00, which was 80% of the appraised value. The Defendants signed a Personal Credit Agreement (the “Second PAC”) for the Scotialine Visa. A new collateral mortgage for the appraised value was registered against the property (the “New LOC Mortgage”). The Original LOC Mortgage was discharged.
A second Scotialine Visa account was established in 2008 under the STEP and over the course of 2009 and 2010 the limit was increased 3 times. In each instance, a Personal Credit Agreement was signed by the Defendants which referenced the prior credit limit of $356,000.00 established by the STEP and referred to the security as being the New LOC Mortgage.
Ultimately, the Bank commenced foreclosure proceedings. The property was sold to the Bank for less than what was owed by the Defendants and the issue before the Court was whether the Bank was entitled to a deficiency judgment.
The starting point for the analysis was s. 40(1) of the Law of Property Act[2] which in general terms limits the Bank’s recovery for the debt to the land itself. The Master noted that although s. 40(1) appears to be an absolute prohibition, there are a number of exceptions which could apply. However, the “court must inquire into the whole of the surrounding circumstances at the time of the transaction to determine its substance whatever form it may have taken”.[3]
While additional security beyond the mortgage is generally enforceable, the Court wants to ensure that the lender is not able to indirectly recover a personal judgment on a mortgage simply by re-structuring its security. Put another way, the issue before the Court is whether the lender is trying to “end run” s. 40(1) of the LPA.
The Master reviewed the circumstances to be considered in order to determine whether s. 40(1) should limit the lender’s recovery.[4] One factor was the lack of a covenant to pay in the mortgage.
This factor is a common feature of almost all collateral mortgages. The mortgage is collateral to another document, such as a line of credit agreement, guarantee or a promissory note. The covenant or requirement to pay is contained in that other document. In Mawer, while the New LOC Mortgage was one which did not contain a covenant to pay on its face, it incorporated by reference Standard Mortgage Terms that were registered at the Land Titles Office which did contain a requirement to pay.
Master Smart went on to note that the Original LOC Mortgage was one where the funds were advanced to purchase the lands in question and it was conceded that “the Mortgage Debt acted as Mortgage Debt”.[5] The Master took this as an acknowledgement that the Original LOC Mortgage and the First PCA were caught by s. 40(1) of the LPA.[6]
This portion of the decision makes a good deal of sense. In Stallman, Master Hanebury described the test to be applied was whether the loan and mortgage were “coextensive in form and substance”.[7] From this perspective, it is fairly easy to see that the Original LOC Mortgage would be caught by the restriction on recovery in s. 40(1). The Defendants had applied for a conventional mortgage loan and had been approved on that basis. Viewed together, the STEP agreement, the Original LOC Mortgage and the First PCA were essentially a conventional mortgage loan. The loan was used to acquire the residence and was advanced in a single tranche for a single loan product. For the Bank to concede that the Original LOC Mortgage was caught is correct.
Master Smart then added that not only was the Original LOC Mortgage and First PAC caught by s. 40(1) of the LPA, but “by extension” the New LOC Mortgage was as well.[8] This is a bit more difficult to rationalize. Indeed, the Bank argued strongly against this position.
One of the problems, as Master Smart noted, is that the concept of a mortgage that encompasses a variety of loan facilities was not “contemplated or even conceivable” when s. 40(1) was enacted.[9] Master Smart stated that the Court’s functional analysis was to take into account common sense and commercial reality.
Master Smart noted that the STEP agreement tied all the loans together and linked them to the New LOC Mortgage. While the New LOC Mortgage was for the full amount of the value of the house, the STEP loans were restricted to 80% of the loan to value ratio. His view of the STEP package was that it simply allowed the Defendants to borrow up to the STEP limit without having to remortgage. This analysis was sufficient for Master Smart to dismiss the Bank’s application for judgment for the deficiency and limited the Bank’s recovery to taking title to the property alone.
While this is one perspective on the commercial reality of the underlying transaction, it is important to note that the two lines of credit are actually Scotialine Visas. This is less the situation of a number of additional advances under a mortgage loan and more an extension of a credit limit on a credit card. Moreover, the increases in the credit limit on the second Scotialine Visa account appear to have been done without any reference to the then current value of the mortgaged lands.
