Tag Archives: Alberta

Careless Discharges Can Result in Chaos

02 Tuesday Mar 2021

Posted by in Foreclosure

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Ksena J. Court and Francis N. J. Taman

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

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

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

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

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

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

Three major lessons for lenders to keep in mind:

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

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

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

[3] Supra note 1 at para. 3

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Lending to Condo Owners – Risky Business?

28 Monday Sep 2015

Posted by in Condominium Fees, Foreclosure

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Ksena J. Court and Francis N.J. Taman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Death changes everything – the interplay between death, bankruptcy and debt

21 Monday Oct 2013

Posted by in Bankruptcy, Foreclosure

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When underwriting loans, lenders should consider not only the assets that the borrower has available but also the assets that would be available in the event that the borrower dies.  Re Cameron Estate[1] is an example of how creditors may be out of luck in the event of the borrower’s death.

Cameron Estate involved the deaths of two doctors.  Both doctors had matrimonial homes which were jointly owned with their wives.  Doctor 1 obtained a $70,000 operating line of credit with the bank.  The security that the bank had against doctor 1 was a General Security Agreement.  Doctor 2 had a $75,000 demand overdraft facility with the bank.  The bank took security against doctor 2 in the form of a General Assignment of Book Debts.  When doctor 1 died, all his payments with the bank were current.  He owed approximately $56,000 to the bank.  Similarly, doctor 2 was also not in default with the bank when he died.  Doctor 2 owed approximately $70,000 to the bank.  In both cases there were insufficient assets in the doctors’ estates to pay the bank.  The main asset of each estate was the matrimonial home, which passed to the wives outside of the doctors’ estates due to the right of survivorship as a joint tenant.

The bank applied for and obtained orders for bankruptcy against each of the doctors’ estates.  Under s. 96 of the Bankruptcy and Insolvency Act,[2] a trustee in bankruptcy has the ability to apply to set aside transfers of property that have been made by the bankrupt before the bankruptcy for less than fair market value.  This section prohibits a bankrupt from making pre-bankruptcy attempts to defeat the claims of his creditors.  The Trustee in each case refused to take proceedings against the wives to have the transfer of the matrimonial home set aside on this basis.  The bank then obtained a court order allowing it to make the applications.

The bank argued that the transfers of the matrimonial homes to the wives in each case should be set aside because there was no payment by the wives for the transfer that occurred.  As such, the doctors’ half of the value of the matrimonial home should be declared an asset of their estates.  The bank also argued that court should order that the wives held the doctors’ half of the matrimonial home in trust for their estates.

Although these were very creative arguments advanced by the bank, the court rejected both.  In order for s. 96 of the BIA to apply, the bank must show that there was a “transfer” at undervalue that occurred within one year of the bankruptcy.  The court examined whether the wives’ becoming sole owners of the matrimonial homes due to survivorship constituted a “transfer” within the meaning of the BIA.  One of the fundamental features of joint tenancy is the right of survivorship – the surviving joint tenant automatically becomes the owner of the whole property upon the death of the other owner.

The court held that on the death of one joint tenant, the deceased does not “dispose” or “part with” his asset.  Rather, his interest in the jointly held asset is extinguished, which leaves nothing for the deceased to “transfer”.   The court noted that quite often parties intentionally hold assets jointly because they know that upon death the property will not form part of the deceased’s estate.  As the automatic vesting of the matrimonial homes to the wives by their right of survivorship was not a “transfer” under the BIA, the bank’s motion failed.

The court also went on to consider whether the automatic vesting was made at “undervalue”, which was the other element that the bank would have had to prove.  In the court’s opinion, the right of survivorship was acquired when the doctors and their wives acquired the property.  The doctors and their wives provided equal consideration for such right – each party had a risk of predeceasing the other and having nothing.  Marriage is considered an economic partnership and each of the wives acquired a right to the sole ownership of the property at the time the matrimonial homes were acquired with their equal, joint efforts.  The court concluded that the wives had already provided adequate consideration for the right of survivorship.

Finally, the court also refused to find that the wives held the doctors’ share of the matrimonial home in trust for the bank.  Because the court had found that there was adequate consideration provided by the wives and the widows owned the whole of the matrimonial homes prior to the bankruptcies, the estates were not deprived of anything.  The right of survivorship under joint tenancy also provided a juristic reason for a trust not to be implied in this instance.

The lesson to be learned is to ensure that the proper security is taken at the time the loan is granted.  The bank in Cameron Estate obtained security from each of the doctors for their loans, but as it turned out, it took the wrong type of security.  Mortgage security against the matrimonial homes would have protected the bank in this instance.  In Alberta, it is possible for a joint tenant to mortgage only his interest in real property.  Upon the death of the borrower, the surviving joint tenant would then take the property subject to the mortgage.  It is therefore important for lenders to carefully consider the assets that the borrower has, not only during the life of the borrower but also after his death.

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.

Take it to the Limit[ation]

14 Thursday Mar 2013

Posted by in Foreclosure, Limitation Periods

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Francis N.J. Taman and Ksena J. Court

It has long been known in Alberta that once a mortgagor fails to make a mortgage payment, the limitation period for bringing a foreclosure action begins to run.[1]  Recently, the Court of Queen’s Bench considered how the Limitations Act[2] applies to a second mortgage in a situation where a first mortgagee has already started a foreclosure action.

Under the Limitations Act, there is a two year limitation period during which a plaintiff must commence its claim in the court.  If it does not do so and the defendant pleads the failure to sue within the limitation period, the plaintiff’s claim will not be enforceable.

