HSBC Bank Canada v. Cambrian (Foothills) I Limited Partnership, 2011 ABQB 177

Court of Queen ’ s Bench of Alberta Citation: HSBC Bank Canada v. Cambrian (Foothills) I Limited Partnership, 2011 ABQB 177 Date: 20110316 Docket: 1001 10607 Registry: Calgary Between: HSBC Bank Canada Plaintiffs - and - Cambrian (Foothills) I Limited Partnership, Cambrian (Foothills) I Properties Corp., 4040 Properties Corp., A.D. Bert Messier, Don Rumpel and Arthur M.

Szabo Defendants Corrected judgment: A corrigendum was issued on May 12, 2011; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice G.C.

Hawco _______________________________________________________ Introduction [ 1 ] HSBC Bank Canada (“the Bank”) and HSBC Capital (Canada) Inc. (“Capital”) are related companies who were both involved in providing a total of some $50 million to Cambrian (Foothills) I Limited Partnership and Cambrian (Foothills) I Properties Corp. and 4040 Properties Corp. for the purposes of developing two medical office buildings on a 5.58 acres parcel in Calgary (“the lands”). The buildings were constructed but things went awry with respect to the proposed tenants.

The corporate Defendants were not able to fulfill their obligation to repay the monies on the terms required. A receivership order was granted on August 24, 2010. The lands are in the process of being sold. Early in the development process, the Defendants had planned to sub-divide the lands into two parcels, one containing the office buildings and the other bare land. Because of the financial problems, as well as other matters, the sub-division did not take place. However, it is still anticipated that the property will be sub-divided, within the relatively near future.

[ 2 ] The Bank holds a mortgage and judgment for $35 million. The mortgage ranks as a first encumbrance against the lands. Capital holds a mortgage for $15 million. It ranks second in priority with respect to the lands. [ 3 ] In this application Capital seeks a declaration that the Bank is obligated to discharge its mortgage as against the bare lands upon sub-division of the five acre parcel.

The result of such a discharge would be that the Bank would continue to have a first priority charge against the lands upon which the buildings stand (“the Phase 1 lands”) and Capital would a the first priority charge against the other lands (“the non-Phase 1 lands”). Background [ 4 ] In August of 2008, the Bank agreed to advance the Defendants $35 million for the development of the lands and Capital agreed to advance $10 million. Each lender was aware of the terms of each other’s loan agreements.

Prior to any money actually being advanced, both lenders were aware that the Defendants intended to sub-divide the lands into two parcels, with the Phase I lands having two four-storey medical office buildings and the other lands to be developed at a later time. Most of the money being advanced was to go into the construction of the two buildings. [ 5 ] At the time of the original financing discussions, there was an existing mortgage on the lands. That mortgage had to be discharged in order for the Bank to have the first priority.

Following a number of discussions among the parties, Capital agreed to increase its loan from $10 million to $15 million so that the existing mortgage could be paid out. This would result in the Bank having first priority over the entire five acre parcel.

It was understood by all parties that when the proposed sub-division did take place, the Bank would discharge its mortgage with respect to the second parcel and Capital would then rank first on that piece of property with respect to its $15 million mortgage. [ 6 ] The financing documents between the Bank and the Defendants, copies of which were forwarded to Capital, clearly set out that the Bank would discharge its security from the non-Phase 1 lands after sub-division. The commitment letters of September 26, 2008 and November 24, 2008 from the Bank to Cambrian sets this out.

The Loan Agreement of March 31, 2010 states it. Indeed, the Bank acknowledged to the Court in this application that it had agreed with Cambrian to do so. [ 7 ] In March of 2010, pursuant to earlier discussions, the Bank’s loan was extended. At that time, it was not aware of a number of adverse developments which would have resulted in the Bank not extending the loan at that time. [ 8 ] On June 28, 2010, both the Bank and Capital made a demand on their loans.

On July 19, 2010, the Bank commenced formal proceedings against the Defendants. [ 9 ] Settlement discussions ensued resulting in a Consent Order being issued by Madam Justice Strekaf on August 24, 2010. Pursuant to that Order, it was agreed that the Bank’s mortgage against the lands ranked in priority to the interests of each Defendant and Capital. That Order was consented to by Capital. [ 10 ] The Bank argues that the effect of this Order is to prohibit Capital from claiming to be entitled to first priority upon the non- Phase 1 land, should the lands be divided.

Issues [ 11 ] The issue in this application is whether Capital is entitled to its declaration in law or equity. Decision [ 12 ] Capital is entitled to a declaration that the Bank is obliged to discharge its mortgage as against the non-Phase 1 lands should sub-division take place.

