Tag Archives: Foreclosure

Watch Your Wording

15 Thursday Mar 2018

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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)

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The Boundaries of the Interest Act

31 Tuesday May 2016

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Ksena J. Court and Francis N. J. Taman

In foreclosure proceedings, we are often asked by lenders why certain default fees, other charges or interest rate changes that are clearly chargeable based upon the terms of the mortgage are not collectable through the Court proceedings.  Our answer has been that in part it is because some Masters or Justices feel that such fees, charges or interest rate changes are a “penalty” under the Interest Act[1].  The Supreme Court of Canada recently released its decision confirming what fees and interest can and cannot be charged in mortgages.

In Krayzel Corp. v. Equitable Trust Co.,[2] which is commonly referred to by the Calgary Bar as the “Lougheed Block” case, Lougheed Block Inc. (“Lougheed”) granted a mortgage to Equitable Trust Company (“Equitable”) to secure a $27 million loan.  The initial interest rate in the mortgage was 2.875% per annum.  When the mortgage matured, Lougheed and Equitable agreed to a renewal for a 7 month term.  The interest rate in the renewal was prime plus 3.125% for the first 6 months and then 25% for the 7th month.  The term of the first renewal expired on March 1, 2009.

On April 28, 2009, the parties entered into a second renewal agreement which was made effective as of February 1, 2009 (a month before the expiration of the first renewal period).  Under the second renewal agreement, the interest rate was 25% per annum.  Lougheed was required to make monthly interest payments.  However, the monthly “pay rate” was not at the 25% rate of interest.  Rather, the “pay rate” was set at 7.5%, or prime plus 5.25%, whichever was greater.  The difference between the stated rate of 25% and the “pay rate” was to accrue to the loan, and if Lougheed did not default then the accrued interest would be forgiven.

As one might guess, since the matter was being litigated, Lougheed defaulted (in its first payment) under the second renewal agreement and Equitable sought payment at the 25% interest rate.  Lougheed claimed that the interest rate changes infringed the Interest Act.

Section 2 of the Interest Act states that a person can contract for any rate of interest that is agreed upon, except of course if it violates anything else stated in the Interest Act, or any other piece of legislation.  Section 8 of the Interest Act is one of those limiting sections.  It states:

No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property…that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

One of the purposes of s. 8 is to “protect landowners from charges ‘that would make it impossible for [them] to redeem, or to protect their equity’”.[3]  Essentially, if the borrower is already in default, the legislators felt that it was unfair for the mortgagee to be able to put the borrower further in the hole by charging a default fee or higher rate of interest on default.

The majority of the Court held that the substance of the clause will determine whether it violates the Interest Act, not the labels used.  It matters not whether the mortgage terms are described as a “bonus”, “penalty”, “discount”, or “benefit”.  “If its effect is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended”. [emphasis added][4]

The majority of the Court made it clear that an interest rate increase due solely to the passage of time, and not due to a default, does not offend the Interest Act.  As such, the terms of the first renewal agreement were fine.  However, the terms of the second renewal agreement were not.  The effect of the second renewal agreement was “to reserve a higher charge on arrears (25 percent) than that imposed on principal money not in arrears (7.5 percent, or the prime interest rate plus 5.25 percent).”[5]  Essentially, the higher interest rate only came into effect in the event there was a default and therefore imposed a penalty.  It mattered not that the terms described as a discount or that the higher interest rate would be “forgiven” if there was not default.  The Court allowed interest at the higher of 7.5% and prime plus 5.25%.

In light of this decision, lenders should review their mortgage paper and may wish to reconsider the effect that certain mortgage terms have and whether or not certain fees, charges or interest will be collectible.

 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] R.S.C. 1985, c. I-15, ss. 2 and 8.  Fees and charges are also disallowed by the Court as penalty under Section 10 of the Judicature Act, R.S.A. 2000, c. J-1, which allows relief from forfeiture for all “penalties and forfeitures”.

