Bank of Montreal v. Southcombe, 2012 ABQB 20

Court of Queen ’ s Bench of Alberta Citation: Bank of Montreal v. Southcombe, 2012 ABQB 20 Date: 20120110 Docket: 0803 15963 Registry: Edmonton Between: Bank of Montreal Plaintiff - and - Kimberlie Jane Southcombe and Gregory K. Southcombe Defendants Corrected judgment: A corrigendum was issued on January 11, 2012; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Memorandum of Decision of W. S. Schlosser, Master in Chambers _______________________________________________________ [ 1 ] This is a case where one of two innocent parties has to suffer for the fraud of a third.

[2] The Southcombes are husband and wife. They purchased a Gulfstream Conquest motorhome from Leisure RV Rental Ltd.and dealt with Arnold Donszelmann. This wasn’t the first one they had purchased. The idea was that the motorhome would go into arental pool. Eventually there would be sufficient rental proceeds so that the Southcombes would own a motorhome free and clear fortheir retirement. [3] The purchase was financed by the bank. The bank paid the dealer. Title and ownership passed to the Southcombes. Thingswent well for a time. The Southcombes received what they understood to be rental income.

Then the payments stopped. [4] Unfortunately the motorhome never existed. [5] The Southcombes entered into a conditional sales contract for the motorhome in July of 2005. $97,128.83 was financed. Afinal payment of $83,766.97 was due July of 2010. The Southcombes made regular payments for 38 months, between July 31, 2005 andDecember 31, 2008. As at March 15, 2010, the Southcombes owed the bank $99,419.52; consisting of principal sum $89,243.70 andinterest in the amount of $10,175.82. [6] When the motorhome was purchased, Mr.

Donszelmann told the Southcombes that the Conquest was a new constructionbeing built to order. He said the chassis was produced but the remainder of construction was being completed. This statement was false.No record has been found of the motorhome the Southcombes understood they had purchased. The evidence suggests that themotorhome never existed. [7] The Southcombes weren’t the only ones taken in by Arnold Donszelmann. There were apparently many others. Althoughthere is a separate action against the dealer, the prospect of recovery doesn’t look good.

Now the Southcombes are sued by the Bank forthe amount owing on the financing contract. [8] The contract can be characterized in several ways. In one sense, the Southcombes were labouring under a (unilateral) mistakeabout the existence of the subject matter of the contract. In another sense, the agreement was induced by Donszelmann’smisrepresentation. At law, such a contract is sometimes treated as a nullity and void from the beginning. The problem is that the Bank ofMontreal acquired rights under the contract for value. [9] In Kingu v.

Walmar Ventures Ltd., (BC CA), 10 B.C.L.R. (2d) 15 (BCCA), McLachlin J.A. (as she thenwas) said at p. 20-21: ..... Rescission may always be obtained for fraudulent misrepresentation which induced the plaintiff to enter into the contract. But it maybe obtained for innocent (non-fraudulent) misrepresentation only in cases where the plaintiff establishes the following requirements: (

a) A positive misrepresentation must have been made by the defendant. (Where the defendant owed a fiduciary duty to the plaintiff,as it may be contended Chmilar did to the plaintiffs in this case, failure to disclose material facts may suffice: Laskin v. Bache & Co., (ON CA), [1972], 1 O.R. 465, 23 D.L.R. (3d)385 (C.A.); Waddams, The Law of Contracts, 2nd ed. (1984), p. 262. (

b) The representation must have been of an existing fact: Anderson v. Pac. Fire Marine Ins. Co.

(1872) L.R. 7 C.P. 65; see alsoBisset v. Wilkinson, (UK JCPC), [1927] A.C. 177 (P.C.). (

c) The representation must have been made with the intention that the plaintiff should act on it: Peek v. Gurney (1873), L.R. 6 H.L.377. (

d) The representation must have induced the plaintiff to enter into the contract: Shortt v. MacLeannan, (SCC),[1959] S.C.R. 3, 16 D.L.R. (2d) 161 [Ont.].