Reasons [13] Preliminary Objection [14] The Bank has argued that while this Court may have the jurisdiction to grant the order sought, it ought not do so because, asthe lands have not yet been sub-divided, the matter is purely hypothetical. [15] In this case it is appropriate that a declaration issue. Capital has a very real interest in whether it will rank first or second withrespect to the non-Phase 1 lands. The sub-division will most likely occur. It is in the process without any known opposition.

Theprospective value of the whole parcel against two parcels is of real interest to both parties when a determination is made as to what bidswill be more acceptable to each party. Those bids will be coming in on or before March 31 of this year. I agree with the reasoning ofWachowich, ACJ, as he then was, in Canada Deposit Insurance Corp. v. Canadian Commercial Bank, 2000 ABQB 440. Contract Principles [16] The Bank argues that there is no privity of contract as between Capital and the Bank and thus Capital has no standing beforethe Court.

The obligation to discharge, the mortgage if one exists, is between the Bank and Cambrian or 4040. It is agreed that shouldeither of these parties seek to compel the Bank to discharge the mortgage, they would not be in a position to do so as they have agreed inthe August 24th order that the Bank has the first priority over all the lands and, in any event, they do not come before the Court withclean hands as they misled the Bank prior to the extension of their loan on March 31, 2010. [17] Although Mr.

Michael Berkson of Capital claims that there was indeed an agreement between the Bank and Capital, he wasnot, of course, able to point to any particular document as between the lenders which one could look at and determine whether there wasor was not a contract, or what the terms were. [18] I am not satisfied that there was any agreement between the Bank and Capital such that there was an offer by one party to dosomething, which offer was accepted by the other. [19] I am, however, satisfied that there was clearly an agreement between the Bank and Cambrian on March 31, 2010 that: Upon sub-division, [the Bank] would discharge its security from the non-Phase 1 lands. [20] I appreciate the Bank’s argument that Cambrian may not have clean hands.

I further appreciate that while Cambrian maysupport Capital’s position in this application, they themselves have not brought an application for a declaration. Unjust Enrichment [21] In general, the law recognizes the right of a party to recover in restitution where another party has been “unjustly enriched” atthat party’s expense. Three requirements must be met: There must be an enrichment, a corresponding deprivation, and the absence of any juristic reason for the enrichment. See Atlas Cabinets& Furniture Ltd. v. National Trust Co., (BC CA), [1990] B.C.J.

No. 719; 1990 CarswellBC 76 (S.C.C.) at para. 28. [22] Notwithstanding that there may be no contract between the Bank and Capital, I am persuaded that this Court should exerciseits equitable jurisdiction and require that the Bank discharge its mortgage as against the non-Phase 1 lands when, and if, sub-divisiondoes occur.

[ 23 ] I do so for a number of reasons. Firstly, both lenders were involved in the same project. Both lenders were aware of what was going on as between themselves. Capital knew of the Bank’s commitment to discharge. The Bank knew that Capital knew of its commitment. In order for the Bank to obtain first priority over the lands, the existing mortgage had to be discharged. Capital increased its loan by $5 million so that that would happen. [ 24 ] The Bank obtained a distinct benefit because of that. Capital put itself at risk of an additional $5 million. Everyone but Capital gained something.

If ever there was a time when equity should step in, this is such a time. [ 25 ] Capital should not suffer because the Defendants may not have been forthright with the Bank. The Bank should not retain priority over the non-Phase 1 lands having agreed to discharge its mortgage on sub-division. There is no juristic reason for the enrichment. Res Judicata [ 26 ] I do not accept that the settlement order of August 24 is a bar to Capital’s application. Capital may be considered to be privy to that agreement even though it was not a party to the proceedings.

But the issue at that time did not include what would happen if the lands were subsequently sub-divided. The Bank had priority over all the lands prior to the order. It still has priority over all the lands and will continue to do so unless they are sub-divided. Capital was not a party. Its rights were not considered. The Bank made an agreement to release their priority should a certain event take place. All of the parties relied upon that agreement. The Bank should be required to honour its commitment. Equity demands it. Heard on the 15 th day of March, 2011.

Dated at the City of Calgary, Alberta this 16 th day of March, 2011. G.C. Hawco J.C.Q.B.A. Appearances: Chris Simard Bennett Jones LLP for the HSBC Capital (Canada) Inc. John I. McLean, Q.C. Gowling Lafleur Henderson LLP for the HSBC Bank Canada

Terry L. Czechowskyj Miles Davison LLP for the Defendants _______________________________________________________ Corrigendum of the Reasons for Judgment of The Honourable Mr. Justice G.C. Hawco _______________________________________________________ The citation number has been corrected to read: HSBC Bank Canada v. Cambrian (Foothills) I Limited Partnership, 2011 ABQB 177 .