David M. Gottlieb Professional Corporation v. Champion Homes Inc., 2011 ABQB 250

Court of Queen ’ s Bench of Alberta Citation: David M. Gottlieb Professional Corporation v. Champion Homes Inc., 2011 ABQB 250 Date: 20110411 Docket: 1001 07856 Registry: Calgary Between: David M. Gottlieb Professional Corporation and Swiss Investments Inc. Plaintiffs - and - Champion Homes Inc., 1412263 Alberta Ltd., and Satpal Nahal Defendants _______________________________________________________ Memorandum of Decision of J.B.

Hanebury, Master in Chambers _______________________________________________________ [ 1 ] This application is brought by Peoples Trust, a third mortgagee on the title to a property in Calgary. It argues that a prior mortgagee, who has a mortgage on this property and another property, cannot unilaterally discharge its mortgage from the other property and thereby leave its full claim to be paid from the mortgage registered against this property. FACTS

[ 2 ] The facts are complicated and a chart is appended to this judgment setting out the various properties and encumbrances. [ 3 ] There are two parcels of land involved, the Champion land and the Nahal land. Peoples Trust had security against the Champion land only, by way of a third mortgage. There was a prior mortgage on the Champion land to 907840 Alberta Ltd. (the 907 Champion mortgage). [ 4 ] Peoples Trust expected that some of the debt owing under the prior 907 Champion mortgage would be paid from a mortgage 907 had on the Nahal land, thereby decreasing the amount of secured debt ahead of it.

This did not happen. The 907 mortgage was voluntarily discharged from the Nahal land. [ 5 ] This discharge was at the request of subsequent co- mortgagees of the Nahal land, Swiss Investments Inc. and Mr. Gottlieb (Swiss Gottlieb). They caused Swiss Investments Inc. and a trust company (Swiss Olympia), to purchase the security for the debt owed to 907. That security included the 907 mortgages on the Champion and Nahal lands. They then discharged the 907 mortgage from the Nahal land.

As a result, there was less debt before Swiss Gottlieb’s mortgage on the Nahal land and Swiss Gottlieb would receive funds from the imminent sale of the Nahal land. [ 6 ] Swiss Olympia then sought payment of the entire 907 debt from the sale of the Champion land.

Peoples Trust objected and brought this application. [ 7 ] Peoples Trust advanced a number of marshalling arguments as to why the court should not allow the full debt owed to 907 to be enforced against the Champion land to the prejudice of Peoples Trust, the holder of the third mortgage. [ 8 ] In the end, it has not been necessary for me to adjudicate on those marshalling arguments due to my conclusion, for the reasons set out below, that nothing remains owing under the 907 Champion mortgage.

ISSUE [ 9 ] Has the discharge of the 907 Ltd. mortgage on the Nahal land (the 907 Nahal mortgage) extinguished the liability under the 907 Champion mortgage?

ANALYSIS [ 10 ] The first question to consider is whether the discharge of the 907 Nahal mortgage extinguished the debt secured by that mortgage. [ 11 ] The discharge of the 907 Nahal mortgage states that “...the Mortgagees do acknowledge to have received moneys due or to become due under a certain Mortgage made by ....Nahal as Mortgagor to the said...Mortgagees...” [ 12 ] However, no money was received and the sole purpose of the discharge was to maximize the money available to Swiss Gottlieb on their fifth mortgage on the Nahal land. That this was the purpose of the discharge is clear. [ 13 ] Mr.

Germiquet, an officer of Swiss Investments explains in his affidavit that Swiss Gottlieb were concerned that the value of their loans to Nahal and Champion exceeded the value of their security and therefore Swiss Olympia made a decision to purchase the

security granted by Nahal and Champion to 907. They took an assignment of all of the security held by 907 and an assignment of its foreclosure action in relation to the Nahal land. [1] He states that a decision was taken to discharge the 907 Ltd mortgage from the Nahal land as the money owed was well secured by the 907 Ltd. mortgage on the Champion land.

