Servus Credit Union Ltd. v. Miller, 2012 ABQB 765

Court of Queen ’ s Bench of Alberta Citation: Servus Credit Union Ltd. v. Miller, 2012 ABQB 765 Date: 20121218 Docket: 1203 05719 Registry: Edmonton Between: Servus Credit Union Ltd. Plaintiff - and - Mark Glen Miller and the Toronto Dominion Bank Defendants _______________________________________________________ Reasons for Decision of W. S.

Schlosser, Master in Chambers _______________________________________________________ [ 1 ] The issue in this case is whether a foreclosing second mortgagee who takes by way of Order for Sale is subject to the implied covenant to indemnify the first mortgagee remaining on title. [ 2 ] There is no dispute about the underlying facts. Mr. Miller had a line of credit with the TD Bank. It was secured by a collateral mortgage against his property in the Village of Wabamun. The TD Mortgage was second on title after the mortgage of Servus Credit Union Ltd. Servus held a high-ratio mortgage - which meant that Mr.

Miller would be liable on the covenant to pay if there were

a deficiency. [ 3 ] The TD line of credit went into default and it took a direct Order for Sale to itself and a deficiency Judgment for $6,398.93 plus costs. [ 4 ] The appraised fair market value of the property was then $128,000.00. That number was accepted by the Court. [ 5 ] The amount owing on the line of credit was relatively small in comparison to the appraised fair market value of the property. The amount of the Servus mortgage created the deficiency. The deficiency judgment was calculated as follows: Calculation of Deficiency Judgment 1. Principal Amount owing as at Affidavit of Default $24,817.74 2.

Interest at Date of Affidavit of Default June 13, 2011 35.34 3. Per diem interest June 14, 2011 to August 11, 2011 (59 days @ $18.48) 159.89 4. Tax Account 5. Other charges paid by Plaintiff; (

a) NSF Charges (

b) Late charges (breakdown and provision in mortgage required) © Inspection Fees (

d) Property Maintenance (

e) Sundry Charges - Insurance paid 36.75 6. Condominium Fee arrears paid 7. Interest at ___% computed on said other charges from Date of payment thereof to date of Rice Order 8. Taxed Costs 9. Amount owing under First Mortgage $109,349.21 TOTAL DUE TO PLAINTIFF AT DATE RICE ORDER GRANTED $134,398.93 LESS PURCHASE PRICE $(128,000.00)

AMOUNT OF DEFICIENCY JUDGMENT $6,398.93 [6] Paragraph 6 of the Order for Sale said: 6. The Registrar of Land Titles shall cancel the existing certificate of title to the mortgaged lands and shall issue a new certificate of title in the name of the Plaintiff The Toronto Dominion Bank, 23rd Floor, 380 Wellington Street, London, Ontario, N6A 4S4 or itsnominee free and clear from Mortgage No. 082 325 932 but subject to: Mortgage 082 246 419 Amending Agreement 102 246 960 and Amending Agreement 102 318575 [7] Mortgage 082 246 419 is the Servus mortgage.

The Order does not have TD “assume” the mortgage but it does notexpressly negative any of the obligations arising from it. [8] TD attempted to sell the property at $128,000 but there were no offers. It did not make any payments to Servus. Mr. Millerdidn’t either. To everyone’s consternation, the land value declined. Servus obtained an Order for Sale to itself at the then appraised fairmarket value of $75,000.00, along with a deficiency Judgment against Mr. Miller in the sum of $39,288.97, plus costs. [9] Servus now applies for Judgment against TD for the deficiency.

TD has brought a cross application for dismissal. Section 58(1) of the Land Titles Act [10] If TD had taken title by way of a Final Order for Foreclosure, there would be no issue. That question was decided byGuarantee Trust Company of Canada v. Bailey et al (1985) 1985 ABCA 116 , 38 Alta. L.R. (2d) 262 (C.A.). In that case, thesecond mortgagee obtained title by way of a Final Order for Foreclosure. The land was sold and the question was whether a purchaser(there, several purchasers down the line) was liable to the first mortgagee.

The Court held that they were not. [11] There is no Final Order for Foreclosure in this case. However, the Court of Appeal’s reasoning with respect to theinterpretation of

section 58 is authoritative and binding. The question is whether the reasoning in Bailey requires treating an Order forSale to the Plaintiff the same as a Final Order for Foreclosure. [12] The basis of the Plaintiff’s argument in Bailey was old

section 62 of the Land Titles Act, which is materially identical tocurrent section 58(1), and provides: 58(1) In every instrument transferring land for which a certificate of title has been granted, subject to mortgage or encumbrance, thereshall be implied the following covenant by the transferee both with the transferor and the mortgagee: That the transferee will pay theprincipal money, interest, annuity or rent charge secured by the mortgage or encumbrance, after the rate and at the time specified in theinstrument creating it, and will indemnify and keep harmless the transferor from and against the principal sum or other money secured bythe instrument and from and against the liability in respect of any of the covenants contained in the instrument or under this Act impliedon the part of the transferor.

