MCAP Service Corporation v. Chiang, 2011 ABQB 477

Court of Queen ’ s Bench of Alberta Citation: MCAP Service Corporation v. Chiang, 2011 ABQB 477 Date: 20110721 Docket: 1003 18874 Registry: Edmonton Between: MCAP Service Corporation Plaintiff - and - Chuan Huan Chiang and Cuong Chiang Defendants _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice D.L. Shelley _______________________________________________________ Background [ 1 ] The Plaintiff completed foreclosure proceedings in relation to a mortgage (the “Mortgage”) that had been granted to it by Mr.

Chuan Huan Chiang (“the Mortgagor”) against property legally described as Lot 49, Block 2, Plan 9312117 (the “Property”). [ 2 ] Sometime after granting the Mortgage on July 30, 2010, the Mortgagor leased the Property to his son, Mr. Chong Chiang (the “Tenant”). During some of this time period the property was used for a marijuana grow operation.

[3] As a result of damage caused by the marijuana grow operation, the Property was condemned and clean-up orders wereissued by the Calgary Health Region in 2007. A second health hazard notice was issued by Alberta Health Services in August of 2010. [4] The foreclosure action eventually resulted in a sale to a third party which was completed in March 2011. The Property wassold on an “as is” basis as a result of the damage caused by the marijuana grow operation. The sale price was $260,501. [5] The approximate amount due to the Plaintiff at the time of the sale was $365,200.

This Application [6] The Plaintiff sued both Defendants for the tort of waste. It also sued the Mortgagor for breach of the Mortgage covenant torepair the Property and keep it in good condition. It seeks default judgment against both Defendants in the amount of $71,499, plusinterest and costs. The principal amount claimed is the difference between: (

a) the value that the Property would have had, had it been remediated and repaired to its former non-damaged condition (being theamount of $332,000 as indicated in the Affidavit of Value filed in the foreclosure proceedings); and (

b) the sale price of $260,501. [7] Both Defendants were served with the Amended Statement of Claim and were noted in default. They were not provided withnotice of this application. The Issues [8] The issue is whether the Plaintiff is entitled to default judgment against either or both of the Defendants. In relation to theMortgagor, I must consider whether the Plaintiff is precluded from obtaining judgment against him by virtue of s. 40(1)(

a) of the Law ofProperty Act, RSA 2000, c L-7 (the “Act)”. Plaintiff’s Position [9] The Plaintiff argues that it is not attempting to obtain judgment on the covenant to pay in the Mortgage. Rather, it isadvancing a separate claim for waste. It relies on a passage from Price and Trussler, Mortgage Actions in Alberta (Calgary: CarswellLegal Publications, 1985) which cites Brown v Sage (1865), 11 Gr 239, 1865 CarswellOnt 30 (Court of Chancery, Upper Canada),McLeod v Avey (1888), 16 OR 365 (Ont HCJ) and Mann v English (1876), 38 UCR 240, 1876 CarswellOnt 241 (Upper Canada QB), asauthority for the propositions that:

a) an action for waste is separate from an action on a covenant to pay and is not barred by what is now s. 40(1) of the Act; and

b) mortgagors are liable to account for damage they cause to mortgaged property to the prejudice of mortgagees. [10] An earlier decision of this Court relied on by the Plaintiff is that of Parisian Fashions Ltd v Petrus (1996), (AB KB), 195 AR 81, 46 Alta LR (3d) 159 (QB). In Parisian Fashions, Hawco J agreed with Mann’s rejection of the argumentthat the mortgagee’s only remedy is on the covenant to pay, agreeing instead that acts of waste provide a remedy independent of contractagainst a wrongdoer, whether the wrongdoer is a mortgagor or another person. He concluded that the mortgagee in Parisian Fashions

could sue either the party who committed the waste or the mortgagor who had covenanted to keep the property in good repair. Heconcluded that s. 40(1) of the Act applies only to the covenant to pay and that either the mortgagor or the third party could be liable foracts of waste which have reduced the value of the mortgagee’s security. [11] It is the Plaintiff’s further position that the Mortgagor is also liable on the covenant to keep the Property in repair and thatthis liability is independent of his liability on the covenant to pay.