[2] 2016 SCC 18 (S.C.C.)

[3] Ibid. at paragraph 21

[4] Ibid. at paragraph 25

[5] Ibid. at paragraph 35

Another Mortgage Fraud Empire Crumbles

01 Monday Dec 2014

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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 the Real Estate Purchase Contract;
  • Manipulation of background information in the Mortgage Application; and
  • Incorrect statements regarding the borrower’s principal residence.

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.

Mortgage Fraud with a New Twist

21 Wednesday May 2014

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Toronto-Dominion Bank v. Salekin (“Salekin”)[1] is “yet another case where rogues have taken advantage of a person who was willing to sign legal documents with little care for their meaning.”[2]  In the typical mortgage fraud, the “straw buyer” is induced by one or more individuals who are behind the mortgage fraud scheme (often referred to in the cases as “rogues”) to sign mortgage documents.  The inducement is often the payment of money accompanied with a promise that the straw buyer will only have to hold the property and mortgage in their name for a few months.  Salekin is a recent decision from the Alberta Court of Queen’s Bench that involved such a straw buyer.  However, in this instance, the straw buyer ended up with a mortgage in his name without having to sign any mortgage documents.

Mr. Salekin was approached by an individual (“Mr. D.”) who offered an investment opportunity or joint venture in a property.  Mr. D promised to pay Mr. Salekin a $5,000 “kickback” for participating.  In order to “expedite the process”, Mr. D asked Mr. Salekin to sign a Power of Attorney.  Mr. D promised that the Power of Attorney would only be used if the property came up for sale and Mr. Salekin was out of the province or not available.  The only document that Mr. Salekin signed was the Power of Attorney, but it was this document that allowed the fraud to be perpetrated and which left Mr. Salekin holding the bag at the end of the day.

A Power of Attorney is a document that authorizes another person, called the attorney, to step into your shoes and deal with your property as if it was their own.  A Power of Attorney document can be limited by giving the attorney authorization to deal with only certain property, or it can be very broad and give the attorney unlimited powers to deal with all of your property.  The Power of Attorney that Mr. Salekin signed was a general power of attorney that gave another individual (“Mr. L”) authorization to sign any documents with respect to the property that was being purchased.  It did not contain any statement that it would only be used if Mr. Salekin was unavailable as he alleged was promised by Mr. D.

Unbeknownst to Mr. Salekin, someone had already forged his signature on a purchase contract and a mortgage commitment for the property.  The Power of Attorney was then used to sign further documents respecting the purchase of the property, which included a transfer of the property into Mr. Salekin’s name and a high ratio mortgage in favour of the bank.  As is usually the case, the mortgage payments were not made and the mortgage went into default.  It was at that point in time that Mr. Salekin became aware that he was the registered owner of the property with a mortgage to the bank.

In the foreclosure proceedings, the property was sold to the bank.  Because the balance outstanding under the mortgage was higher than the fair market value of the property, the bank sought a judgment against Mr. Salekin for the difference.  At first instance, the Master denied the bank’s application.  The bank appealed to a Justice of the Court of Queen’s Bench.

The Court held that it was not necessary for the bank to have to prove that Mr. Salekin or someone authorized by him had signed the purchase contract or the mortgage commitment.  The bank had acknowledged that the signatures on these documents were forged.  This was not a sufficient defence for Mr. Salekin as he had signed the Power of Attorney which authorized Mr. L to sign any documents respecting the property for him.  The Court concluded that if the purchase contract and mortgage commitment had not already been signed, Mr. L still would have been able to sign those documents for Mr. Salekin by using the Power of Attorney and so the result would have been the same at the end of the day.

The Power of Attorney enabled the purchasing of the property and the placement of the mortgage against it.  While the Power of Attorney may have been used contrary to the conditions that were promised to Mr. Salekin, and Mr. Salekin may have a claim against Mr. L or Mr. D for breach of their promises, this was not a defence to the bank’s claim against him.  The bank had no notice of any conditions of use placed against the Power of Attorney.

