Source: https://albertaforeclosureblog.com/tag/foreclosure/
Timestamp: 2019-04-25 10:20:49+00:00

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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 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, 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.
Bankruptcy – it’s not the end!
Under the Law of Property Act, 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, 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!
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. Recently, the Court of Queen’s Bench considered how the Limitations Act 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, 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.
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?
Had the limitation period begun to run yet?
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. 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.
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.
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.
RSA 2000, c. L-12 (the “Limitations Act”).
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 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. 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. 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.
 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.

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