[ 13 ] Bailey has been affirmed recently: Winners Equities Inc. v. 664050 Alberta Ltd.

(2009) ABCA 50, (affirming Veit J. at 2007 ABQB 630 ). [ 14 ]

Section 1(k)(iii) of the Land Titles Act (then

section 1(l)(ii)) defines “ instrument transferring land ” to include “ a judgment or order of a court. ” A Final Order for Foreclosure would fall into this category, as would an Order for Sale to the Plaintiff. Both parties here agree that an Order for Sale to the Plaintiff in a foreclosure action is an instrument transferring title as that term is defined by the Land Titles Act. [ 15 ] TD, (like the Defendant in Bailey ) , would seem to be caught by the plain meaning of

section 58. There is nothing express in the Order here to negative or modify the operation of the implied covenant, as section 59(1) permits. [ 16 ] Bailey tells us that the correct

interpretation of

section 58 is more subtle than it first appears (note Price and Trussler, Mortgage Actions in Alberta , Carswell 1985, ch. 10 ). The effect of

section 58 is to create privity between the transferor and the mortgagee. The purpose is to prevent circuity of action.

Section 58 codifies a principle of equity identified by Lord Eldon, L.C., in Waring v. Ward , 1802, 7 Ves. Jun., 32 E.R. (Ch. Div) 136 (at 137, 138). The

section is to be interpreted in accordance with that equitable principle. [ 17 ] Harradence J.A., writing for the Court in Bailey said (at p. 271) : But the equitable rule codified by s. 62 was not designed to catch the transfer of land in any circumstances where he obtained the benefit of payment of the first mortgage security rather, it was designed to protect a seller who, having parted with the land, was still liable for the mortgage debt. In its origins, the equitable rule codified by s. 62 was founded upon the claims of conscience and not the claims of contract. Lord Eldon said in Waring v.

Ward (1802), 7 Ves. Jun. 333 , 32 E.R. 136 at 137 : If he entered no obligation with the party, from whom he purchases, neither by bond nor covenant of indemnity to save him harmless from the mortgage, yet this Court, if he receives possession, and has the profits, would, independent of contract, raise upon his conscience an obligation to indemnify the vendor against the personal obligation to pay the money due upon the vendor ’ s transaction of mortgage; for, being become owner of the estate, he must be supposed to intend to indemnify the vendor against the mortgage.

But the proposition has not since held that the obligation arises independently of the existence of a contractual obligation between the payor of the mortgage and the person who gets the benefit payment. The rule was first expressed in the context of a vendor/purchaser situation. No doubt in Waring , as in all such cases, the vendor allowed a credit against the purchase price for the balance owing under the mortgage. It is not surprising that, later, the obligation came to be expressed as an implied covenant and, under that rubric, found it way into the legislation.

It is sufficient for the purposes of this case to say s. 62(1) by its terms applies only to that obligation a purchaser owes to his seller because he bought subject to the encumbrance and was given credit against the purchase price. In such circumstances, he must indemnify his seller against any personal obligation of the seller and s. 62 confirms and codifies that rule . If his seller has no personal obligation, there is no need for such an indemnity.

That is all this case decides. (emphasis added) [ 18 ] The question, is whether the equitable principle would apply to an Order for Sale to the Plaintiff, as it would an ordinary purchaser. [ 19 ] The Alberta Law Reform Institute, in “ Mortgage Remedies in Alberta ” , Report, No. 70, June 1994, reviewed

section 62, and the exceptions to the equitable principle, saying (at p. 56 et seq):

It will be noted that section 62(1) states that the transferee ’ s implied covenant is with both the transferor and the lender. In this respect Alberta goes further than most other Canadian jurisdictions, where the law implies covenants by the transferee with the transferor only and not with the lender. In such jurisdictions, the lender ’ s right of action on the covenant is thus limited to the borrower. The latter can then look to his or her transferee for indemnity by virtue of the implied covenant.

In Alberta however, section 62(1) gives the lender the right of direct action against the transferee as well by creating privity between them. The transferee ’ s liability under the implied covenant continues after he or she transfers the land to another who becomes the registered owner - even if the latter expressly covenants to pay the mortgage - but the Alberta courts have differed as to the nature and duration of the liability. To correctly interpret

section 62, one must understand the law that existed before 1886. At that time, when the borrower sold the property subject to the mortgage. “ . . . the purchaser was held in equity bound to indemnify the vendor against his personal liability to the mortgagee under the covenant to pay contained in the mortgage ” . The covenant to indemnify was raised in favour of the vendor and not in favour of the lender. The lender could not sue the purchaser directly. If the lender wished to pursue the purchaser, it had to obtain an assignment of the vendor ’ s right to indemnity and pursue that cause of action.