(

e) The plaintiff must have acted promptly after learning of the misrepresentation to disaffirm the contract: Clough v. L.N.W. Ry.(1871), L.R. 7 Exch. 26; Wallbridge v. W. H. Moore & Co.; W. H. Moore & Co. v. Baldry (1964), (BC SC), 48W.W.R. 321 (B.C.S.C.); Dodds v. Millman (1964), (BC SC), 47 W.W.R. 690, 45 D.L.R. (2d) 472 (B.C.S.C.); Bango v.Holt, (BC SC), [1971] 5 W.W.R. 522, 21 D.L.R. (3d) 66 (B.C.S.C.); Timmins v. Kuzyk (1962), (BCSC), 32 D.L.R. (2d) 207 (B.C.S.C.). (

f) No innocent third parties must have acquired rights for value with respect to the contract property: Babcock v. Lawson (1880), 5Q.B.D. 284 (C.A.). (

g) It must be possible to restore the parties substantially to their pre-contract position: Redgrave v. Hurd (1881) 20 Ch. D. 1 (C.A.);Schlote v. Richardson, (ON SC), [1951] O.R. 58, [1951] 2 D. L.R. 233 (H.C.); McLaughlin v. Colvin, (ON CA), [1941] 4 D.L.R. 568, affirmed (SCC), [1942] 3 D.L.R. 292 (S.C.C.) [Ont,]; Frieson v. Berta (1979), (BC SC), 100 D.L.R. (3d) 91 (B.C.S.C.); Andronyk v. Williams, (MB CA), [1986] 1 W.W.R. 225, 21, D.L.R. (4th) 557, 36 Man. R. (2d) 161 (C.A.). (

h) An executed contract for the sale of an interest in land will not be rescinded unless fraud is shown: Redican v. Nesbitt, (SCC), [1924] S.C.R. 135, [1924] 1 W.W.R. 305, [1924] 1 D.L.R. 536 [Ont,]; Shortt v. MacLennan, supra: Kragh-Hansen v.Kin-Com Const. & Dev. Ltd. (1979), 13 R.P.R. 22 (B.C.S.C.). [10] Statements about the law of mistake and fraud are sometimes not models of clarity.

Although virtually every leadingauthority and every modern text has been written after November 1, 1875, when the Judicature Acts came into force, there is often ananalysis of how mistake is treated at law (the contract never existed) and how it is treated in equity (a right to rescind), as if law andequity were administered separately. [11] Typically, a contract void for mistake is void ab initio. This characterization, or a finding that a contract never existed, couldbenefit the Southcombes as it would then be just a question of determining the mechanics of unwinding the contract.

The bank wouldthen be left to chase the dealer or bear the loss. [12] Contracts that may be rescinded are treated as valid until they are set aside. If a third party has obtained rights in themeantime, this will bar the right to rescind. This principle is simply stated by Lord Denning in Lewis v. Averay, [1971] 3 All ER 907 at 911 (a case of mistaken identity) and see also Snells Equity, 31st ed. para. 13-02, 13-19, generally.

In circumstances where ‘equity’sdarling’, the bona-fide purchaser for value without notice, has obtained rights under the contract, the void/voidable distinction, or ‘voidab initio’ assessment has no useful application. There is little of practical value to separate legal and equitable analyses if the onlypractical remedy is an equitable one and it is barred by the intervention of third party rights. [13] The crux of the matter, therefore, is whether the bank can be identified with the acts of Arnold Donszelmann.

If the bank is inthe same position as the dealer then the Southcombes’ right to rescind for mistake or misrepresentation will prevail. If the bank isinsulated from Donszelmann’s misrepresentations, and is treated as a third party, then the bank’s rights will prevail. [14] The commercial nature of this transaction sets it apart from situations in which the bank might otherwise be identified withthe dealer. [15] The starting point is that the bank is essentially an assignee of the conditional sales contract.

