Scotia Mortgage Corporation v. Manzouri, 2012 ABQB 395

Court of Queen ’ s Bench of Alberta Citation: Scotia Mortgage Corporation v. Manzouri, 2012 ABQB 395 Date: 20120614 Docket: 0901 02526 Registry: Calgary Between: Scotia Mortgage Corporation Plaintiff - and - Ali Manzouri and Amjad Ashour Defendants _______________________________________________________ Reasons for Judgment of J.T. Prowse, Q.C.

Master in Chambers _______________________________________________________ Defendants seek a reduction in the amount of a Rice Order [ 1 ] The defendant mortgagors seek a reduction in the deficiency judgment claimed by the plaintiff mortgagee (“Scotia”) because of delays in the foreclosure proceeding which they attribute to Scotia. Two issues arise: - should a Rice order set the land value at an earlier, higher value, when the defendants filed a meritless defence, and the lender’s delay occurred in applying for

summary judgment, a step which would not have been necessary but for the filing of the meritless defence?

- does an Alberta court have the power to eliminate contractual interest charges for the period following the date when a Rice order couldhave been obtained using reasonable diligence? Effective date for valuing the land for the purpose of a Rice order [2] Lenders often apply to purchase the land under foreclosure for the appraised fair market value, and seek judgment for theshortfall between what the lender is owed and the fair market value. This is known as a “Rice order” because the process was approvedin the case of Trusts and Guarantee Company, Limited v.

Rice et al, (AB CA), 1924 CarswellAlta 35, 20 Alta.L.R.444, [1924] 2 W.W.R. 691, [1924] 3 D.L.R. 352. [3] In a falling market, if the lender has delayed in applying for a Rice order, then the court may refuse to sell the property forthe current fair market value and instead require the offer to purchase to be at an earlier, higher value. Decisions to that effect aresummarized in the decision of Master Laycock in Resmor Trust Company v. Rahman, 2011 ABQB 725, 2011 CarswellAlta 2065, 209A.C.W.S. (3d) 434. See also: Paradigm Quest Inc. v.

Fox, 2012 ABQB 70, 2012 CarswellAlta 151. [4] The leading case is Yorkshire Trust v.

Armwest Development, 1985 ABCA 225 , 1985 CarswellAlta 210, 41 Alta.L.R.(2d) 1, [1986] 1 W.W.R. 478, 66 A.R. 93, where, at paragraph 4, the Court states that the purchase price used in a Rice order should beassessed “on the day when the mortgagee was first entitled to apply for such an order, or the day when such an order is indeed obtained,whichever is the higher”. [5] The defendants in this case ask the court to apply Yorkshire Trust, supra, and direct that Scotia only be allowed to purchasethe subject property for what is expected to be a higher, earlier fair market value, rather than the April, 2011, fair market value of$120,000.00. [6] I have reviewed the earlier decisions cited in Rahman, supra.

Typically, the defendant mortgagor was either noted indefault, filed a Demand for Notice, or otherwise admitted liability, and yet the lender did not apply for a Rice order in a reasonablyexpeditious manner. [7] The earlier decisions also include cases where the defendant mortgagor defended the foreclosure, and the lender thenobtained

summary judgment in the form of an redemption order (previously known as an order nisi). The redemption period expired, thesubsequent listing or tendering did not produce an acceptable offer, but then the lender delayed in applying for a Rice order: see, forexample, Royal Trust v. 371890 Alberta Ltd., (AB KB), 1993 CarswellAlta 235, 15 Alta.L.R. (3d) 325, 146 A.R.292, 43 A.C.W.S. (3d) 1111; and North American Life v. Greater Edmonton, (AB KB), 1994 CarswellAlta 261, 24Alta.L.R. (3d) 428, 161 A.R. 372. [8] The unique aspect of this case is that the lender’s delay occurred after the mortgagors filed a statement of defence. Thealleged delay was a delay in applying for

summary judgment in the form of a Rice order. The defendants in this case filed a statement ofdefence in June of 2009, but the lender did not apply for

summary judgment in the form of a Rice order until April of 2011. No newinformation came to the lender’s attention after June, 2009. In other words, the lender could have applied for, and obtained,

summaryjudgment in June, 2009, rather than waiting until April, 2011. [9] The Alberta Court of Appeal stated in Yorkshire Trust, supra, that the value at which the property should be sold to thelender is the higher of the present value and the value on the date “when the mortgagee was first entitled to apply for such an order”.Does that rule apply where Scotia was forced to apply for

summary judgment because the defendant mortgagors had filed a statement ofdefence? [10] Scotia takes the position that the loss due to delay should be attributed to the defendants, or if not, then the loss should beshared by both parties. Scotia points out that under Rule 1.2(3), it is the responsibility of all parties to an action to facilitate the quickestresolution of disputes. At the relevant times, the defendants in this case were represented by counsel, who had an equal obligation tomove the litigation forward toward resolution.