He says that “this course of action enhanced the probability of recovery” on the Swiss Gottlieb fifth mortgage on the Nahal land, a mortgage that had already been foreclosed off other properties. [ 14 ] He also says that the only reason that the discharge stated that the mortgage had been paid was because he thought that wording was necessary to register the document at the Land Titles Office. No funds were actually received. [ 15 ] The Alberta Court of Appeal held in First National Mortgage Co. v. L.J.V. Holdings Ltd. [1989] A.J.

No. 317 , that if a mortgagee unilaterally [2] registers a discharge of its mortgage, it is taken to have elected to accept the value, whatever it might be, that it received for the discharges in satisfaction of the debt. In that case no money was paid for the discharges. [ 16 ] The Alberta Court of Appeal based its reasoning on s. 64(1) of the Law of Property Act , now s. 73(1) , R.S.A. 2000 c. L- 7 .

It provides that: When a mortgagor becomes entitled to pay off the balance owing on the mortgage, the mortgagor may require the mortgagee on receiving payment, instead of giving a discharge, to transfer the mortgage to a third party and the mortgagee is bound to transfer the mortgage as the mortgagee directs. Subsection (3) states that any waiver or release of this right is void and against public policy. [ 17 ] This right, the Court said, cannot be removed without the authorization of the mortgagor.

If it is, and the mortgagee cannot transfer the mortgage as directed by the mortgagor, the effect is the same as if the mortgagee had acquired the property by foreclosure and then disposed of it. The debt is deemed to be satisfied. [ 18 ] Swiss Olympia cannot transfer the 907 Nahal mortgage. It unilaterally discharged the mortgage [3] to maximize the money available to Swiss Gottlieb on their subsequent mortgage. [ 19 ] Therefore, the debt owing under that mortgage is deemed to have been satisfied.

There is no amount outstanding under the 907 Nahal mortgage. [ 20 ] To determine the effect of the satisfaction of this mortgage on the debt owing under the 907 Champion mortgage, the nature of the latter must be considered: specifically, is it a collateral security? [ 21 ] “Collateral security” has been described as: (

a) any property or right of action, such as a bill or sale or share certificate, which is given to secure the performance of a contract or the discharge of an obligation and is additional to the obligation of the contract and which is to be discharged or returned upon the performance of the obligation; (

b) a separate obligation attached to another contract to guarantee its performance; (

c) security given in addition to the principal security for the payment of money or performance of covenants; and

(

d) a concurrent security for another debt, whether antecedent or newly created, which is designed to increase the creditor’smeans to realize on the principal debt: Johnston Investment Co. v. Fisher (AB CA), [1921] 3 W.W.R. 680 at p. 696. See as well: Royal Bank of Canada v. Slack (1958) (ON CA), 11 D.L.R. (2d) 737 (Ont. C.A.). [22] In Falconbridge on Mortgages[4] the author comments that the term collateral security is more a commercial than a legal termand determining if a mortgage is collateral is a question of construction in each case.

Reference should be had to the dealings between theparties, the type of transaction and the nature of the securities, for example, whether one mortgage is to be resorted to first as the primarysecurity or whether they are all to be considered as parallel security. [23] The 907 Champion mortgage states that “[t]his mortgage is collateral to a mortgage between ...Nahal and the Mortgageeregistered against [the Nahal lands] (hereinafter the ‘Primary Mortgage’) and is given as additional and continuing collateral security tothe Mortgagees for the payment of all monies now due or owing or which shall hereafter become due or owing to the Mortgagees underand by virtue of, and not in substitution for, the Primary Mortgage...” [emphasis added]. [24] It provides that payment is to be made upon demand under either mortgage and that it is agreed that the lender could pursueits remedies under the two mortgages concurrently or successively at its option. [25] There is no evidence that funds were advanced to Champion Homes.