The Plaintiff therefore submits that this liability, like the action forwaste, is not barred by the Act. [12] The Plaintiff also cites Holland - Canada Mortgage Co v Fraser, (SK KB), [1926] 2 WWR 32 (Sask KB),and Metropolitan Life Co v McQueen, (AB KB), [1924] 2 WWR 981 (Alta TD), as authority for a mortgagee’s abilityto recover for acts of waste committed by someone other than a mortgagor.

Furthermore, it cites Haoare v Tsapralis (1997), 31 OTC 39;10 RPR (3d) 89 (Ont Ct Gen Div), as authority that an action for waste can sound in both contract and tort. [13] The Plaintiff submits that the Tenant is liable in tort for his acts of waste - specifically, by damaging the Property when heused it for a marijuana grow operation. The Plaintiff submits that he owed a duty to not impair the value of the Property and it wasreasonably foreseeable to him that damaging the Property in this manner would impair the Plaintiff’s security. Analysis [14] Section 40(1)(

a) of the Act provides that no action lies on a covenant for payment contained in a mortgage in any actionbrought on a mortgage of land and that the right of a mortgagee is restricted to the land and to foreclosure of the mortgage. Theexception, for mortgages granted by a corporation, does not apply to the facts of this case. [15] Section 40(1)(

a) prevents recovery of a deficiency judgment by a mortgagee in cases in which this

section applies. Thepurpose of this legislation is “to frustrate attempts either directly or indirectly to recover a personal judgment on the personal covenantset out in an agreement of sale or in the mortgage” (Tuxedo Savings and Credit Union Ltd v Krusky (1987), 1987 ABCA 29 ,49 Alta LR (2d) 282, 75 AR 190 (CA) at page 285).

It is clear that courts look at all of the circumstances of a lending transaction whendetermining whether the lender is attempting to do indirectly that which it can’t do directly - namely, to enforce the covenant forpayment contained in a mortgage granted by an individual (Royal Bank of Canada v. Stallmann, 2009 ABQB 766, 485 AR 391 andauthorities referred to therein). [16] The Plaintiff’s action against the Tenant is in tort and is unrelated to the covenant to pay contained in a mortgage. Section40(1)(

a) has no application to the action against the Tenant. The Amended Statement of Claim was served on the Tenant and he wasnoted in default. In addition to the Statement of Claim, the Plaintiff has provided affidavit evidence in support of its assertion that theTenant was directly involved in the marijuana grow operation which constituted the waste that caused the damage to its security. Neitherthe Statement of Claim nor the affidavit evidence has been challenged by the Tenant.

Similarly, the Plaintiff has provided affidavitevidence to confirm the extent of the damage and the devaluation of the Property that resulted from it. The Tenant has not challengedthat evidence either. However, as the Tenant had no notice of this application and therefore did not receive the affidavit evidence, itcannot be said that he has agreed with the Plaintiff’s assessment of damages. [17] More problematic is the Plaintiff’s position in relation to the Mortgagor.

Unfortunately, because the facts here are sodissimilar from those in any of the cases in which the courts have looked at whether a mortgagee is attempting to indirectly enforce thecovenant for payment, those case authorities are of limited application. There is surprisingly little case authority in Alberta concernedwith the issues of:

a) whether a separate action for waste can be maintained outside a mortgage; and

b) whether a covenant to maintain, contained in a mortgage, can be the foundation of a separate action for damages apart from thecovenant to pay the mortgage debt. [18] Of the authorities provided by the Plaintiff, Justice Hawco’s decision in Parisian Fashions is the most applicable to the facts

of this case. He accepted that s. 40(1) of the Act did not preclude a mortgagee from seeking damages from either a mortgagor or a thirdparty who has committed or allowed waste which has reduced the value of the mortgagee’s security. He considered an action for waste tobe an independent remedy which did not fall within the scope of the prohibition covered by s. 40(1). [19] I agree. In this case, the Plaintiff does not seek to recover a deficiency judgment, which would have been considerably higherthan the amount claimed as a result of waste.

Rather, it obtained evidence of the amount by which the Property has been devalued as aresult of the waste committed or permitted by the Defendants.