Although the above analysis sufficed to dismiss the application, Master Smart chose to continue his analysis. The Bank argued that while the First PCA was for the purposes of financing the acquisition of the mortgaged lands, the Scotialine Visas were personal lines of credit. Moreover the New LOC Mortgage was for more than 75% of the loan to value ratio. The Master simply stated that the protection provided to borrowers by s. 40(1) is given for all mortgages, not just for conventional mortgages. While there have been some exceptions created, they have been in often extraordinary circumstances.
The Bank also asserted that they were looking that the Defendants’ ability to pay rather than solely at the land. Master Smart dismissed this argument by noting that the Defendants couldn’t support the payments being proposed without the rent from the mortgaged premises and concluded that the Bank was not relying upon the ability of the Defendants to pay.
This is somewhat problematic for lenders from a cash flow perspective. One point not argued by the Bank was that these were clearly business loans. It appeared that the purpose of the loans was to acquire income properties, which would, by definition, produce cash flow. Moreover, it appeared that the Defendants already owned a number of income properties when they purchased the mortgaged lands.
The commercial reality was that the cash flow from the mortgaged premises and the other buildings were legitimately part of the income of the Defendants. Once the Defendants owned the mortgaged lands, it made perfect business sense to consider the income from the mortgaged lands to determine whether the Defendants could financially support increased payments. If the Defendants had run a retail business or restaurant from the mortgaged lands, it would have been clear that the income should be considered. The fact that it was a different type of income shouldn’t, at least in our opinion, matter.
Although the Bank did not make this argument, the Master did note that business loans were involved in a number of the cases where s. 40(1) was held to not apply to limit the lender’s recovery. Master Smart noted that those cases were distinguishable as in each instance the loan had been in the context of a commercial or farming operation and the mortgage was a part of a larger bundle of security.
Another issue which hadn’t been raised by the Bank was that the face amount of the New LOC Mortgage was the full appraised value of the mortgaged lands, but no explanation or rationale was given for using that amount. Master Smart noted that the STEP had a lower credit limit that was 80% of that amount. He found that the difference between the two numbers was one of form not substance. This comment is a bit difficult to understand outside of the context of the prior case law. In essence the Master appears to be suggesting that the real limit was the STEP credit limit. The New LOC Mortgage face amount, however, acts as a limit to how much principal advanced under a line of credit will be secured. It is a hard, legal limit that will not change even if the STEP credit limit changes. So while the face amount isn’t determinative, it certainly is not irrelevant. Indeed, as noted earlier, the limits under the Scotialine Visa were increased apparently without any reference to the value of the mortgaged lands or the face amount of the mortgage.
Certainly, not all Masters have taken the same perspective. We have had success in obtaining deficiency judgments for our lender clients in a number of instances, both with business loans for condominium rental properties (Chinook Credit Union Ltd. v. Clarke)[10] and with multi-loan facilities similar to the STEP facility (HSBC Bank Canada v. Pleskie )[11]. It will be interesting to see whether this judgment signals a move by the Court to an even more restrictive approach than currently exists.
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] 2013 ABQB 587 (Master) (“Mawer”).
[2] RSA 2000, c. L-7 (the “LPA”).
[3] Clayborn Investments Ltd. v. Wiegert (1977), 5 AR 50 (S.C. App. Div.) at 59. Other decisions where section 40 have been discussed are: Merit Mortgage Group v. Sicoli, 1983 ABCA 130 quoted in Tuxedo Savings and Credit Union Limited v. Krusky, 1987 ABCA 29 (“Tuxedo”) at para. 8; Ibid. at para. 10, citing Krook v. Yewchuk, 1962 CanLII 62 (SCC). This can include other in rem security. The Court notes that the distinction between indirectly enforcing the covenant and enforcing other security is difficult to state.
[4] These were summarized in Royal Bank v. Stallman, 2009 ABQB 766 (“Stallman”).
[5] Mawer at para. 14
[6] Ibid. at para. 14.
[7] Stallman at para. 21.
[8] Mawer at para. 14.
[9] Ibid. at 15.
[10] Court of Queen’s Bench of Alberta Action Number 1201-10614 (unreported).
[11] Court of Queen’s Bench of Alberta Action Number 1108-00291 (unreported).
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