Bank of Montreal v. Askar, 2011 ABQB 52

Court of Queen ’ s Bench of Alberta Citation: Bank of Montreal v. Askar, 2011 ABQB 52 Date: 20110131 Docket: 1001 12544 Registry: Calgary Between: Bank of Montreal Plaintiff - and - Samer Askar Defendant - and - Clive O. Llewelyn, Clive O. Llewelyn Professional Corporation and Fleming LLP Third Parties _______________________________________________________ Reasons for Judgment of J.B. Hanebury, Master in Chambers _______________________________________________________

[ 1 ] The plaintiff and the defendant seek

summary judgment and

summary dismissal, respectively. Both argue that there is no genuine issue to go to trial. The Bank of Montreal seeks judgment against Mr. Askar for the sum outstanding under a mortgage. Mr. Askar states that it is clear that he has no liability and the claim should be dismissed. He argues that by obtaining a judgment against the prior owner for the amount outstanding the Bank has merged its claim in the judgment and can no longer claim against him. FACTS [ 2 ] The pertinent facts are not in dispute. [ 3 ] The property was mortgaged to the Bank in March 2007, by Yuksel Helvali.

The mortgage was granted under the provisions of the National Housing Act , R.S.C. 1985, c. N-11, with the result that the mortgagor, Mr. Helvali, was personally liable on the covenant to pay found in the mortgage. [ 4 ] The Bank commenced a foreclosure action on March 4, 2008, against Mr. Helvali and a subsequent purchaser of the property, Mr. Veroba (the 2008 action). [ 5 ] On February 12, 2009, the Bank obtained an Order for Sale in the 2008 action permitting it to purchase the property at the fair market value and granting it a deficiency judgment against Helvali and Veroba in the amount of $163,941.20.

The order provided in paragraph 17 that it was stayed if Helvali and Veroba paid the arrears owing under the mortgage pursuant to a specified payment plan. The Bank filed the Order at the Court House but, in light of the stay, did not register it at the Land Titles Office. [ 6 ] On June 22, 2009, Mr. Askar became the registered owner of the property.

He advised the Bank of the transfer and the Bank confirmed that it would permit him to continue making monthly payments as allowed under the Order and the Bank would continue to hold the 2008 action in abeyance pending receipt of the outstanding arrears. [ 7 ] In April, 2010, the Bank advised Mr. Askar that he had defaulted in making his payments. This notification was required pursuant to paragraph 17 of the Order for Sale. Mr. Askar admitted his default. [ 8 ] On August 23, 2010, this action (the 2010 action) was commenced against Mr. Askar seeking payment of the balance outstanding under the mortgage.

Mr Askar filed a defence. [ 9 ] On September 7, 2010, Mr. Askar’s counsel consented to the registration of the Order for Sale in the 2008 action at the Land Titles Office. This consent was necessary as the property was registered in the name of Mr. Askar and the Registrar would not otherwise accept the Order and transfer the title to the Bank. That Order was registered at the Land Titles Office on November 10, 2010. [ 10 ] The Bank and Mr. Askar brought these opposing applications for

summary judgment and

summary dismissal. Counsel for Mr. Askar acknowledged that the mortgage was subject to the provisions of the National Housing Act . The sole issue between the parties was the question of whether the Bank could seek judgment against Mr. Askar in light of the fact it had already obtained judgment against the prior mortgagors in the 2008 action. ISSUE [ 11 ] Once a lender obtains judgment against a mortgagor, can it still obtain judgment against someone who subsequently purchases the property subject to the mortgage?

ANALYSIS [12] Mr. Askar argues that the cause of action in the 2008 action and the 2010 action are the same. Both seek the remediesavailable to the Bank pursuant to the mortgage registered in 2007. He says that the Bank, having recovered judgment against two of thedefendants in the 2008 action, cannot obtain judgment against him in the 2010 action. The cause of action against him, he argues, iswholly merged in the judgment found in the Order for Sale. [13] He relies on Bank of Scotland v. “Nel” (The), (FC), [2001] 1 F.C. 408 (F.C.T.D.).

In that case the courtnoted that when judgment has been given in an action, the cause of action is merged with the judgment. The cause of action is replacedby the rights created by the judgment and a second action may not be brought on that cause of action. [14] Mr Askar also relies on the Canadian Encyclopedic Digest,

(2010) Judgments and Orders XV:457 which states that when aplaintiff proceeds against several separate defendants in several actions based upon the same cause of action and recovers judgmentagainst one of the defendants, the cause of action is wholly merged in the judgment and is no longer available as the basis of the otheractions. See as well CED Actions VIII.i(

a) clauses 173 to 176; Cockshutt Plow Co. v. Kornyssyn, (SK KB), [1931] 3W.W.R. 171 (Sask K.B.), at para. 3. [15] He points out that, similarly, when a plaintiff sues two partners and obtains judgment, and has omitted to sue the third, thedebt becomes merged in the judgment. The plaintiff can no longer sue the third partner: Hudson’s Bay Co. v. Scott (BC SC), [1929] 3 W.W.R. 232 (B.C.Co.Ct.). [16] Mr. Askar also relies on Royal Trust Corporation of Canada v. Turner, [1985] 5 W.W.R. 36 (Alta. QB). In that case thedefendant P granted a mortgage to Royal Trust and then transferred the property to Turner.