[ 11 ] In my view, there is no reason to exclude the circumstances of the case before me from the general rule set out in Yorkshire Trust , supra . As will be seen from the chronology below, there was clearly no defence to Scotia’s claim, and it could easily have applied for and obtained

summary judgment in the form of a Rice order months before it did. This may have resulted in a higher sale price being credited to the defendant mortgagors, rather than the sale price of $120,000.00. Chronology - November 8, 2007 - the defendants granted a mortgage to Scotia. - August 8, 2008 - the defendants attended upon Scotia and advised that they obtained the mortgage by fraud at the instigation of others.

They identified the masterminds behind the fraudulent scheme, hoping that Scotia would pursue the masterminds either through criminal or civil proceedings. - October 8, 2008 - a monthly mortgage payment was missed for the first time. - January 27, 2009 - Scotia assigned the file to its present lawyer for collection. - February 19, 2009 - the foreclosure statement of claim was issued. Fraud was not alleged.

In my view, the passage of time between the first missed payment on October 8, 2008, and the issuance of a foreclosure statement of claim on February 19, 2009 is at the outside limit of what might be considered reasonable in the circumstances. - February 23, 2009 - the defendants filed a demand of notice. - May 9, 2009 - Scotia applied to amend its statement of claim to allege fraud. It obtained an order allowing the statement of claim to be amended. The amended statement of claim was filed on May 21, 2009.

Fraud could have been alleged at the outset on February 19, 2009, as the defendants had admitted fraud in August of 2008. This 2.5 month delay was unnecessary. - June 30, 2009 - the defendants filed a statement of defence to the amended statement of claim as they were now facing a claim of fraud instead of a simple foreclosure action. - March 9, 2010 - Scotia filed an affidavit of records. - March 24 and 29, 2010 - the defendants filed affidavits of records. - October 25, 2010 - the defendants’ lawyer ceased to act. - March 29, 2011 - Scotia served its application for

summary judgment (Rice order). - April 14, 2011 - Scotia obtained

summary judgment in the form of a Rice order, selling the property to Scotia for $120,000.00, and awarding a deficiency judgment against the defendants in the amount of $220,227.71. Interest at the contractual rate was allowed up to April 14, 2011. The Rice order reserved Scotia’s right to seek a declaration of fraud against the defendants at a later date.

- July 7, 2011 - Scotia filed an affidavit of its investigator who met with the defendants in August, 2008. This supported its application for a declaration of fraud.

None of the information contained in the affidavit was of recent origin. - August 24, 2011 - the defendants applied under Rule 9.15 to set aside the Rice order of April 14, 2011 on the basis that the defendants had failed to appear on April 14, 2011, by reason of accident or mistake, and I set aside that Rice order, which opens up the issue of the correct amount of the Rice order to now be granted. [ 12 ] The defendants in this case only defended when the claim was amended to include fraud. The Rice order given on April 14, 2011, reserved the question of fraud for a future application.

Scotia could have used this approach in the spring of 2009, rather than waiting until April, 2011. This is not a situation where new information was discovered triggering the Rice order application on April 14, 2011. [ 13 ] From a review of the chronology set out above, I conclude that the effective date at which the property should be evaluated for the purpose of a Rice order is November 1, 2009. Here is how I arrive at that date. [ 14 ] Scotia could have commenced an action in foreclosure and fraud by February 19, 2009.

This would have been defended by the end of March 2009, and should have been defended in a manner which clearly disclosed that no challenge was being made to the in rem validity of the mortgage. A Rice order application could have been brought forward by June 1, 2009. It was not brought forward for approximately another 10 months. [ 15 ] Both parties were equally responsible for the 10 month delay. The defendants filed an ambiguous defence, which, on the face of it, challenged the in rem validity of the mortgage. This raised an unnecessary hurdle.

Counsel for both parties should have pressed for the immediate sale of the subject property, leaving aside the issue of fraud for future deliberation. [ 16 ] If I add 5 months (half of the 10 month delay) onto the date of June 1, 2009, I come to November 1, 2009.

