Westside Accounting & Tax Ltd. v. Barclay, 2012 ABQB 216

Court of Queen ’ s Bench of Alberta Citation: Westside Accounting & Tax Ltd. v. Barclay, 2012 ABQB 216 Date: 20120411 Docket: 0901 15646 Registry: Calgary Between: Westside Accounting & Tax Ltd. Plaintiff - and - Brett Barclay Defendant _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C.A. Kent _______________________________________________________ [ 1 ] The Defendant lawyer practises law in Crossfield, Alberta.

The Plaintiff Westside Accounting & Tax Ltd. is primarily in the business of preparing financial statements and tax returns for small businesses and individuals. In addition to the accounting services it provides, Westside conducts the business of second mortgage financing. It is a small mortgage financing business. It has closed 19 mortgages and currently has 6 active second mortgages. In addition the owner of Westside has rental properties that he manages. [ 2 ] The issue in this trial arises as a result of a decision by Westside to grant a second mortgage to Wanda Breti. She was the

owner of a condominium in Airdrie, Alberta. When Ms. Breti approached Westside, the condominium was subject to a first mortgage in favour of the CIBC and a second mortgage in favour of HSBC. Ms. Breti found herself in financial difficulties. The arrangement which she made with Westside was that Westside would fund a second mortgage in the principal sum of $42,000. At the time the first mortgage to CIBC was at about $160,000 and the value of the condominium was somewhere between $215,000 and $225,000.

The plan was that the money advanced by Westside would first pay out the current second mortgage, leaving some money so that Ms. Breti was able to pay outstanding bills and condo fees. It was known to Westside that Ms. Breti had a very poor credit rating. [ 3 ] Sometime in September the Defendant received instructions to place the Westside mortgage, take the Westside funds to pay out the HSBC second mortgage and pay the balance to Ms. Breti. He forgot to pay out the HSBC second mortgage and paid most of the funds directly to Ms. Breti.

The Westside mortgage was registered but because of the failure to pay out the second mortgage it stood in line as a third mortgage. [ 4 ] On March 13, 2008, CIBC commenced foreclosure proceedings against Breti. The affidavit of default stated that the amount owing under the mortgage at that time was $156,852.54.

Westside received notice of the CIBC foreclosure sometime in mid-April 2008. [ 5 ] As 2008 proceeded, the value of the condominium went down and then, in the Fall of 2008, the worldwide recession occurred so that the value of the condominium reduced significantly. [ 6 ] The foreclosure proceeded to an Order Nisi/Order for Sale on May 23, 2008. Westside was represented at that hearing. Ms. Breti appeared on her own behalf. Ms.

Breti admitted that the HSBC mortgage was in arrears as were her condo fees but that she was expecting sufficient funds soon to pay off all arrears and bring the mortgages into good standing. The Master granted an Order Nisi/Order for Sale with a 4 month redemption period followed by a 90-day judicial listing at a minimum listing price of $205,000.00. Noone from HSBC appeared at the hearing. Counsel for Westside argued for a reduced redemption period. The 4 month redemption period expired without redemption. CIBC listed the Breti property for sale.

On January 22, 2009, CIBC filed a final affidavit of default in support of a motion for a final order for foreclosure. That showed that the CIBC mortgage was at $170,000.00. After a further listing of the property for sale, on June 1, 2009, the Master granted a final order for foreclosure. [ 7 ] The principal of Westside said that he had ensured that Westside always had enough liquidity to pay out the first mortgage when they funded a second mortgage. This was done to protect its security.

In one previous circumstance of default and foreclosure of the first mortgage, Westside did pay out the first mortgage, to protect its security. The parties agree that Westside did have sufficient funds to pay out the first mortgage. [ 8 ] Liability is not an issue. The Defendant admitted that it was his mistake in not having the second mortgage discharged and therefore negligence and breach of trust are both admitted.

The issue is what remedy is available to Westside. [ 9 ] Both sides admit that the proper process to analyse this issue is to determine what damages are appropriate to restore the client to the position that it would have been in, had the solicitor properly discharged his duty. ( Toronto Industrial Leaseholds Limited. v. Posesorski et al. [1994] [O.J. no.2691] [Ont. C.A.]).

The issue is joined however by the differing assumptions made by the Plaintiff and the Defendant about what position Westside would have been in but for the negligence and breach of trust. [ 10 ] Westside says that had the lawyer performed his duties adequately Westside would have been the second mortgagee. As a result it would have been able to redeem the first mortgage as it had done on one previous occasion. As third mortgagee it could not redeem the first mortgage; it could only redeem the second mortgage. Had the HBSC mortgage been discharged, Ms. Breti would have had $29,000 less cash than she actually had.

With less cash it is likely that she would have defaulted on the CIBC mortgage earlier. Westside suggests that the CIBC would have commenced foreclosure proceedings by January 2008. Westside would have moved more quickly to pay out the CIBC mortgage. And finally, the entire foreclosure procedure would have proceeded differently. The statement of claim would have been issued and served earlier. Section 41 (2) (

b) of the Law of Property Act RSA 2000, c-l-7 sets out the matters which the Master must consider in determining how long a period of redemption to grant at the time that the Order Nisi/Order for Sale is granted. One of the important factors is how much equity will be left in the property at the end of the redemption period. Given the burn rate of the mortgage interest and assuming Westside had paid out the CIBC mortgage in the early part of 2008, there would be $203,000 or $204,000 owing on the condo with the value of $205,000.