Turner signed an assumption agreement withthe lender and eventually executed a renewal agreement. The mortgage went into default and Royal Trust commenced foreclosureproceeding against both defendants. An Order for Sale to the lender was obtained, leaving a deficiency of several thousand dollars forwhich P was liable. [17] P became insolvent and made a proposal under the Bankruptcy Act. It was accepted by a majority of the creditors, includingRoyal Trust, and approved by the court.

Royal Trust filed a proof of claim against P in which it valued the security under its mortgageand a claim was made for the anticipated deficiency. The proposal provided that upon the distribution of funds, all provable claimswould be fully satisfied. Royal Trust received funds under the proposal and then sought judgment against Turner. [18] The Court found, at paragraph 14, that a proposal accepted by a majority of the creditors and approved by the Court creates anew contract between the debtor and its creditors and the terms of the proposal replace the terms of the original contracts.

Once RoyalTrust accepted the satisfaction of the debt through the proposal, it could not pursue Turner for the same indebtedness. [19] Mr. Askar argues that Royal Trust v. Turner is analogous to the facts in his case. He argues that it and the other casesreferenced support his position that the Bank merged its claim in the judgment it obtained against the prior owners and therefore cannotnow claim against him. [20] The Bank responds by pointing to the provisions of the Land Titles Act, R.S.A. 2000, c. L-4, s. 58. It says that Mr. Askar isliable on the covenant to pay created by this section.

It states: In every instrument transferring land for which a certificate of title has been granted, subject to mortgage or encumbrance, there shall beimplied the following covenant by the transferee both with the transferor and the mortgagee: That the transferee will pay the principalmoney, interest, annuity or rent charge secured by the mortgage or encumbrance, after the rate and at the time specified in the instrumentcreating it, and will indemnify and keep harmless the transferor from and against the principal sum or other money secured by theinstrument and from and against the liability in respect of any of the covenants contained in the instrument or under this Act implied onthe part of the transferor. [21] The reasoning behind this

section was considered in Short v. Graham, [1908] 7 W.L.R. 787 (Alta. T.D.), by Justice Stuart.He noted that the

section was new and designed to change the common law. He said at paragraph 6:

....The law formerly was that the purchaser, taking..[the] property subject to an incumbrance, (sic) was bound to pay off that incumbranceand could be sued by the vendor and made to pay the money, not to the vendor himself but to the [lender]; and I think the statute wasmerely intended to make that obligation enforceable by the [lender] directly against the purchaser, without any circuity (sic) ofprocedure. [22] Stuart J. concluded by saying that this statutory provision should be available only where there has been a “real purchase” bythe transferee.

If it is impossible for the vendor to seek indemnity from the purchaser for the amount outstanding under the mortgage, thecovenant to pay should not be implied in favour of the lender. See as well: Trusts and Guar. Co. v. Monk, (AB CA),[1925] 1 W.W.R. 5 (Alta.S.C.A.D.) [23] In short, he found that the new

section created privity between the lender and subsequent owners of the property so that thelender could sue the new owners directly on the covenant to pay in the mortgage. [24] The Bank, relying on the cases outlined below, argues that the covenant to pay created by s. 58 is not merged in the judgmentobtained against the prior owners of the property as the covenants to pay are not joint but several. [25] In Netherlands Investment Co. v. Des Brisay, (AB CA), [1928] 1 D.L.R. 581 (Alta. S.C.A.D), the courtheld that the above-mentioned

section of the Land Titles Act creates separate covenants to pay the same debt. In that case the lenderfailed to sue the original owner, but sued the subsequent owner. It then purchased the property pursuant to an Order for Sale in itsforeclosure action and obtained a judgment for the deficiency. The court noted at paragraph 66 that a lender in that situation still has theright to sue the original owner. [26] The effect of obtaining judgment against only one debtor where there are several covenants was considered in Campbell FlourMills Co. v. Bowes, [1914] 32 O.L.R. 270 (Ont. S.C.A.D.).

The court in that case explained at para. 38 that: ...If A. and B. are jointly and severally bound to C., and C. sues A. alone to judgment, that does not bar his action against B. The contractof A. to pay is merged and transit in rem judicatam, [ie. it is coverted into a judgment] but the separate contract of B. is wholly unaffected. Payment will operate as a bar, but not judgment. [emphasis added][1] [27] Against this background the more recent case of Guaranty Trust Co. of Canada v. Bailey, (1985) 1985 ABCA 116 ,38 Alta. L.R. (2d) 262 (C.A.) was decided.

