Magnum Mortgage & Realty Corp. v. Cruickshank, 2011 ABQB 744

Court of Queen ’ s Bench of Alberta Citation: Magnum Mortgage & Realty Corp. v. Cruickshank, 2011 ABQB 744 Date: 20111129 Docket: 0903 16008 Registry: Edmonton Between: Magnum Mortgage & Realty Corp. Plaintiff - and - Jeffrey Michael Cruickshank Defendant _______________________________________________________ Memorandum of Decision of L. A.

Smart, Master in Chambers _______________________________________________________ Introduction [ 1 ] On November 5, 2007 the Defendant Cruickshank executed a mortgage in favor of Canadian Western Trust Company over lands briefly legally described as Lot 10, Block 3, Plan 744HW concurrently with a General Security Agreement (GSA) over all of his present and after acquired personal property to secure a loan for $59,700 plus interest at 16 percent per annum.

Cruickshank defaulted in the making of payments under the mortgage and the Plaintiff (Magnum) issued a Statement of Claim seeking foreclosure and judgment against him. The Statement of Claim also alleges that the mortgage and the Mortgage Disclosure Statement were assigned to Magnum although there is no similar allegation with respect to the GSA.

[2] Cruickshank was noted in default. An Order Nisi/Order for Sale was granted on the application of Magnum on December21, 2009. It declared the amount owing under the mortgage, provided a one-day redemption period, and in default of redemption foradvertising the property for sale by tender.

The Order goes on to provide for the application for sale or a foreclosure to be adjourned toJanuary 18, 2010 in the event a tender was received which would net more than $238,000, or if less than $238,000 then the Plaintiff’sapplication for sale to the Plaintiff for $238,000 and judgment against Cruickshank would proceed. [3] There is no indication in the Order that Cruickshank appeared. Parenthetically, I observe that the Notice of Motion filed forthe Order Nisi/Order for Sale mentioned nothing of an application for Sale to the Plaintiff or Judgment. The Order was served onCruickshank on December 30, 2009.

The property was advertised for sale and no tenders were received. The adjourned applications didnot proceed. [4] On a January 20, 2010 the prior Mortgagee accepted an offer under its judicial sale process for $266,100. Eventually onAugust 26, 2010 the surplus proceeds after payout of the prior mortgagee were paid out of court to Magnum and applied to its mortgage.Magnum now applies for judgment pursuant to the GSA for the remaining balance due under the mortgage debt. Issue [5] The issue raised by the Court was that in light of the limitations set out in Section 40 (1) of the Law of Property Act, c.

L-7R.S.A. 2000 (the “Act”) was Magnum permitted to obtain an in personam judgment under these circumstances. Section 40(1) reads asfollows: In an action brought on a mortgage of land, whether legal or equitable, or on an agreement for the sale of land, the right of the mortgageeor vendor is restricted to the land to which the mortgage or agreement relates and to foreclosure of the mortgage or cancellation of theagreement for sale, as the case may be, and no action lies (

a) on a covenant contained in the mortgage or agreement for sale. Discussion [6] Magnum relies on Krook v. Yewchuk, (SCC), [1962] S.C.R. 535 as authority for the proposition that s.40 ofthe Act does not preclude the taking of additional security, enforcement of that security and personal judgment. In Krook the chattelswere sold to Yewchuk by Krook and the issue of the application of what was then s.19 of the Conditional Sales Act, R.S.A. 1955, c.4was raised.

The court did not decide that issue as Krook had sought a foreclosure of the land and chattels only and did not ask for ajudgment over in respect of any deficiency. Magnum nonetheless argues that the decision supports their position that they are entitled toa personal judgment as their “chattel” security and circumstances are not subject to restrictions under current legislation (what is nowreferred to as a purchase-money security agreement). Such an

interpretation goes well beyond the decision. Krook stands for the singleproposition that additional security and recovery against that security is permitted, nothing more. My view is reinforced by the decisionof the Supreme Court of Canada in Edmonton Airport Hotel Co. Ltd. v. Credit Foncier Franco-Can., (SCC), [1965]S.C.R. 441. The mortgagor argued that the taking of a chattel mortgage was an indirect attempt to overcome the restriction on suing onthe covenant to pay contained in the mortgage. In the facts of that case there was no vendor-and-purchaser situation.