The Court also noted that Mr. Salekin was not a completely innocent party in the transaction.  He was prepared to act as the straw buyer.  While Mr. Salekin did not receive the “kickback” he was promised, by signing the Power of Attorney, he put Mr. D or Mr. L in a position to perpetrate the fraud.  Mr. Salekin therefore did not come to the Court with “clean hands”.[3]

Mr. Salekin also attempted to argue that the bank was negligent in failing to review all of the documentation submitted to it when it granted the mortgage.  His argument was that the bank ought to have known that the Power of Attorney was not legitimate and that the mortgage was not authorized by Mr. Salekin.  This “failure of due diligence” argument was again clearly rejected by the Court as a defence.  The bank “was under no obligation to inquire into the validity of the Power of Attorney.  Further, the Bank’s diligence procedures were for its own protection, not the borrower’s, and it was entitled to follow or waive those procedures as it saw fit.”[4]

What is most interesting about Salekin is that it is a deviation from the standard straw buyer fraud scenario.  With the use of the Power of Attorney document, the straw buyer need only sign one document and does not have to attend a lawyer’s office in order to do so.  This innovation certainly reduces the risk to the “rogues” as the straw buyer no longer attends the lawyer’s office and may therefore not have the opportunity to obtain legal advice regarding the legality of the transaction or their liability under the mortgage.

While the bank was successful in obtaining judgment against the borrower in this case, and clearly does not have any obligation to inquire into whether the Power of Attorney that is presented to it is legitimate, it may be prudent during the underwriting and loan transaction process to do so in any event.  As the inventiveness of the “rogues” involved in mortgage fraud continues to evolve, the banks will clearly need to continually adapt their underwriting practices to reduce the risk of having to deal with these scenarios.

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] 2014 ABQB 168 (Alta. Q.B.).

[2] Justice Clark quoting from MCAP Service Corp. v. Halbersma, 2013 ABQB 185 (Alta. Q.B.) at para. 1.  Our blog post regarding this decision was posted May 22, 2013 (see https://albertaforeclosureblog.com/2013/05/22/if-it-sounds-too-good-to-be-true/).

[3] Salekin, at para.39.

[4] Salekin, at para 43.

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

21 Monday Oct 2013

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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.

Bankruptcy – it’s not the end!

21 Wednesday Aug 2013

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Under the Law of Property Act,[1] a mortgagee is limited to recovery of the property unless the mortgage is high ratio, insured by CMHC, or granted by a corporation.  If one of these latter circumstances exist, then the mortgagee is entitled to both recovery of the property and a judgment against the mortgagor for the deficiency in the event that the amount owed under the mortgage exceeds the value of the property.  The mortgagee can then take steps to collect on the deficiency judgment in order to make itself whole.

Unfortunately for mortgagees, the deficiency judgment is an unsecured debt, and if the mortgagor makes an assignment into bankruptcy, the mortgagee ends up lumped in with all of the other unsecured creditors ranking at the bottom of the distribution list of the bankrupt mortgagor’s estate.  If bankruptcy occurs, should the mortgagee give up?  Is bankruptcy the end of the mortgagee’s rights to collect?  As with most things, timing (in this case, the timing of the bankruptcy) is everything.

In CIBC Mortgage Corp. v. Stenerson,[2] the Donalds granted a mortgage to CIBC which was insured by CMHC.  Subsequently, the Donalds transferred the property to the Stenersons and by operation of the Land Titles Act, the Stenersons became liable for payment of the mortgage.  In March 1996, Cherie Stenerson assigned herself into bankruptcy.  For seven months after the assignment, she continued to make the mortgage payments.  In November 1996, the mortgage went into default, and in December 1996, Ms. Stenerson was discharged from bankruptcy.  Foreclosure proceedings were started by CIBC in February 1997.  Because the amount owed under the mortgage exceeded the value of the property, CIBC was granted a deficiency judgment against Mr. Stenerson.  The issue before the Court was whether CIBC was also entitled to a deficiency judgment against Ms. Stenerson given her bankruptcy.