The parties have leave to bring forward evidence as to the fair market value of the subject property on that date, and if that amount is more than $120,000.00, then the plaintiff will have leave to purchase the property for that amount, and the Rice order of April 14, 2011 shall be modified accordingly. [ 17 ] In making these calculations I have been careful not to demand procedural perfection from the lender or its lawyer. Every action cannot be advanced as if it were the only file being handled by the lender or its lawyer.

Should Scotia Mortgage ’s deficiency judgment only allow interest under the mortgage until the date upon which a Rice order could have been obtained using reasonable diligence? [ 18 ] It is one thing to set the value of the property as it was on November 1, 2009, but it is another to restrict the lender’s right to claim the agreed upon contractual interest rate to November 1, 2009.

Restricting the right of a lender to claim an agreed upon contractual interest rate to the date of judgment strikes me as a somewhat remarkable proposition, with potentially far reaching implications. [ 19 ] For example, where a lender sues to recover an unsecured credit card debt, can the Court restrict contractual interest to some date prior to judgment on the basis that the lender could have sued earlier, or moved more quickly in the litigation?

Or, when a lender applies for a redemption order in a foreclosure action in Alberta, can the defendant insist that, at the redemption order stage of the proceedings, the lender be forced to take a judgment, rather than the current practice of simply seeking a declaration of indebtedness pending the disposition of the security? [ 20 ] There does not seem to be any legislation allowing an Alberta court to deny contractual interest to the date of judgment.

Various provinces, including Alberta, have legislation giving the Courts jurisdiction to modify prejudgment interest, but those enactments typically expressly exempt from their purview prejudgment interest flowing from the parties’ contractual agreement to pay interest: M.A.Waldon The Law of Interest in Canada (Thompson Professional Publishing 1992 Toronto) p. 142. The federal government had not dealt with this topic in the Interest Act .

[21] There is conflicting case authority as to whether, barring applicable legislation, or a finding of unconscionability, the courts havethe authority to deny a plaintiff a rate of interest agreed to by contract. [22] The earliest case I could find was Beard v. Ketchum, 1850 CarswellOnt 173, 6 U.C.Q.B. 470. There the plaintiff sued to collectunder promissory notes given over 40 years earlier (the indebtedness had been acknowledged so that no limitation issue arose). Thequestion was whether the court had the jurisdiction to restrict the amount of prejudgment interest to be awarded to the plaintiff.

Thecourt observed “... we can only say that the contract being express to pay interest, the plaintiff has in law the same right to the interest asto the principal, and we cannot by any act or judgment of ours direct or sanction its disallowance ...”. [23] Other cases which held that there is no common law or equitable power to deny contractual interest are: 1. Bank of Montreal v. Awards-West Ventures Inc., (BC CA), [1990] B.C.J.

No. 2247, 50 B.C.L.R. (2d) 363, 14R.P.R. (2d) 56 (C.A.) where a lender sued for remaining mortgage indebtedness, presumably both principal and interest, and the trialjudge dismissed the claim due to delay. The Court of Appeal reversed the trial decision and concluded that there were no grounds at lawor in equity to prevent the lender from collecting on the debtor’s contractual promise to pay.

In response to the debtor’s submission thatthe covenant should be released based on equity and fairness, the Court of Appeal quoted with favour from Campbell Discount v.Bridge, [1961] 2 All E.R. 97 (C.A.) as follows: I do not think that the discrepancy can be healed by some rather loose conception of what are called equitable principles. Equitableprinciples are, I think, perhaps too often bandied about in common law courts as though the Chancellor still had only the length of hisown foot to measure when coming to a conclusion.

Since the time of Lord Eldon the system of equity for good or evil has been a veryprecise one, and equitable jurisdiction is exercised only on well known principles. There are some who would have it otherwise, but as atpresent advised I am of opinion that, at any rate in the instant case, there is no equitable principle that can be called in aid. Similarly I rather deprecate the attempt to urge the court on what are called equitable principles to dissolve contracts which are thoughtto be harsh, or which have turned out to be disadvantageous to one of the parties.

The observation of Lord Nottingham, C., in Maynard vMoseley [(1676), 3 Swan. 651 at 655] is still true that: ‘... the Chancery mends no man’s bargain,’ and I do not therefore see my way tocall in aid equity to mend what may be an unfortunate situation and one which, if it calls for remedy, calls for aid by the legislaturerather than by the justiciary. 2. Brennenstuhl Estate v. Trynchy, 2008 CarswellAlta 529, 2008 ABQB 256, 89 Alta.L.R. (4th) 137, 435 A.R. 85, 61 C.P.C. (6th) 126.In that case the plaintiff by counterclaim had delayed a lawsuit by more than 2 years, but was ultimately successful.