Mr. Nahal, the principal debtor, is apparently theprincipal of Champion, but that does not result in funds received by him being deemed received by Champion Homes. There is no reasonto lift the corporate veil: 565075 Alberta Ltd. v. Community Development Corp. [1994] A.J. No. 486 (Q.B. Master) para. 22 and casescited therein. [26] The terms of the 907 Champion mortgage do not speak to any continuing liability should the “primary mortgage” bedischarged, nor do they mention any other security such as a guarantee by Champion Homes of the monies owed by Mr. Nahal to 907 Ltd.

While the terms of the 907 Champion mortgage allegedly permit the mortgagor to dispose of part of the Champion land,[5] itcontains no such authorization in relation to the Nahal land. [27] The 907 Champion mortgage is described as, and is, collateral security. It was provided only to ensure payment of any amountoutstanding under what it called the “principal mortgage”. The fact that the lender could pursue its remedies under the two mortgagesconcurrently or successively at its option does not change its fundamental purpose.

CONCLUSION [28] The 907 Champion mortgage is a collateral mortgage for the payment of money in default under the 907 Nahal mortgage.With the satisfaction of the debt owing under the latter, there are no funds in default and therefore nothing to be paid under the former. [29] In

summary, with the discharge of the 907 Nahal mortgage, Swiss Olympia released Champion[6] from any further liabilityunder the 907 Champion mortgage. [30] The final issue raised by Peoples Trust is whether it may step into the place of Swiss Gottlieb as mortgagee of the mortgageregistered as a second charge on another parcel of land owned by Champion. From the information provided by counsel as found in thechart appended hereto as Appendix “A” to this decision, it appears that the Peoples Trust mortgage will now be paid in full from the saleof the Champion lands.

Therefore, there is no need to consider this issue. [31] Should the calculations provided be incorrect and payment in full not be received by Peoples Trust, it has leave to reapply for

a determination of this issue. At that time the parties should address the applicability of the doctrine of marshalling by apportionment to that question, an issue which was not addressed. [ 32 ] If the parties wish to speak to costs they may arrange to do within thirty days of this decision. Heard on the 18 th day of January, 2011. Dated at the City of Calgary, Alberta this 11 th day of April, 2011. J.B. Hanebury M.C.C.Q.B.A. Appearances: Demiantschuk Milley Burke & Hoffinger LLP Judy D. Burke and Derek Nash for the Plaintiff David M. Gottlieb Professional Corporation Borden Ladner Gervais LLP Andrew K.

Maciag for the Plaintiff Swiss Investments Inc. Caron & Partners LLP John W. McKinley for the Defendants Bishop & McKenzie LLP Francis N.J. Taman for Peoples Trust Company Fraser Milner Casgrain LLP

Kuly Gill for Bank of Montreal Appendix “A” David M. Gottlieb et al v.

Champion Homes Inc. et al Action No. 1001-07856 Nahal Land 40 Acre Parcel - Owner: Satpal Nahal Market Value-$1,440,000.00 Forced Sale- $1,200,000.00 Sold for 2.3 million on November 29, 2010 through foreclosure Proceedings DATE MORTGAGE INSTRUMENT # ORIGINAL AMOUNT COMMENTS October 25, 2006 TD $547,000.00 Paid from Sale proceeds October 25, 2006 Gottlieb/Swiss Investments 061 444 116 $800,000.00 (1.1 million owed) Foreclosure December 2009 August 2010 * May 9, 2007 907840 Alberta Inc. 071 225 305 $530,000.00 (.9 million owed) Foreclosure initiated Caveat (Promissory Note) Mangat 081 066 490 175 thousand claimed July 8, 2008 Gottlieb/Swiss Investments/Olympia 081 239 603 1.925 million (2.1 million owed) Foreclosure December 2009 *Transferred to Swiss Investments/Olympia Trust – Discharged November 2010 Champion Land 11 Avenue Lands – Owner: 1412263 Alberta Ltd.