The Court held that yes, CIBC was entitled to its deficiency judgment because Ms. Stenerson had affirmed the contractual relationship with CIBC by making the required mortgage payments during the bankruptcy.

The mortgagee’s right to a deficiency judgment is therefore dependent upon the timing of the date of bankruptcy and the date that payments are made.  If the default under the mortgage occurs before the date of bankruptcy and no further payments are made under the mortgage, then the mortgagee will be limited to recovery of the property and a declaration of the deficiency.  The mortgagee will then be able to register a proof of claim in the bankruptcy for the amount of the deficiency, but will rank alongside the other unsecured creditors.  However, if even one payment is made under the mortgage after the date of bankruptcy, the mortgage is affirmed and the mortgagee will be entitled to claim for both the property and any deficiency judgment against the bankrupt mortgagor.  Bankruptcy is not always the end to the rights of creditors!

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.

If It Sounds Too Good To Be True…

22 Wednesday May 2013

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Francis N. J. Taman and Ksena J. Court

It’s always amazed us that no matter how good the economic situation and how much money can be made legitimately, there is always someone who seems to want more.  The popping of the property value bubble of the mid-2000s in the Calgary real estate market exposed a number of schemes that exploited the system in ways that were at best unethical and, in some instances, were in fact fraudulent.  “Straw man” schemes appear to have been one of the more prevalent methods employed to defraud banks.

The scheme itself is simple, although each one seems to vary slightly in the details.  The rogues behind the scheme (as we will refer to them) find an individual (the “straw man”) and offer them an opportunity to make some money.  This is sometimes characterized as an investment opportunity or as providing bridge financing.  Usually these individuals are paid $4000-5000, although we have seen payments as high as $20,000 in some instances.

The rogues use the straw man to apply for a loan and purchase a house.  The purchase price is usually artificially inflated.  When the mortgage goes into default, the bank is left with a property that is worth far less than it thought.  Since many of these schemes involve insured mortgages, the straw man is also left with something to remember the rogues by – a large judgment against him.

While the property in these straw man deals is usually sold back to the bank, the applications for deficiency judgments are occasionally contested by the straw man.  Often the bank is awarded the deficiency judgment on a summary basis.  Recently, however, we had an exception.

MCAP Service Corporation v. Halbersma[1] was a trial decision of Madam Justice R.E. Nation of the Court of Queen’s Bench of Alberta.  There were some unusual twists to the facts in this instance, but the basic mechanism of the scheme involved a classic straw man scenario. 

The Defendant, Halbersma, had immigrated to Canada from the Philippines in 1975.  There was no suggestion, however, that she was unable to understand the nature of a purchase transaction involving a mortgage.  Indeed, Halbersma had purchased a condominium in Calgary on her own and so was familiar with the process of obtaining a loan and executing paperwork for the transaction at a lawyer’s office.

Halbersma ran into an old work acquaintance (“M”) in the summer of 2007.  Her story was that M owned a business that helped foreign workers gain entry to Canada.  Halbersma paid M $10,000 to help her nephews and nieces come to work in Canada. 

Later, Halbersma claims, she gave M $5000 to invest, but she said it was a loan.  At her request, a document was drawn up which stated that $5000 had been paid to M’s company and the investment would receive interest at 20% for 2 months.

Halbersma said she insisted on more formal documentation, apparently for the whole $15,000.  She was taken to a lawyer’s office.  There, according to her, she met with a woman and was given a pile of documents to sign.  She was told to sign by the Xs.  She did so.  She did not read the documents to see if they outlined the deal that she had with M.  No one, according to Halbersma, explained the documents to her.  She acknowledged she didn’t ask any questions nor did she indicate to anyone that she didn’t understand the documents.