It attempts to remove itself fromthe acts, omissions and obligations of the dealer, by providing in para. 8 (for example): that the Southcombes agree to hold the bank“harmless [from] all equities and set offs existing between the merchant and the buyer unless such liability is extinguished by applicablelegislation.” [16]

Section 52 of the Law of Property Act limits the ability of lenders to make themselves immune with a cut-off clause. Section52 provides:

52(1) The right of a transferee of the interest of a secured party under a purchase-money security agreement or the right of a transferee under an agreement for the purchase of consumer services to have the whole or any part of the agreement performed by the debtor is no greater than the secured party or the transferor would have had in any action on the agreement and the transferee is subject to the same obligations, duties, liabilities and defences, other than counterclaim, as the secured party or transferor would have been.

(2) Any provision of a purchase-money security agreement or an agreement for the provision of consumer services or any related agreement that (

a) purports in any manner to limit or render inapplicable, or (

b) has the effect of in any manner limiting or rendering inapplicable the application of subsection (1) is against public policy and void. [ 17 ] However, this limitation of cut-off clauses applies only to “ consumer goods ” as defined in subsection (

i) of the

definitions portion of the Personal Property Security Act . ( Law of Property Act, s. 51). “ Consumer goods ” is defined to mean goods that are used, or acquired primarily for personal purposes. [ 18 ] In this case, the primary intention was commercial. The Southcombes wanted to use the motorhome to generate income. The intention was that the income from this (and other units) would generate sufficient funds to provide a retirement motorhome. [ 19 ] Accordingly, this particular transaction is outside the limitation in the Law of Property Act .

If the bank were identified with the dealer, it would be in no better position than the dealer to enforce it. The dealer could not enforce the contract in the face of the mistake or Donszelmann ’ s misrepresentations. However, the bank is one step removed from the dealer and ends up occupying the same position as a third party who has acquired rights under the contract in good faith.

It is only the commercial aspect of the contract that takes it outside the protection of the Law of Property Act and puts the bank in a superior position. [ 20 ] The net result is that the cut-off clause and the terms of the assignment are sufficient to isolate the bank from the fraud of the dealer ’ s employee. [ 21 ] Much was made by the bank about who had the ability to discover the true facts or, in this case, the non-existence of the motorhome. Binnie, J. in Sylvan Lake Golf and Tennis Club v.

Performance Industries , (2002) 209 DLR ( 4 th ) 318 at 338, para. 61, writing for the majority, says that rectification should not become a belated substitute for due diligence. The bank may have assumed that the Southcombes were purchasing the motorhome and driving it off the lot, as is the case in most of these contracts, and consequently, might have assumed that the purchasers had verified the existence of the motorhome when the agreement was financed.

The purchaser had acknowledged that they had examined the motorhome and were satisfied with it (clause 9). [ 22 ] In the circumstances, it would be difficult to impose a duty on the bank to verify the existence of the vehicle the purchasers asked the bank to finance, or, otherwise, to prevent the bank from relying on the terms of the agreement. [ 23 ] Accordingly, the bank ’ s application for

summary judgment is allowed and the Southcombes ’ counterclaim against the bank is dismissed. Heard on the 26 th day of October, 2011. Supplemental Briefs filed Nov. 16 and Nov . 22, 2011 .

Dated at the City of Edmonton, Alberta this 10 th day of January, 2012. W. S. Schlosser M.C.C.Q.B.A. Appearances: R. W. Steen and P. W. Messner Witten LLP for the Plaintiff V. Tong Strathcona Law Group for the Defendants _______________________________________________________ Corrigendum of the Memorandum of Decision of W. S. Schlosser, Master in Chambers _______________________________________________________ In the Appearance

section of the Memorandum of Decision it states that R. Steen of Witten appeared on behalf of the Plaintiff. It is hereby amended as follows: Appearances: R. W. Steen and P. W. Messner Witten LLP for the Plaintiff