Market Value 1.7 million – 2.1 million Order Confirming Sale- 2.4 million

DATE MORTGAGE INSTRUMENT # ORIGINAL AMOUNT COMMENTS March 22, 2007 Gottlieb/Swiss Investments 071 140 648 $590,000.00 ($250,000.00 owing) Foreclosure August 2010 July 28, 2007 907840 Alberta Inc. 071 377 225 $530,000.00 ($875,000.00 owing) Transferred to Swiss Investments/Olympia Trust November 2010 August 11, 2008 People ’ s Trust 081 291 638 1.630 million (1.7 owing) Foreclosure 70 Acre Parcel – Owner: Satpal Nahal Market Value- 1.260 million Forced Sale- 1.070 million DATE MORTGAGE INSTRUMENT # ORIGINAL AMOUNT COMMENTS August 4, 2005 Farm Credit Corporation 051 278 269 $472,000.00 Foreclosure initiated November 2010 October 25, 2006 Gottlieb/Swiss Investments 061 444 116 $800,000.00 (1.1 million owed) Foreclosure Initiated December 2009 August 2010 May 9, 2007 907840 Alberta Ltd. 071 225 393 $530,000.00 ($875,000.00 owed) Foreclosure initiated July 8, 2008 Gottlieb/Swiss Investments/Laura Germiquet 081 239 603 1.925 million (2.1 million owed) Foreclosure initiated December 2009 Writ holders- James Wilder, Leah Luprya 57 th Avenue condos (17 units) – Owner: Champion Homes Market Value - $2,199,000.00 Forced Sale – 1.485 million

DATE MORTGAGE INSTRUMENT # ORIGINAL AMOUNT COMMENTS March 22, 2007 Gottlieb/Swiss Investments/Olympia Trust 071 140 647 1.485 million Foreclosure December 2010 March 22, 2007 Gottlieb/Swiss Investments 071 140 648 $590,000.00 ($250,000.00 owing) Foreclosure July 23, 2007 1160195 Alberta Ltd. 071 368 105 Caveat $140,000.00 claimed July 8, 2008 January 2009 Gottlieb/Swiss Investments/Laura Germiquet Bank of Montreal -3 units 081 239 603 Varied 1.925 (2.1 million) Face value 680 thousand dollars Foreclosure December 2009 Proceedings initiated 740 81 Street – Owner: Satpal Nahal Market Value- 1.4 million Forced Value- 1.2 million DATE MORTGAGE INSTRUMENT # ORIGINAL AMOUNT COMMENTS March 6, 2009 BMO 091 062 073 $550,000.00 Listed for sale by BMO July 8, 2006 Gottlieb/Swiss Investments/Laura Germiquet 081 293 603 1.925 million (2.1 million owed) Foreclosure initiated December 2009 [1] No list of this security was provided.

The only security documentation filed was the mortgage on the Nahal land and the collateral mortgage on the Champion land. Apparently 907 Ltd. also had a mortgage for the same amount registered against another parcel of land owned by Nahal. [2] This finding does not apply to mortgages that are discharged at the request of, or with the consent of, the mortgagor: Narduzzi (c.o.b.

Ultimate Construction) v. Richardson 2009 BCSC 588, cited in argument by Swiss Gottlieb. [3]The fact that there was an order for sale of the Nahal land in a foreclosure action when the Swiss Olympia discharge was registered,does not change the result. The property had not yet been transferred and the 907 Nahal mortgage was still on the title. While the owner,Mr Nahal, had no further right to redeem the mortgage in foreclosure, his right to redeem the subsequent mortgage continued: MorguardMortgage Investments Ltd. v. Faro Development Corp. Ltd. et al (AB CA), [1974] A.J. No. 286 (Alta. C.A.). [4]W.B. Rayner, R.H.

McLaren (Canada Law Book) 1977, p. 15. [5]A term that may be void pursuant to s.73(3) of the Law of Property Act. [6]And its successors, as the property was transferred to another of Mr. Nahal’s companies, 1412263 Alberta Ltd.