Section 62 codified this covenant of indemnity which arose between transferor and transferee and it avoided the circuity of action by creating privity of contract between the transferee and the lender. The

section did not create new personal liability for the transferee; it created a more direct route for the lender to enforce existing liability. The result is that no covenant arises under

section 62 between the transferee and lender unless right to indemnity exists between the transferor and transferee. There are many situations in which the transferee is not bound in equity to indemnify the transferor against his or her personal liability to the lender and therefore, no covenant arises under

section 62 between the lender and the transferee. This is so even though a literal

interpretation of the

section suggests the covenant arises. We do not propose to summarized all the situations in which a covenant has not arisen under

section 62, but we shall discuss several such situations to illustrate this concept. No covenant arises under

section 62 where: (1) the transferor transfers less than his or her entire interest in the land or transfers only some of the land charged by the mortgage, (However, if the transferor transfers by one instrument of transfer the entire interest in all the lands charged by the mortgage to several transferees, each transferee is jointly liable for the covenant of indemnity arising from

section 62.) [1] (2) the transferee purchases from a transferor who is not liable on the express covenant to pay found in the mortgage or assumption agreement or on a implied covenant to pay, [2] (3) the lender has dealt with the borrower in such a way that the lender can no longer compel payment from the borrower, [3] (4) the transferee takes the land as a trustee, [4] (5) the transferee is unaware of the transfer [5] (6) the transferee takes the land as security for a debt owed to the transferee by the transferor, [6] (7) the transferee purchases at an execution sale. [7] [ 20 ] Bailey is an example of the second situation. [ 21 ] One exception that would seem to apply is (6): ‘ where the transferee takes the land as security for a debt owed to the transferee by the transferor ’ .

However, the cases cited in the accompanying footnote are all cases in which the debtor transferred title but kept an equity of redemption. An Order for Sale to the Plaintiff, like a Final Order for Foreclosure, extinguishes the equity of

redemption. Exception (6), noted above, does not apply. [22] The cases referred to in support of the 6th exception do, however, provide a nice description of the equitable principle. InFullerton v. Brydges, (1895), 1895 CanLII 140 (MB CA), 10 Man. R. 431, Bain J., in the Manitoba Court of Appeal, said (at p. 441): As a general principle, there can be no question that, when a vendor sells and conveys land subject to an incumbrance, the purchaser isbound in equity to indemnify the vendor against the incumbrance.

In the ordinary case of a purchaser buying an estate cum onere, thisCourt, as Lord Chancellor Sugden said in Jones v. Kearney, 1 Dr. & War. 155, “fastens on every such purchaser a liability to indemnifythe seller against the incumbrances affecting the property sold. If I create an incumbrance on my estate and sell, and no engagement beentered into with respect to that incumbrance, but I convey the estate subject to it, the purchaser is bound in equity to indemnify meagainst such incumbrance.

It was my object in so selling to charge him and indemnify myself.” Prima facie this obligation rest on everypurchaser of an equity of redemption or any estate subject to an incumbrance, but still it is only an equitable implication arising from thesupposition that the facts are as they appear to be on the face of the conveyance, viz., that the purchaser has become the actual owner ofthe equity of redemption or of the estate subject to the incumbrance on it, and that the vendor has no further interest in the estate.

In sucha case the obligation equity imposes on the purchaser is only what is just and reasonable; but it is always open to the purchaser to showby evidence of extrinsic and collateral facts and circumstances that it was not the intention that he was to assume the incumbrance andindemnify the vendor against his personal liability in respect of it: Corby v. Gray, 15 O.R.1; Beatty v. Fitzsimmons, 23 O.R. 245, BritishCanadian Loan Co. v. Tear, 23 O.R. 664. [23] In this case there is no evidence of contrary intention and, as mentioned, nothing in the Order that expressly negatives theimplied covenant.

It would not be open to the Court to infer a contrary intention on these facts. [24] Exception (7) might apply by analogy. However, Anderson v. Stasiuk (SK CA), [1927] 1 W.W.R. 49(Sask C.A.), the case cited in support of that proposition and, for that matter, Douglas v. Mutual Life Assurance Company of Canada(1918) (SCC), 57 S.C.R. 243, a case relied upon by the Saskatchewan Court of Appeal in Anderson, appear to have beendecided in a different statutory regime. Douglas was decided on the 1906 Land Titles Act, before the definition of ‘instrument’ wasexpanded to included “judgment or order of the court”.

