Condominium Corporation No. 082, 6970 v 1117398

Court of Queen ’ s Bench of Alberta Citation: Condominium Corporation No. 082 6970 v 1117398 Alberta Ltd., 2012 ABQB 233 Date: 20120411 Docket: 1003 15475 Registry: Edmonton Between: Condominium Corporation No. 082 6970 Plaintiff - and - 1117398 Alberta Ltd., Second Wind Enterprises Inc., Everest Builders Ltd., Becker Elzein & Associates Ltd., Omar Elzein, R. Saunder Architects Ltd., Raj Saunder, W. Jappsen Architect Ltd., Werner Japsen, Apem Engineering Ltd., S.K. Metha, the National Home Warranty Programs Ltd. Carrying on Business As National Home Warranty Program and David Ross Ives, Everest Builders Ltd.

Defendants _______________________________________________________ Reasons for Judgment of the Honourable Mr.

Justice Donald Lee _______________________________________________________ [ 1 ] Condominium Corporation No. 0826970 (the “Condominium Corporation”) is the Respondent in the present appeal of 1117398 Alberta Ltd. (“111") and 1209900 Alberta Ltd. (“120") who seek to appeal the decision of the Master who on January 13, 2012, granted an order allowing the attachment order registered against the condominium units owned by 111 in Condominium Plan 082 6970 to be discharged upon closing of an Offer to Purchase and registered the attachment order to be registered against units owned by 120 in Condominium Plan 091 0178.

Background Facts and Procedural History

[ 2 ] On July 6, 2011, an attachment order was granted in favour of the Condominium Corporation on a without notice basis. [ 3 ] The Condominium Corporation then brought an application on notice to 111 to continue the attachment order.

The application was heard on July 21, 2011 and was adjourned to allow questioning on the affidavit of David Ross Ives. [ 4 ] On August 26, 2011, an application was heard to continue the attachment order and Master Breitkreuz granted the extension as he was of the opinion that the matter had already been decided. [ 5 ] 111 brought an application to set aside the attachment order and address the issue as to whether the equitable doctrine of marshalling was appropriate in relation to the proceeds from the foreclosure by the first mortgagee, Lanyard Holdings Inc. (“Lanyard”), on the units owned by 111. [ 6 ] A special application was heard before the Master on November 29, 2011, where written submissions were submitted.

The Master was again of the opinion that the validity of the attachment order was already decided and adjourned the marshalling issues sine die . [ 7 ] The Condominium Corporation learned that the units owned by 111 were sold with a closing date of January 13, 2012. There was evidence that the first mortgagee, Lanyard also held security over a condominium project in Okotoks owned by 120, and the Condominium Corporation sought a direction that the equitable doctrine of marshalling be applied to those units.

The January 13, 2012, Order of the Master directs that the attachment order be registered on those Okotoks units owned by 120. Issues [ 8 ] The present appeal raises the following issue: (

a) Has there been an appropriate direction of “marshalling” with respect to the proceeds from the Lanyard foreclosure by the attachment orders issued herein?

Analysis [ 9 ] The Appellants submit that the Master erred in concluding that “marshalling” applied to th Okotoks units owned by 120, after having previously granted an already extraordinary prejudgment attachment Order against 111 in another Condominium Plan. [ 10 ] Marshalling is a doctrine rooted in a longstanding principle of equity which essentially provides that a “senior” creditor, or a creditor with access to multiple funds to satisfy its debt, should marshal its enforcement in such a way as to cause as little harm as possible to a “junior” creditor, or a creditor with access to only one of the same funds.

Equity directs that the senior creditor look first to those funds that the junior creditor does not have access to, in order to avoid needlessly wiping out the junior creditor’s security. [ 11 ] Marshalling requires that there be more than one fund to which the senior creditor has recourse, and these funds either belong to the same debtor or relate to the same debt. Marshalling is not available where prejudice may be done to other junior creditors, to third parties, or to the senior creditor’s paramount right to recover its debt.