The documents themselves actually were for the purchase and financing of a residential property in Calgary.  This included a CMHC insured mortgage in favour of the Plaintiff.    Not surprisingly, shortly thereafter the mortgage went into default. 

The Plaintiff sued Halbersma and sought a judgment for any shortfall under the mortgage.  Halbersma defended the action.  The property was sold to the Plaintiff for its then fair market value, leaving a shortfall on the mortgage of approximately $139,000.00.

The matter went to trial.  At trial, the paralegal who met with Halbersma and the lawyer testified that they didn’t recall specifically meeting the Defendant.  However, the paralegal testified that her normal practice was to go through the documents with the individual and explain about the purchaser’s liability under the CMHC insured mortgage.  She would then put an X next to where the individual was to sign or initial.  The paralegal indicated that she was always alert for any sign that the individual didn’t understand the documents or was being coerced.  Justice Nation rejected Halbersma’s version of the facts and accepted that the paralegal did in fact explain the documents in accordance with her usual practice.

Halbersma raised a number of defences to avoid liability.  Most were simply unsupported by the facts, but two were examined by the Court in detail.  The first was the allegation that the Plaintiff was barred from recovering the shortfall due to the conduct of the lawyer, who had acted for both the Plaintiff and Halbersma.  A number of irregularities were pointed out.

  1. The pre-authorized debit form was clearly not signed by Halbersma.  In fact, it appeared to have been signed by M. No one remembered the document being signed, but it was forwarded by the lawyer to the Plaintiff as part of an 18 page fax requesting funds be advanced to close the sale.
  2. The transaction involved a skip transfer with a large increase in purchase price, which the lawyer was aware of.[2]
  3. As a part of the transfer, the paralegal had signed an affidavit of transferee stating that the value of the property was $380,000.  This happened after Halbersma swore an affidavit in front of the paralegal stating the property was worth $445,000. 

Halbersma argued that this proved that the lawyer and the paralegal were parties to the fraud.  As the lawyer acted for the Plaintiff, it was argued that the Plaintiff was tainted by this involvement and should be unable to enforce its mortgage.  Although not stated in the decision, the usual basis alleged for this argument is the fact that a solicitor at common law is an agent of its client.  The client is therefore bound by any actions of the lawyer and is deemed to know what the lawyer knows.

The Court cited with approval Isaacs v. Royal Bank of Canada[3] which noted that the difficulty with this argument is that in the usual residential real estate purchase, the lawyer acts in a dual capacity, as lawyer for both the bank and the borrower.  As such, the lawyer’s knowledge and conduct is attributed to both parties.

Justice Nation also held that the facts set out above were simply not sufficient to establish that the lawyer or the paralegal were directly involved in the fraud.  While they did not follow “best practices” this did not equal fraud.  Finally, the Justice accepted the evidence of the lawyer and the paralegal that skip transfers were not unusual.

The second significant defence raised was that the Plaintiff had failed to exercise diligence in reviewing the transaction to avoid the fraud being perpetrated against it.  It was argued that if the Plaintiff had been more diligent, M could not have perpetuated the fraud. 

In dealing with this issue, the Court began by approving of two of the findings in the decision of MCAP Service Corporation v. Molina-Tan[4]. Specifically, Her Ladyship held that the conditions for the advancement of a loan are the lender’s and the lender can choose to enforce, alter or waive those conditions.  She also held that there is no obligation on lenders to look beyond the documents provided to them in apparent good faith by borrowers.

Justice Nation then cited Isaacs, noting that a lender, per se, has no special relationship with a borrower and has no obligation to take steps or examine documents for the protection of the borrower.  There must be special knowledge held by the bank or exceptional circumstances that would change the nature of the normal debtor-creditor relationship to one that would attract a duty to protect the borrower in some fashion.