In that case the owner granted a first mortgage to Guaranty Trust and a second mortgage to ALtd. A Ltd. became the owner of the property pursuant to a final order for foreclosure. The land was subsequently resold several timesand default on the first mortgage occurred. Guaranty Trust commenced a foreclosure action and sought deficiency judgments against allsubsequent owners (transferees) subsequent to A Ltd.

Two of them defended the action, claiming that they were not liable as the propertyhad come into the name of the transferor, A Ltd. by way of a foreclosure, rather than a transfer. [28] The court held that s.62, (now s.58) was intended to protect a vendor from liability for the mortgage debt after he had sold theland. To operate, it required the existence of a right by the transferor to be indemnified by the transferee for the mortgage obligationshould the lender seek payment from the prior owner. [29] Relying on earlier case law, including Short v.

Graham, the court found that if the transferor is not liable on the covenant topay and therefore cannot seek indemnification from the transferee, the

section will not operate to create an implied covenant to paybetween the transferee and the lender. [30] The court held that a lender who obtains title pursuant to a foreclosure is not a transferee as that term is defined in the Act andtherefore is not liable on the implied covenant to pay the mortgage. As the foreclosing lender who took title was not liable, those whosubsequently purchased the property subject to the mortgage were also not liable as the foreclosing lender had no claim forindemnification.

[ 31 ] The Court in Royal Trust v. Turner , the case relied upon by Mr. Askar, reviewed and considered Guaranty Trust Co. of Canada v. Bailey . The Court held that Royal Trust had no right to claim directly against Turner, the transferee, on the covenant to pay created by the statute. The transferor had made a new contract that discharged and fully satisfied the amount outstanding under the mortgage. The transferor could not now claim against the transferee, Turner. As the lender, Royal Trust, had no higher right than the transferor to claim against the transferee, it had no claim against Turner. [ 32 ] From this case law the following principles can be established: (

a) Section 58 of the Land Titles Act gives the lender a statutory ability to sue the transferee directly on the covenant to pay found in the mortgage. It comes into effect when there is a transfer of land subject to a mortgage, the transferor is liable to the lender, and the transferor has the right to seek indemnity from the transferee for the amount unpaid under the mortgage. (

b) The covenant to pay of the transferee that is created by s.58 is a several covenant. Therefore, judgment against the transferor for the amount outstanding under the mortgage will not bar a claim against the transferee on its covenant. (

d) Where the lender has either been paid by the transferor or has made a new contract with the transferor that results in the debt being satisfied, it has no claim against the transferee on the several covenant created by s. 58 . [ 33 ] In this case, the land was transferred to Mr. Askar subject to the Bank of Montreal mortgage as the Order for Sale had not been registered at the Land Titles Office. The mortgage continued to secure the property. [ 34 ] The original transferors were liable to the Bank and the Bank obtained judgment against them for the amount remaining outstanding under the mortgage. With Mr.

Askar’s default, the prior owners could have sought indemnity from him of the sum outstanding to the Bank. [ 35 ] The requirements necessary to trigger s. 58 of the Act were met: there was a transfer subject to a mortgage, the transferor was liable to the lender, and the transferor could seek indemnity from the transferee of the amount outstanding to that lender. [ 36 ] However, as the case law indicates, that does not end the matter.

The Bank will be barred from relying on s. 58 and suing on the several covenant to pay if the debt has been satisfied, either by payment by the transferor or by way of a contract between the Bank and the transferor. In this case neither has occurred. [ 37 ] The requirements of s. 58 have been met and there is no bar to the Bank’s reliance on the covenant to pay created by that section. [ 38 ] Mr. Askar’s argument that no covenant to pay can be imputed to him pursuant to s. 58 when the original covenant to pay has been reduced to a judgement finds no support in the statute or the case law.

There is no genuine issue for trial. [ 39 ] Therefore,

summary judgment is granted to the Bank and Mr. Askar is liable for the deficiency outstanding under the mortgage. [ 40 ] Mr. Askar’s counsel raised the question of the interest rate to be used in determining the final balance outstanding. Neither party provided any case law on point. If the parties cannot agree to the calculation of the balance outstanding or to the costs, they may speak to those issues within 30 days of this decision.

Heard on the 30 th day of November, 2010. Dated at the City of Calgary, Alberta this 31 st day of January, 2010. J.B. Hanebury M.C.C.Q.B.A. Appearances: Richard J. Cotter, Q.C. Fraser Milner Casgrain LLP for the Plaintiff Poole Lawyer Jeffrey D. Poole for the Defendant Anne Kirker MacLeod Dixon LLP for the Third Parties [1] The court noted that this principle is “as old as Queen Elizabeth’s time”, referring to Queen Elizabeth I.