[12] 111 submits that as a matter of law, marshalling is not available to creditors other than mortgagees, and is not available wherethere is more than one debtor in respect of the same debt. [13] 111 also submits that marshalling in the present circumstances would cause “prejudice”. [14] A definition of marshalling is found in the decisions of Prothonotary Hargrave in Scott Steel Ltd. v Alarissa (The), (FC), [1996] 2 F.C. 883, 1996 CarswellNat 519 and in Bank of Scotland v Nel (The), (FC), [1998] 4F.C. 388, 1998 CarswellNat 1409 In both decisions, Hargrave P. cites the definition from Tetley on Maritime Liens and Claims, BusinessLaw Communications Ltd., 2nd edition, 1998 at para. 100:– Marshalling is the equitable process, whereby the Marshall or the court orders a creditor who has a secured right on more than one res ormore than one fund belonging to the debtor, or security from two or more debtors for the same debt, to exercise his right on the securityin a manner which will be in the best interests of all creditors.

The Marshal or court must also take into consideration the best interests ofthird parties and even of the debtor. [15] The doctrine of marshalling was also discussed in First Investors Corp. v Veeradon Developments Ltd. (1988), 1988 ABCA38 , 84 A.R. 364, 1988 CarswellAlta 9 (C.A.) (“Veeradon”).

Veeradon is a 1988 decision by three different Justices of Appeal,who concurred in the result but not in their reasons for judgment. 111 relies on a number of statements from Veeradon. [16] Veeradon concerned a senior creditor, First Investors, who held a first mortgage over properties described as “A” and “B” inthe Reasons for Judgment. A junior creditor, Butler, held a second mortgage on property “B” and no security on property “A”.

This wasdescribed by Beizil J.A. in his reasons as “the classic textbook foundation for marshalling between mortgagees.” [17] In Veeradon, Butler had sought to convince the Court that First Investors should have to accept a higher, appraised value forthe properties, as opposed to an apparent lower actual value.

Butler then argued that the Court could not simply order the properties forsale, but under the doctrine of marshalling First Investors had to purchase property “A” at the higher appraised value (referred to in theReasons as a “Rice” order), and then allow Butler to redeem the shortfall in the mortgage amount to First Investors, at which point Butlerwould receive Title to property “B” free and clear. [18] 111 offers Veeradon as authority for the proposition that “nothing [may] interfere with the primary mortgagee’s choice toenforce against either estate”, and that marshalling would cause “interference with Lanyard’s choice of which property to enforceagainst.” [19] In Veeradon, BeIzil J.A. held that the principle of marshalling could not have effect because the order sought by Butlerwould force First Investors to accept a remedy it had not sought: namely the “Rice” order.

Harradence J.A. and Hetherington J.A. bothconcurred with this point as this offended the “paramount right” of the first mortgagee to realize its securities and pursue its remedies “asit pleases.” [20] It is clear from Belzil J.A.’s reasons that the quote from Orde J. in Ernest Brothers Co. v Canada Permanent MortgageCorporation 192047 O.L.R. 362 affirmed (ON CA), 48 O.L.R. 407, 57 D.L.R. 500 (C.A.) was presented in Veeradonin order to explore the definition of what “satisfaction” the first mortgagee was entitled to, in exercising its “paramount right’.

Adoptingthe definition of “satisfaction” by Laycraft J.A. (as he then was) in Can. Permanent Trust Co. v King Art Dev. Ltd. (1984), 1984 ABCA182 , 54A.R. 172 (CA.), Belzil J.A. goes on to point out that the “paramount right” of the first mortgagee was to be repaid inmoney. [21] The term “as it pleases”, relating to this “paramount right” of the first mortgagee, refers to how the right is to be enforced, notagainst whom, as Belzil J.A. explained at para. 16:– The important qualification to marshalling which appears in the authorities cited, and was apparently overlooked below, is that its

application is not to prejudice the “paramount” right of the first mortgagee to realize its securities and pursue its remedies as it pleases.Its primary right is to receive and enforce payment of its debt in money.