Finally, Justice Nation addressed a number of 2012 cases where the banks’ summary application for a deficiency judgment were dismissed due to some potential evidence of the bank’s employee or agent being involved in the fraud.  She held that these were not a new line of cases that somehow limited the lender’s ability to enforce its judgment.  Rather they were situations where there was a need for a trial to evaluate whether there was in fact any involvement by the bank’s employee or agent in the scheme.

In the end, the Plaintiff was awarded judgment for the full amount of the shortfall.  Halbersma is an important decision for a number of reasons beyond being a rare trial decision on a straw man mortgage fraud. 

First, it has made it clear that mere mistakes and irregularities in a transaction are not sufficient on their own to provide a defence for participants in a straw man scheme.  In this instance, the Court noted specifically that the lawyer probably had “not followed best practices”.  

Second, the decision as acknowledged that skip transfers are legitimate transactions.  Even when combined with what arguably were mistakes by the lawyer, skip transactions do not automatically lead the associated mortgage transaction to be defeated by the straw man.

Third, the Court appears to affirm the principal that the knowledge and omissions of a lawyer in a dual representation situation will be attributed to both clients.  Arguably, that neither party will be able to rely upon any potential involvement by the solicitor in the fraud to set aside the transaction.   This is a fair outcome in situations where the lender had no real knowledge of what was going on in the background.  Moreover, in light of the fact that the practice in Alberta residential deals is for the borrower to choose the lawyer and the bank to use that same lawyer as well, it more truly represents the reality of the situation.  The lender usually has no real connection with its solicitor and no ongoing relationship that would lead them to have confidence in this solicitor.  They are merely relying upon the fact that lawyers are supervised by the Law Society and, like most people, are generally honest.

Fourth, Justice Nation has affirmed that a lender’s conditions and due diligence are for the benefit of the lender.  A borrower cannot rely upon the fact that a lender’s condition was unfulfilled or that their due diligence was not exhaustive as a defence.   That would suggest that any gaps or, arguably, even errors made in the underwriting will not be fatal to a lender provided they fall short of actual knowledge of the fraud.  While this would seem obvious on its face, defendants have repeatedly attempted to use lender’s conditions and their due diligence as a defence in Alberta.

Halbersma is a significant tool in the box for lender’s counsel.  It provides a trial level decision that undermines a number of the usual defences brought forward by straw buyers. 

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 185.  In the interests of full disclosure, Ksena Court was the trial counsel for the Plaintiff in this Action.

[2] The purchase that had been undertaken actually involved two transfers.  The first was from a third party to a company controlled by M.  The second was from M’s company to Halbersma.  The two transfers happened one after the other on closing.  This is termed a skip transfer. Both the lawyer and the paralegal testified that skip transfers were not unusual at the time of the transaction because property values were rising quickly.

[3] 2010 ONSC 3527 aff’d 2011 ONCA 88 (“Issacs”)

[4] 2009 ABQB 472, 503 A.R. 1 (Q.B.).  Again in the interests of full disclosure, this was also one of the cases in which we represented the Plaintiff.

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”)

You Owe, You Owe, How Much I’d Like to Know

26 Tuesday Feb 2013

Posted by in Foreclosure

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Francis N.J. Taman and Ksena J. Court

It’s always interesting how basic assumptions are rarely challenged and when they are, it creates no end of difficulty.  For many years, most mortgage lenders would honour a request by a subsequent encumbrancer for a letter outlining the balance owing on their mortgage.  However, the decision of the Ontario Court of Appeal in Citi Cards Canada Inc. v. Pleasance[1] has had a chilling effect on this practice.  Thankfully, a recent decision by Master Schlosser of the Alberta Court of Queen’s Bench, holds that, at least in Alberta, mortgages in second or later position still have access to this information.