There was virtually no equity so the Master would likely have granted a one day redemption period. It is also likely that the Master would order a 90 day judicial listing during which listing Westside would have been entitled to make an offer. If Westside offered $205,000 the Court would likely have granted that order. Once Westside had title to the condo, the falling value of the condo would have become irrelevant. The principal of Westside would have rented out the condo.

[ 11 ] If all of those assumptions are accepted and taking into account the foreclosure costs which Westside would have incurred by stepping into the place of the first mortgagee, the loss suffered by Westside is $43,930.70. [ 12 ] The second argument made by Westside is that it is entitled to recover because the lawyer was in breach of trust.

Westside argues that although the amount that they would be entitled to is not necessarily different than under the negligence analysis, the rules for obtaining a remedy for breach of trust in circumstances such as this are less onerous. [ 13 ] The Defendant argues first that while Westside has approached the issue in the proper manner, the assumptions that are made are not based on common sense and reality. The Defendant argues that if the correct assumptions are used, Westside has suffered no loss. First the Defendant says that there is an assumption that Westside would have paid out the CIBC mortgage.

She points out that Westside was not a large mortgage company and on only one previous occasion did it actually assume the place of the first mortgagee. Second, she disagrees with the fact that Ms. Breti would have gone into default on the first mortgage sooner. She acknowledges that had the lawyer done his job properly she would not have had an extra $29,000.00 in her pocket but she also would not have had three mortgages that she was trying to pay. Third, she does not agree that Westside would have acted significantly faster had Breti gone into default earlier.

The first time that a subsequent mortgagee is entitled to notice of a foreclosure action by a prior mortgagee is at the time of the application for the Order Nisi/Order for Sale. On the facts of the case as they are, that occurred in May 2008. She says it would only be slightly earlier, if at all, that Westside would have known about the foreclosure. Fourthly, she says that while Westside is technically correct about the matters that the Master must consider in determining how long a redemption period to order, in reality, defendants often come to court without affidavits and are heard by the Master.

In this case, Ms. Breti came to court without an affidavit. She told the court that she had cashed in some RRSPs and was expecting a cheque to arrive. The Master knew that the second and third mortgages were in arrears and also that condo fees were owing. Under all of those circumstances the Master ordered a 4 month redemption period. The defendant argues that it would not have been any different had Westside taken over the CIBC position and foreclosed. The defendant argues that all of this must be considered in the context of the Calgary and Airdrie residential real estate markets in 2008 and early 2009.

An expert retained on behalf of the defendant said the following: Beginning in the summer of 2007, the Calgary Metro residential real estate market became unbalanced in terms of the absorption rate (inventory turnover). This unbalanced market was placing downward pressure on both single family and multi family home prices through the first three quarters of 2008.

He goes on to say that Both Calgary and Airdrie were witnessing a downward trending condominium prices through 2008 before the rate of decline of decline increased more sharply in the fourth quarter as a result of the onset of the worldwide recession. [ 14 ] Sometimes, determining what would have happened had the lawyer fulfilled his duties is reasonably easy. If a lawyer misses a limitation period in a negligence action but the underlying facts do not disclose a duty of care owed by the Defendant to the Plaintiff, then there is no loss suffered by the Plaintiff. A case like this is more difficult.

I must determine what a small business person would have done just before and during the tumultuous economic circumstances of 2008. Hindsight is a wonderful thing, but also a dangerous thing. It is well known how devastating the economic downturn in the fall of 2008 was. However, that is what we know now, not what ordinary reasonable business people could necessarily have predicted in Spring 2008. [ 15 ] I accept the following to be reasonable assumptions. Ms. Breti would have been in more serious financial circumstances in the fall of 2007.

In March, 2008, the value of the first and second mortgage was about equal to the equity so that if Westside knew about the default in the mortgage, it could have acted. Because of Ms. Breti’s more difficult financial circumstances, either default under the mortgage would have occurred earlier or it would have been more likely that the redemption period would have been shorter. In June, 2008, the condo was still close to the value of the mortgages. All I need to decide is whether Westside would have moved to pay out the first mortgage and take over the foreclosure.

I do not need to decide whether that turned out to be a bad decision. Given the value of the condo up to June, 2008, it is reasonable to assume that Westside would have moved to take over the first mortgage. In the result, Westside’s claim against the Defendant has been made out. Westside shall have judgment for $43,930.70, any further interest and costs.

Heard on the 1 st day of March, 2012. Dated at the City of Calgary, Alberta this 11 th day of April, 2012. C.A. Kent J.C.Q.B.A. Appearances: Gary A. Befus Walsh Wilkins Creighton LLP for the Plaintiff Jennifer M. Blanchard Norton Rose Canada LLP for the Defendant