Author Archives: ksenacourt

Careless Discharges Can Result in Chaos

02 Tuesday Mar 2021

Posted by in Foreclosure

≈ Leave a comment

Tags

, , , , , , , , ,

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

Advertisement

COVID 19 UPDATE #3 – Alberta

01 Monday Jun 2020

Posted by in Bankruptcy, Foreclosure

≈ Leave a comment

Tags

,

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

13 Wednesday May 2020

Posted by in Foreclosure

≈ Leave a comment

Tags

, , , , , , , , , , , ,

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 – Alberta

08 Wednesday Apr 2020

Posted by in Foreclosure

≈ Leave a comment

Tags

,

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. 

Appraisals

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.

Applications

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.

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

04 Monday Mar 2019

Posted by in Foreclosure, Line of Credit

≈ Leave a comment

Tags

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!

28 Monday Jan 2019

Posted by in Foreclosure

≈ Leave a comment

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.

[1] http://www.albertaforeclosureblog.com

[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

Watch Your Wording

15 Thursday Mar 2018

Posted by in Foreclosure

≈ Leave a comment

Tags

, , , , , ,

Ksena J. Court and Francis N. J. Taman

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

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

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

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

[1] 2017 ABQB 774 (Alta. Master)

Legal Costs in Condominium Proceedings – A Province Divided

04 Wednesday Oct 2017

Posted by in Condominium Fees, Foreclosure

≈ Leave a comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[8] Justice Decision at para. 82.

Too much reliance can be a bad thing

16 Thursday Mar 2017

Posted by in Foreclosure

≈ Leave a comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[3] Supra, at para. 7

[4] Supra, at para. 20

WRITHOLDERS – NO LONGER BOTTOM OF THE BARREL

22 Wednesday Jun 2016

Posted by in Civil Enforcement Act, Foreclosure, Writs

≈ Leave a comment

Tags

Ksena J. Court and Francis N.J. Taman

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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