It is its election, and its alone, to seek a ‘Rice” order upon termssatisfactory to it, to take the land by final foreclosure or pursue other courses of action such as simply leaving its security in force. [emphasis added] [22] 111 says that it is a qualification of the doctrine of marshalling that a primary mortgagee may enforce against any fund “as itpleases”, without regard for subsequent encumbrancers.

However, Belzil J.A.’s reasons state that a subsequent encumbrancer may notapply the doctrine of marshalling to force the first encumbrancer to accept a method of realization that it did not seek. [23] Belzil J.A. proceeded to explain at paras. 17 and 18 the situation in which marshalling would be appropriate: Equity will not allow the first mortgage to needlessly wipe out the second mortgage by paying itself firstly out of funds derived from theproperties covered by both mortgages.

The first mortgagee must leave as much as possible for the second mortgagee out of funds derivedfrom properties covered also by the second mortgage. In modern practice, the funds derived from sale will be under control of the court,and the court will marshall by simply directing payment accordingly. When marshalling applies, there is really no contest between the first and second mortgagees. The underlying issue is between the secondmortgagee and the mortgagor and its assigns... The sole interest of the first mortgagee is in receiving the money due to it, andmarshalling will not affect that interest.

It is immaterial to the first mortgagee whether it gets its money from one fund or the other.Equity assumes that any reasonable first mortgagee would want to act honourably, and not capriciously, by leaving as much as possiblefor the second mortgagee.... [emphasis added] Marshalling Is Available Where There Is More than One Debtor, and to Creditors Other than Mortgagees [24] 111 also relies on the British Columbia decision of Bancorp Investments (Fund 2) Ltd. v Bhugra Holdings Ltd., 2006 BCSC 893 [“Bancorp”], in arguing both:

a) that marshalling may not be applied to a situation where (as here) there are two debtors granting security for the same debt; and

b) that marshalling is not available to “creditors with unproven claims” or those “whose interest in land arises by statutory charge.” [25] 111 cites and quotes from the two B.C. cases underpinning the reasoning in Bancorp: Hirsh v 467145 B.C. Ltd., [1996]B.C.J. No. 1901 (S.C.) [“Hirsh”]; and Goodman v Parkhurst, (BC SC), [1980] 6W.W.R. 601 (B.C.S.C.)[“Goodman”]. None of Bancorp, Hirsh, or Goodman is binding on this Court. [26] In Narduzzi v Richardson, 2009 BCSC 588 the B.C. Supreme Court dealt with an application for marshalling brought by aBuilders Lien claimant.

The owner of the property objected that the claimant was not entitled to marshalling, relying on Bancorp (therereferred to as “Bhugra”), Hirsh, and Goodman. Burnyeat J. reviewed those cases and their reasoning and found at paras. 20, 23 and 24:– Regarding the decision in Goodman, supra, it should be noted that no explanation is given by Hutcheon, J., as he then was, as to why hehad “many doubts’ whether the doctrine of marshalling applies to a person who has a charge against land created by statute. It should

also be noted that the application was dismissed because the second property which the applicant sought to marshal was in Ontario, andthere was insufficient evidence on the connection between the parties to confer jurisdiction on the B.C. Court. Accordingly, the decisionin Goodman, supra, can be distinguished on the basis that the jurisdiction of the Court was not established.

Regarding the decision in Hirsch, supra, it should be noted that Master Bishop relied on the decision in Goodman, supra, and followedthat decision on the basis that the lienholders merely had claims for an undetermined amount of money on the property, whereas amortgagee was a secured creditor for monies actually advanced from time to time on its mortgage. In addition to being satisfied that thedecision in Hirsch, supra, is not binding on me, I am also satisfied that the Learned Master was in error in assuming that a lienholder isnot in the same position as a mortgagee with respect to the doctrine of marshalling.

Regarding the decision in Bhugra, supra, it should be noted that there was a finding that apportionment rather than marshalling wasapplicable and that the doctrine of marshalling did not apply. In that regard, apportionment can be described as a situation where anowner mortgages two properties in favour of the same first mortgagee, but then mortgages the first property to “8” and the secondproperty to “C”.