The measure of damages is not necessarily the sum which it would cost torestore the property to its condition before the waste, but the diminution in value of the reversion: Joyner v Weeks, [1891] 2 QB 31 at p.36-37 cited in Miles v Marshall (1975), (ON SC), 7 OR (2d) 544, 55 DLR (3d) 664 (Ont HC) (at para. 20); Heemskerkv Rossum (AB CJ), 191 A.R. 126 (ABPC) (at para. 24); Montreal Trust Co v Hercules Sales Ltd (1969), (ON CA), 3 DLR (3d) 504 (Ont CA). [20] To the extent that the Plaintiff’s action is based on the tort of waste, the Plaintiff is not attempting to recover the mortgagedebt per se.

Rather, it is seeking to recover damages in tort for the devaluation of its security caused by the wrongful acts of either, orboth, Defendants. [21] However, to the extent that the Plaintiff seeks to recover on the basis of the covenant to repair contained in the Mortgage, thePlaintiff’s action must fail. There are many contractual obligations contained in a mortgage besides the covenant to pay. For example, amortgagor is usually required to pay property taxes, keep the property insured, pay builders’ liens, etc.

Where the mortgagor fails to doso, the mortgagee’s remedy is to pay the outstanding amounts and add them to the mortgage debt. It will then be in a position tocommence foreclosure proceedings if the amounts remain outstanding, as this will constitute a default. Similarly, if a mortgagor allows aproperty to fall into disrepair, the mortgagee can give notice to the mortgagor to repair, failing which the mortgagee can effect the repairsand add the cost of them to the mortgage debt.

In all of these cases the mortgage debt is increased and repayment is subject to therestriction contained in s. 40(1) of the Act. [22] I do not read the Plaintiff’s authorities as supporting its suggestion that the covenant to maintain and repair contained in amortgage can give rise to a separate judgment in the absence of the actions of the mortgagor or a third party constituting waste or someother tortious act which might support a separate action in tort.

Otherwise, every scratched floor, dented wall, poor paint job, poorlyfunctioning furnace, leaky roof or other similar item would give rise to separate actions in or following a foreclosure action where thesale price is insufficient to cover the amount of the mortgage debt. This would clearly be at odds with the intent of s. 40(1) and wouldindirectly allow mortgagees to do what they cannot do directly. [23] As was the case with the Tenant, the Mortgagor was noted in default and did not receive notice of this application.

However,unlike a claim for a deficiency judgment in a foreclosure action, where Rule 6.5(3) applies to require service of notice where a personaljudgment is sought, the Rules do not require notice in other actions. This action was brought separate and apart from the foreclosureproceedings and, therefore, Rule 3.37(1) permits this application to be brought without notice. Rule 3.37(3) provides me with severaloptions, including referring the matter for a determination or assessment of the amount of damages.

In this case, however, I was providedwith a copy of the Affidavit of Value, with the attached Appraisal Report.

It provides good evidence of the cost of the repairs required toremediate the damage caused by the marijuana grow operation, as well as the amount of its devaluation due to the presence of themarijuana grow operation . [24] Although I do not have the benefit of having heard the expert appraiser in the proceedings before me (unlike Justice Strekafin Toerper v Hoard, 2011 ABQB 85, ), I am persuaded by the Affidavit evidence that has been provided and see no reason why it shouldnot be accepted as an appropriate assessment of the damages caused to the property as a result of the Defendants’ waste.

Conclusion [25] The Plaintiff shall have default judgment against both Defendants in the principal amount of $71,491. [26] In its draft Judgment the Plaintiff requested interest at the Mortgage rate, together with solicitor and client costs. The Plaintiffis not entitled to costs or interest on that basis. The Plaintiff relies on, and succeeds on, the basis of a tort. It cannot look to the Mortgageto justify its claim for interest and costs.

[ 27 ] Therefore, pre- and post-judgment interest will be as provided in the Judgment Interest Act, RSA 2000, c J-1, and the costs will be pursuant to the Rules of Court . Heard on the 12 th day of April, 2011. Dated at the City of Edmonton, Alberta this 21 st day of July, 2011. D.L. Shelley J.C.Q.B.A. Appearances: Wendy L. Thiessen for the Plaintiff