Justice Judsonspeaking for the court said: 5 The first question that arises under this legislation is the company’s defence that where a mortgage of land is involved, acollateral chattel mortgage for the same indebtedness or part of it is necessarily void, because in an action upon a mortgage of land, theright of the mortgagee thereunder (i.e., the mortgage of land) is restricted to the land, and that to enforce the security of the chattelmortgage would be another way of enforcing personal liability on the covenant to pay.

In my opinion, which coincides with that of thetrial judge and the majority in the appellate division, this submission was rejected by this court in Krook v. Yewchuk (1962) (SCC), 39 W.W.R. 13, [1962] S.C.R. 535, reversing (1961-62) (AB CA), 36 W.W.R. 547. 6 I cannot accept the distinction drawn in the dissenting reasons in the appellate division between this case and Krook v. Yewchuk.It is true that Krook v. Yewchuk was a vendor-and-purchaser situation.

The vendor was selling a hotel property comprising land andchattels and he took back security on both, the chattel mortgage being expressed to be collateral to the land mortgage for the full amount.

The present transaction is one between borrower and lender, mortgagor and mortgagee. The lender will not lend unless he gets certainsecurity both on land and chattels. I can see no possible distinction between the vendor and purchaser and mortgagor and mortgageerelationship. 7 It is additional security that the lender wants. He would not lend without it. He is not interested in the personal covenant but inproperty. It is true that if the lender took security only on the land, he could not reach the chattel property by way of execution becausehe could not get a personal judgment.

The lender is under no obligation to go into a transaction with these limitations and takes thesecurity as part of the loan transaction. Under this legislation, he is and can only be interested in the taking of security. The taking ofsecurity on chattels does not offend in any way against the restriction in sec. 34(17) of the right of the mortgagee to the land. He isseeking to enforce his security on chattels outside the terms of sec. 34(17). He is enforcing his security on the land and he is enforcinghis security on the chattels.

In neither case is he attempting to get a personal judgment either directly or indirectly. The company’sdefence fails. [7] If not explicit, at least implicit in the decision, is that mortgagees may recover on the “security” in the land and the chattelsbut are not entitled to a personal judgment. [8] Having reach that conclusion there may yet be an entitlement to personal judgment. Magnum’s argument did not address the application of the principles enunciated in Clayborn Investments Ltd v. Weigert (1977) 1977ALTASCAD 164 , 3 Alta L.R. (2d) 295 (CA) regarding the restriction in s.40 of the Act.

The court succinctly stated inClayborn that it “must inquire into the whole of the surrounding circumstances at the time of the transaction to determine its substance,whatever the form it may have taken, and the burden of proof that the provisions do not apply to the transaction would be upon him whoasserts it.” [9] In Royal Bank of Canada v. Stallman, 2009 ABQB 766, Master Hanebury made a detailed and thorough review of numerousdecisions addressing many examples of circumstances both allowing and restricting enforcement of the covenant for payment in amortgage.

As in Clayborn a number involved the taking of a promissory note with the same terms as the mortgage which were readilyfound to be unenforceable. Examples or circumstances when personal judgment was allowed are where: a. There was a pre-existing basket of securities that was shored up with a second or third mortgage; b. An existing debt was consolidated concurrent with granting of additional security to add to existing security; c. In addition to consolidation there was an increase in the indebtedness with concurrent granting of additional security to add toexisting security; d.

The loan was in default and the mortgage taken after default to shore up the pre-existing loan; e. No appraisal was done or the appraisal disclosed a value well below the loan indicating the lender was looking to the borrowerto pay as opposed to satisfaction from the land; and f.

No covenant for payment is contained in the mortgage. [10] The following provisions of the GSA were expressly identified by Magnum as those most relevant to the Court’s decision: The Borrower agrees that the obligations secured by the security interest and assignment are all of its indebtedness and liability to theLender, direct and indirect, absolute and contingent, whenever incurred, and including without limitation, existing indebtedness, futureadvances and its liability for the costs and expenses and other obligations described in this Agreement.

The indebtedness and liabilitysecured are called “Obligations” in this Agreement.

3. Costs and Expenses The Borrower agrees to pay the costs and expenses the Lender may incur to enforce this Agreement, register this Agreement or notice of it, repossess, maintain, preserve, repair or sell the Collateral, or appoint a consultant, receiver, receiver and manager or agents, and to pay interest thereon. The Borrower also agrees to pay all legal costs and fees incurred by the Lendor to do any of the above or to defend any legal claim or counterclaim by the Borrower or others respecting the manner of the enforcement of the right to the Lender to enforce this Agreement.