In Citi Cards, the Plaintiff, Citi Cards Canada Inc. obtained judgment against the Defendant and sought to sell the Defendant’s house to satisfy that judgment.  There was both a first and a second mortgage on the house.  By law, before the house could be sold, the Sherriff required mortgage discharge statements from the two mortgagees showing the outstanding balances of the mortgages.  The mortgagees refused to provide the discharge statements on the grounds that it might violate the Defendant’s privacy rights under the Personal Information Protection and Electronic Documents Act.[2]  The Plaintiff brought an application to compel the information.

The Justice originally hearing the application held that the disclosure of the mortgage statement was in fact prohibited by PIPEDA and dismissed the application.  He also held that even if that had not been the case, he would not have ordered the production as the Plaintiff could have obtained that information by examining the Defendant or his wife in aid of execution.  The Ontario Court of Appeal upheld the decision.

This decision, not surprisingly, has lead to a great deal of concern by mortgagees.  Privacy issues are taken very seriously by lenders.  At the same time, the outstanding balance of the prior mortgage can be a key piece of evidence in a foreclosure or other enforcement proceeding.  The question was whether other Courts would follow the Ontario Court of Appeal’s decision.

It was not surprising that the next court decision was not long coming.  In November of 2011, the Toronto-Dominion Bank (the “TD Bank”) made an application to compel a prior mortgagee to disclose the balance of its first mortgage as part of a foreclosure proceeding.[3]  The TD Bank was in the process of making an application for a Redemption Order.  As the TD Bank was in second place, in order to establish a reduced redemption period, the TD Bank needed to put into evidence of the amount that was outstanding under the first mortgage.

TD Bank applied, without notice to the first mortgagee, to have the Court compel the first mortgagee to provide a payout figure on its mortgage.  Master Schlosser reviewed the Citi Cards case.  He found that the case was distinguishable in that Citi Cards dealt with a request from a writholder rather than from a subsequent mortgage holder.  Even if it had not been, however, he would have declined to follow it.

He noted that in order for the Court to properly determine the redemption period to be granted in a foreclosure proceeding, the Court needs to know more than the face value of a mortgage as registered against title.  It needed to know the actual amount owing to the prior mortgagee.

He noted, as well, that the “Foundational Rules” under the Alberta Rules of Court require the Court to facilitating actions as quickly as possible at the least expense.  These Rules oblige the Court to  provide effective, efficient and credible remedies.  Since, in Alberta practice, prior encumbrancers are not made parties, some means must be created to allow the plaintiff mortgagee to obtain the information that is required for the Court to grant a proper redemption period.  The alternative is to require prior encumbrancers to become parties and to provide disclosure pursuant to the Rules.  This process would come at a very high cost to the defendant, the person whose rights are being protected.

Master Schlosser noted that it could not be the intention of privacy legislation to sterilize the Defendant’s other rights.  On that basis, he held that it was not inappropriate to require disclosure of the mortgage balance.  He also noted that it was an appropriate circumstance to grant the Order without notice.  If the prior mortgagee objected, they could return to Court to challenge the Order.

As such, he ordered the prior mortgagee to provide the payout figures as requested by The TD Bank.

This is a positive decision for both mortgagors and mortgagees.  Mortgagors benefit from reducing the cost of the foreclosure process and by ensuring that accurate information is brought forward to the Court regarding prior mortgage balances.  Usually, though not always, the mortgage balance is below the face value of the mortgage.  This may mean an increased redemption period.

Mortgagees benefit by maintaining the more streamline process that has become the norm in Alberta.  Prior mortgagees, who will be largely unaffected by the decision, do not have to be made parties to the foreclosure action and served.  At the same time, there is an expedient and cost effective way to get the information that is required to move the foreclosure action forward.

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] 2011 ONCA 3 (CanLII) (“Citi Cards”)

[2] S.C. 2000, c. 5 (“PIPEDA”)

[3] The Toronto-Dominion Bank v. Sawchuk, 2011 ABQB 757 (Master) (“Sawchuk”).  In the interests of full disclosure, it should be noted that the counsel for the TD Bank was our associate Kari Sehr, who practices out of our Edmonton office.