In that situation, the doctrine of “marshalling by apportionment” applies as equity interposes to provide that the claim ofthe first claimant is borne by two funds rateably: Halsbuy’s (4th ed) Vol. 16, p. 785, at para. 876. The decision in Bhugra, supra, wasthat marshalling by apportionment did not apply as there were two properties owned by separate parties.

Accordingly, the statementsregarding whether marshalling or marshalling by apportionment was available to a lien holder were obiter dicta. [Emphasis added] [27] In Narduzzi, Burnyeat J. concluded that marshalling was available to the lien holder. [28] Narduzzi was followed by this Court in Gerrow v Dorais, 2010 ABQB 560. In Gerrow, Manderscheid J. considered thereasoning in Veeradon, Bancorp, and Narduzzi in granting judgment, directing marshalling with apportionment.

He found (citingNarduzzi) at para. 27 that “[t]he doctrine of marshalling is not applied only to mortgagees, and accordingly, I know of no reason why theholder of a builders’ lien cannot have resort to the doctrine of marshalling”. [29] It is of note that Gerrow adopts and applies the reasoning of Laskin J. (as he then was) in Victor Investment Corp. Ltd. et atv Fidelity Trust Co., (SCC), [1975] 1 SCR 251, 41 D.L.R. (3d) 65 to the effect that marshalling by apportionmentarises in relation to two properties held in separate hands, but subject to one mortgage debt covering both of them.

The Applicant notesthat Bancorp distinguished these comments by Justice Laskin as being obiter dicta, however, Laskin, J.’s reasons have now beenadopted as the ratio decidendi in Gerrow. [30] Both Gerrow and Victor follow the principle of law and equity discussed and applied in Brown v Canadian Imperial Bankof Commerce, (1985), 50 O.R. (3d) 420 (H.C.J.) in which Southey J. found ‘that Quay v Sculthorpe (1869), 16 Gr. 449 [a decision of theUpper Canada Court of Chancery, also reported at [1869] O.J.

No. 246 [QL]] is authority for applying the doctrine of marshalling, eventhough there is no common debtor.” Hargrave P. in both Nel and Alarissa, supra, follows the same principle. [31] 111 further submits that Prothonotary Hargrave in Nel concluded that Canadian authorities limit marshalling relief to thosewith “in rem” interests, based on the case of Williamson v Loonstra, (1973), (BC SC), 34 D.L.R. (3d) 275(B.C.S.C.). [32] Williamson v Loonstra, and a number of other cases, had been advanced in Nel by the Bank of Scotland in opposition to theapplication of marshalling.

Prothonotary Hargrave reviewed the authorities and the legal principles and declined to follow the reasoningin the cases advanced by the Bank of Scotland, stating at paras. 20 and 21:– This present dispute over the right to marshal is an issue on which current precedent ought not to be followed blindly, particularly giventhe law surrounding the equitable roots of marshalling. However the cases cited on behalf of the Sank of Scotland can also be dealt within another way, by limiting them to their facts.

The Loonstra case (supra) may be distinguished as the interest of the creditors, in that instance, through the mortgagor, that is, a pure inpersonam claim. In the present instance the creditors have an in rem interest. This rationalization does no violence to the original conceptof marshalling, which clearly extended to contractual creditors, yet does not disturb either Loonstra or Breadman Inc., Re, which is

based on Loonstra . [ 33 ] It is of note that “the creditors” referred to in Nel included lien claimants, as did the creditors in Narduzzi , in which Burnyeat J. found the Loonstra case to be outdated and unhelpful, on the basis that it had been decided before amendments had been made to legislation respecting the registration of judgments against property.

Does Marshalling Cause “Prejudice” in the Present Matter [ 34 ] 111 submits that third parties would be prejudiced by marshalling in this case, although the only “third parties” referred to by the Applicant are Lanyard , 120, and 111. [ 35 ] I conclude that there is no prejudice in applying the doctrine of marshalling with respect to the security held by Lanyard. Lanyard’s “sole interest’ is to receive the money due to it under the Mortgage. It is immaterial to Lanyard which fund it looks to in order to do so.