The Borrower will pay the legal fees on a solicitor and own client basis. 7. Default The Borrower shall be in default if: a. The Borrower or any other person liable for the Obligations is in default under any agreement relating to the Obligations or any part thereof; b. The Borrower or any other person liable for the Obligations is in default under any other loan, debt or obligation owed to anyone else. 8.

Remedies If the Borrower is in default, the Lender may require the Borrower to repay any or all of the Obligations in full, whether matured or not, and the Lender may enforce this Agreement by any method permitted by law, and may exercise any rights and remedies under applicable law. Further, the Lender may appoint any person, including an employee of the Lender, to be an agent, receiver or receiver and manager (the “ Receiver ” ) of the Collateral. The Lender and Receiver shall be entitled to: f. take any other action deemed necessary to carry into effect the provisions of this Agreement. . . . .

The rights and powers in this paragraph are in supplement of and not in substitution for any other rights the Lender may have from time to time. 14. Continuing Effectiveness This Agreement shall be a continuing agreement in every respect, securing the payment of the Obligations. 18. Binding Agreement This Agreement is binding on Jeffery Michael Cruickshank, his heirs, successors and assigns insofar as it extends to all of the Collateral referenced herein that is owned by him. Each person who signs this Agreement is jointly and severally liable under this Agreement to the extent of the security interest.

[ 11 ] Magnum has determined it does not wish to take steps to realize on its security. Many of the provisions identified support the principle that it may pursue its remedies as it chooses. No issue is taken with that principle. It is argued that the GSA contains covenants for payment and under the circumstances it is entitled to choose to enforce the covenant for payment rather than against the secured personal property of Cruickshank.

The GSA states it is taken as security for the “ Obligations ” which is all of Cruickshank ’ s “ indebtedness and liability to the Lender, direct or indirect, absolute and contingent, whenever occurred, and including without limitation, existing indebtedness, future advances... ” It also provides that “ If the Borrower is in default, the Lender may require the Borrower to repay any or all of the Obligations... ” On its face, the covenant to repay the “ Obligations ” is clearly much broader than the covenant for payment in the mortgage. [ 12 ] With the above in mind, it is necessary to examine the specific circumstances of this case to determine the substance of the transaction as stipulated by Clayborn .

The evidence shows there was one loan with a mortgage containing a covenant for repayment and a GSA taken concurrently on the same date. There is no evidence of prior dealings, other loans between the parties, shoring up of security prior to or post default, nor any suggestion that the loan grossly exceeded the value of the lands or of any intention for there to be future or other dealings of any kind. The language of the GSA may be broader but the reality is the only “ Obligations ” is the mortgage debt.

Conclusion [ 13 ] The mere existence of collateral security in and of itself does not entitle a mortgagee to personal judgment in relation to a land mortgage granted by an individual who is otherwise protected by s. 40(1) of the Law of Property Act ( Edmonton Airport Hotel ). If a mortgagee is to succeed it must prove that the substance of the transaction entitles it to avoid the protection of the

section ( Clayborn ). Although Mortgagees may take enforceable security as against other assets and realize on that security, incorporating direct or indirect collateral covenants for payment in that security may in effect be little more than an ill conceived attempt to disguise the security as something substantively different from a simple collateral promissory note.

Notwithstanding the form unless the surrounding circumstances at the time of the transaction supports a finding that the transaction is in substance other than a mortgage granted by an individual under s. 40(1) of the Act (and not otherwise excepted by statute), the mortgagee ’ s action on the personal covenant will fail.

In my view, Magnum has provided no evidence to support such a finding in this case. [ 14 ] If I am incorrect in the above finding, Magnum ’ s claim on the GSA must fail regardless as it did not plead nor prove that the GSA was assigned to it by Canadian Western Trust Company. [ 15 ] The application for in personam judgment against Cruickshank is dismissed. Heard on the 17 th day of February, 2011. Dated at the City of Edmonton, Alberta this 29 th day of November, 2011. L. A. Smart M.C.C.Q.B.A.

Appearances: Francis Price Reynolds Mirth Richards & Farmer LLP for the Plaintiff self represented for the Defendant