In Toronto Dominion Bank v. Letendre[3], the Toronto Dominion Bank (“TD Bank”) commenced an action to enforce its first mortgage.  After the property was sold, there were excess funds left over to pay subsequent encumbrancers on title.  As there was not enough money available to pay out all of the charges on title, a battle quickly developed between the subsequent encumbrancers.

Community Futures Slave Lake Region (“CFSL”) was the second mortgagee on the property.  The defendant had defaulted on the second mortgage on November 1, 2007 by missing a payment.  The two year limitation period for suing under the mortgage in Alberta would have ended on October 31, 2009.  CFSL never commenced an action to enforce its mortgage because the TD Bank had already started its foreclosure action on February 21, 2009.

It took until August 2010 to sell the property and the sale closed November 5, 2010. After the first mortgagee was paid in full (including its legal costs), there remained $74,197.30 which was paid into Court (the “Fund”).

Alberta Indian Investment Corporation (“AIIC”) and the Canada Revenue Agency (“CRA”) each had writs against the title to the lands that were registered after CFSL’s second mortgage.  If CFSL was paid in full, there were not enough funds left over to fully pay out their writs.  When CFSL brought an application to have the balance of the funds paid out to it, AIIC argued that CFSL should not receive any funds as its claim to the funds was statute barred by the Limitations Act.

The Master who heard the application held that CFSL did not have an enforceable claim to the funds because CFSL had never commenced an action to enforce its mortgage and the limitation period to enforce that mortgage had passed.  CFSL appealed.

Justice Manderscheid reviewed the law surrounding limitation periods for mortgages and noted that the limitation period begins to run once a payment was missed.  However, there were three issues that needed to be resolved:

  1.  Could AIIC, a subsequent encumbrancer, use the Limitations Act as a basis for asking the Court to deny CFSL the right to a share of the Fund?
  2. Had the limitation period begun to run yet?
  3. Did the fact that the limitation period had lapsed mean that CFSL no longer had an enforceable claim to the Fund?

1. Could AIIC, a subsequent encumbrancer, use the Limitations Act as a basis for asking the Court to deny CFSL the right to a share of the Fund?

His Lordship held that the answer to this question was no.  Only a defendant could rely upon the Limitations Act and only if they plead it as part of their defence.  In Alberta, subsequent encumbrancers are not defendants in a foreclosure action except in very limited circumstances.  Justice Mandersheid also ruled that an application to pay out the balance of the funds did not fit in the definition of a remedial order in the Limitations Act.

This is an interesting ruling as it runs counter to the perspective of many practitioners.  It is also inconsistent with another recent Justice level decision,  David M. Gottlieb, Professional Corporation v. Tymkow[4]. In Tymkow, Justice Macleod held that it was open to a subsequent encumbrancer to raise the Limitations Act against another subsequent encumbrancer even though it was not a defendant.

Apparently, neither Justice was aware of the decision of the other.  So it would appear that this particular question remains very much up in the air.

2. Had the limitation period begun to run yet?

Justice Manderscheid noted that if CFSL had commenced an independent foreclosure action, it would have to comply with the Limitations Act and file its claim within two years of default under the mortgage. However, since the TD Bank had commenced its action within CFSL’s limitation period, the situation no longer warranted CFSL, as a subsequent encumbrancer, bringing a separate proceeding respecting the same mortgaged lands.  CFSL could, in essence, “ride the coattails” of TD Bank.

This portion of the decision is intriguing but raises risks for mortgagees.  The wording suggests that the bringing of a proceeding by the first mortgagee means that the limitation period for the subsequent mortgagees and writholders ceases to run.

What is not clear is what would have happened if the TD Bank mortgage had been paid out and the mortgage discharged.  Would CFSL have had an additional eight months (the amount of their limitation period that had remained when TD Bank had filed their action) or would the limitation period start anew?  Would CFSL’s limitation period simply be deemed to have expired, leaving CFSL at risk of not being able to recover under its mortgage?  In the absence of clear answers from the Court to these questions, it is best for mortgagees who hold subordinate positions to err on the side of caution and at a bare minimum file a Statement of Claim within 2 years of the first default.

  1. Did the fact that the limitation period had lapsed mean that CFSL no longer had an enforceable claim to the Fund?

The Court held that the present law was that the Court cannot give effect to a limitation period that the defendant had not pled nor tried to plead.  Unless there was a challenge that the mortgage itself was invalid or that the registration on title was invalid, CFSL did not have to prove that it had an enforceable claim.  It merely had to prove that its charge was registered on title.

It would appear that subsequent encumbrancers are still entitled to share in the proceeds of a sale under a foreclosure if they miss a limitation period after a prior mortgagee has started their action.  The wording of the Letendre decision would suggest this might also be the case if the limitation period expired prior to the first mortgagee filing.  However, given all the remaining ambiguities of the case and the contradictory decisions of the Court on whether subsequent encumbrancers can rely upon a limitations defence that has not been plead by a defendant, it would be prudent for mortgagees to file statements of claim within 2 years of the first default in order to protect their position should the prior mortgagee’s action be discontinued for any reason.

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]For a summary of the law under the prior Limitations of Actions Act (Alberta) and an analysis under the current Limitations Act (Alberta), see R. P Choma Financial and Associates Inc. v. McDougall, 2008 ABQB 359.

[2]RSA 2000, c. L-12 (the “Limitations Act”).

[3] 2012 ABQB 323 (“Letendre”).

[4]2012 ABQB 262. (“Tymkow”)