Equity dictates that Lanyard “must leave as much as possible for the second mortgagee out of funds derived from properties covered also by the second mortgage”, so as to avoid needlessly wiping out of the second mortgagee’s security. [ 36 ] The Condominium Corporation does not ask for an order compelling Lanyard to enforce its security in any particular way, or at all.

The Plaintiff has simply asked for, and been granted, an attachment order protecting its security against Title to the lands at issue, and wishes only for the Court marshal the prior securities in such a way that their enforcement will not “needlessly wipe out” that attachment order. [ 37 ] 111 submits that it and 120 are ‘third parties” who would be “prejudiced” by marshalling. 120 and 111 are the owners of Sheep Creek and Station 33rd, respectively.

They are both debtors to Lanyard, and both stand in the same place as did the two owners before Manderscheid J. in Gerrow , Laskin J. (as he then was) in Victor , and Southey J. in Brown . [ 38 ] That the doctrine of marshalling is applied to require a first encumbrancer to realize first against one owner before the other, cannot be prejudical to the owners, or else the doctrine would be rendered meaningless.

The “prejudice” referred to in Veeradon is explained by Belzil J.A., quoting from Sneil’s Principles of Equity , 28th ed. (1982), p. 416: In the above example, B’s right to marshal will be enforced not only against the original mortgagor but also against all persons claiming through him as volunteers, as where the mortgagor dies and Blackacre and Whiteacre pass to different persons. But it is not allowed to prejudice purchasers or mortgagees of one of the estates.

Thus if in the above example the mortgagor had created another mortgage of Whiteacre in favour of C, B would have no equity to throw the whole of A’s mortgage on Whiteacre, and so destroy C’s security . [emphasis added] [ 39 ] No such similar “prejudice” to party “C” exists in this case. [ 40 ] 111 submits that there is prejudice against 120 or 111 as against each other, however there is no evidence or explanation for why 120 and 111 would have security rights against one another, or would be subsequent claimants against the Titles held by one another.

Nor is there any evidence or explanation advanced about a potential breach of contract between 111 and 120. [ 41 ] The fact that Lanyard enforces against Sheep Creek first and against Station 33rd second, so as to avoid extinguishing the Plaintiff’s security on Station 33rd, is not prejudicial to the Appellants. “Prejudice” does not mean the loss of an opportunity to defeat the claim of a creditor by taking advantage of the actions of another creditor.

Conclusion [ 42 ] Marshalling as a concept means that: if a senior creditor has recourse to two funds, “A” and “B”, for satisfaction of its debt, and a junior creditor ranking below has recourse to only fund “B”, then equity directs that the senior creditor recover first from fund “A” as far as possible, so as to avoid needlessly extinguishing the junior creditor’s recourse to fund “B”. [ 43 ] Marshalling applies where the funds belong to the same debtor, or to two or more debtors with respect to the same debt. [ 44 ] Marshalling will not allow prejudice to another junior creditor, such as where there is a third creditor with recourse only to fund “A”.

Nor will marshalling allow prejudice to the senior creditor’s “paramount right” to be repaid in accordance with its debt agreement.

However, the fact that marshalling requires the senior creditor to look to one fund versus the other is not prejudice: its only interest is in being repaid and it is immaterial which fund it is repaid from. [ 45 ] In this situation, and absent demonstrated prejudice, equity dictates that marshalling should apply for the protection of the Condominium Corporation, requiring Lanyard to satisfy itself first from the fund available to it but not to the Condominium Corporation (Sheep Creek), so as to avoid needlessly extinguishing the Plaintiff’s security over the other fund (Station 33). [ 46 ] In the result, I dismiss the appeal of 111 and 120, and uphold the Attachment Orders of the Master.

Heard on the 4 th day of April, 2012. Dated at the City of Edmonton, Alberta this 11 th day of April, 2012. Donald Lee J.C.Q.B.A. Appearances: Jerritt R. Pawylk Bishop & McKenzie LLP for Condominium Corporation No. 082 6970 James Thorlakson Miller Thomson LLP for 120990 Alberta Ltd.

Lanny G. James Biamonte, Cairo & Shortreed LLP for 1117396 Alberta Ltd.