The defendant bycounterclaim sought relief from contractual interest for that 2 year time period. Graesser J. stated: “In my view, the Judgment Interest Act has no application to prejudgment interest in this case. Interest is provided for under theprovisions of the lease option agreement. I have found that agreement is valid and enforceable. I have no general discretion to disallowinterest which has been contractually provided for.” 3. Agate Developments Ltd. v.

United Gulf Developments Ltd., 2009 CarswellNS 282, 2009 NSSC 160, 60 M.P.L.R. (4th) 126, wherethe defendant wanted relief from contractual interest, but the court observed: “Unlike prejudgment interest under the Judicature Act, this court does not have a broad discretion over contracted interest. I do not havethe power to refuse contracted interest, unless the contract is contrary to law.” [24] The practice of denying contractual interest in Alberta foreclosures seems to have begun with the case of Alberta Mortgage andHousing Corp. v. Maplewood Properties Ltd., [1988] A.J. No. 365.

The plaintiff did not proceed expeditiously and the court chose tocap the interest claim against the mortgagor and guarantors at an earlier date, when the defendants had filed an admission of liability.The question of the jurisdiction to cap contractual interest is not discussed in that decision.

[25] Examples of subsequent Alberta mortgage cases which capped contractual interest are Morguard Trust Co. v. Scheider, (AB KB), 1993 CarswellAlta 303, 8 Alta.L.R. (3d) 330, 13 C.P.C. (3d) 287, 139 A.R. 1 (Master); North American LifeAssurance Co. v. Greater Edmonton Development Corp., (AB KB), 1994 CarswellAlta 261, 24 Alta.L.R. (3d) 428,161 A.R. 372 (Master); Servus v. Bardenhagen, (QB 0910-00108, Sept 21, 2011) (Master); Resmor Trust Co. v. Rahman, 2011CarswellAlta 2065, 2011 ABQB 725 (Master); and Paradigm Quest Inc. v.

Fox, 2012 CarswellAlta 151, 2012 ABQB 70 (Master). [26] An Alberta case which capped contractual interest in a non-foreclosure situation is Pacific Western Supply Ltd. v. ApexInsulation 1996 Ltd., 2004 CarswellAlta 1055, 2004 ABQB 596 (Q.B.). The plaintiff had not pursued its action until proceedings inanother action resulted in funds to be divided between writ holders. Wilson J. capped the plaintiff’s contractual interest, stating thatinterest should not accrue while the plaintiff slept on its rights.

Again, the jurisdiction to cap contractual interest was not discussed. [27] My research also located the following cases from outside of Alberta where contractual interest appears to have been capped on acommon law or equitable basis: Canada (Attorney General) v. Edzerza, 1994 CarswellBC 2129 (S.C.); Deneschuk Construction Ltd. v.Waywayseecappo First Nation, 2000 MBQB 136 , 2000 CarswellMan 445, [2001] W.W.R. 333, 151 Man.R. (2d) 22 (Q.B.);and Bank of Nova Scotia v. Pelley, [2004] N.S.J. No. 290, 2004 NSSC 149, 224 N.S.R. (2d) 384.

Conclusion regarding capping contractual interest [28] I agree with the reasons expressed in Bank of Montreal v. Awards-West, Brennenstuhl Estate v. Trynchy, and AgateDevelopments v United Gulf. Where the parties have agreed to an interest rate by contract, absent legislative authority or a finding ofunconscionability, I am unaware of any jurisdiction by which contractual interest rates may be capped.

Accordingly, I decline to do so inthis case. [29] Even if the jurisdiction existed to cap contractual interest in foreclosure situations, I would not do so where, during the period ofthe plaintiff’s delay, the defendant continued to use and enjoy the secured property, or the lender, using an assignment of rents, receivedrent and credited it to the mortgage balance. [30] The result is that the property in question will be evaluated on an earlier date, November 1, 2009, but contractual interest rate isto accrue to the date of the deficiency judgment provided in the Rice order.

Costs [31] If the parties cannot agree as to costs, they may approach me for a ruling in that regard. Heard on the 14th day of February, 2012. Dated at the City of Calgary, Alberta this 14th day of June, 2012.

J.T. Prowse, Q.C. M.C.C.Q.B.A. Appearances: Cassidy J. Lintott YSL Lawyers LLP for the Plaintiff Benjamin J. Kormos Walsh Wilkins Creighton LLP for the Defendants