No parallel

section to our

section 1(k)(iii) is mentioned by the SaskatchewanCourt of Appeal in Anderson. Accordingly, the Anderson case appears to be limited to its particular facts and the Douglas case thatpreceded it, is mainly of historical interest. (see Bailey, at para 24-26). Rice Orders [25] The practice of a lender purchasing the mortgaged property was acknowledged, critically, by the Supreme Court of Canada inSecurity Trust Co. v. Sayre, (SCC), [1920] 61 S.C.R. 109. It was detailed by our Court of Appeal in Trust andGuarantee Company Limited v. Rice, (AB CA), [1924] 2 WWR 691.

In the latter case, property had been offered forsale twice with no bids. The Master ordered a sale by tender, allowing the Plaintiff to bid in the tender process. [26] When the property went to tender the Plaintiff was the only one to bid. The Court confirmed the Master’s Order allowing thePlaintiff to purchase the property at the tendered price but stayed the Order for two months to allow the Plaintiff to come up with a betteroffer. [27] The Court suggested that there might be unfairness in allowing the foreclosing lender to bid in the first instance.

However,the lender is not prohibited from purchasing the mortgaged land. Stuart, J.A. in writing for the Court in Rice, (at p. 694) commented onthe practice as follows: It is, however, I think, advisable that something should be said about the general practice.

My view is that there should not be libertygiven to the plaintiff to bid in the first instance either in mortgage or agreement of sale proceedings, no matter who has the conduct of thesale, that there should be at least in present economic conditions an upset price fixed and announced in the advertisements and that ifafter such procedure should not be as a rule considered to be necessary.

If the sale is abortive I think the plaintiff should then be at libertyto make proposals to the Master to take the property at a certain price and that, instead of any attempts to judge whether this price is a fairand reasonable one - a thing very difficult to do upon mere affidavits of opinion - the defendant should be protected finally by an ordersuch as I have suggested in this case, viz, that the price offered by the plaintiff will be accepted unless within a time fixed the defendant

brings in a better one from a satisfactory purchaser. This latter provision will obviate the dangers which I thought might exist asexpressed in Gunn v. Johnson (AB KB), [1919] 1 WWR 698. The provision would also of course be subject tomodification according to the nature of the property and the period of the year, as also to discretion in the Master to extend the timefixed.

If the property were a farm and the date sometime in the spring, it might be inconvenient to postpone the decision as to who was toget the property and this, therefore, should be a ground for the exercise of some discretion. [28] The Court noted that a sale to the Plaintiff is not a foreclosure within the meaning of the Land Titles Act “so as to prevent theissue of a writ of execution for the balance remaining unpaid” ( Rice at 693). [29] This, of course, is the purpose of an Order for Sale to Plaintiff. It gives the Plaintiff the property, extinguishes the equity ofredemption but it does not extinguish the debt.

It preserves the right of the Plaintiff to obtain judgment for the deficiency. Once thePlaintiff is the owner, the Plaintiff, like any other purchaser, has the benefit of the increased value of the property, or the risk if itdeclines. [30] The property in the Rice case was an apartment house in Calgary. The rents had fallen off. The Alberta economy was in aslump. The University of Alberta’s website tells us that the province was emerging from a drought and Rice was decided on the eve ofthe 1925 bumper crop. The great depression was on the horizon.

This case and others recognize that a mortgage operates in a specializedcontext. The decided cases acknowledge the need to balance the interests of lender and borrower in fluctuating economies. [31] The Rice Order procedure started as a lender’s proposal to purchase, stayed for a period of time to give the borrower anopportunity to come up with a better offer. The Court of Appeal, by a majority, in Canada Permanent Trust Company v. King ArtDevelopments Ltd. (1984) 1984 ABCA 182 , 32 Alta.

L.R. (2d) 1, affirmed the Rice Order procedure and the ability of thelender to recover a deficiency in appropriate circumstances. However, the Court also held that the procedure available was not limited tothe practice discussed in Rice. It found that the discretion given to the Court by the Law of Property Act and the Rules was wide andflexible, depending on the facts of each case. The only constraint was that the procedure chosen by the Court should be fair and open. Final Order vs.

Order for Sale to the Plaintiff [32] Foreclosure, in its original sense, was only a means by which the equity of redemption was extinguished. The lender alreadyhad title. Since the Torrens system, it is a means of obtaining title (King Art at pg. 46). Now a mortgage is just a charge. An Order forSale to the Plaintiff extinguishes the equity of redemption and, like an Order for Foreclosure, is the means by which the property istransferred into the name of the lender.

But whether the lender bids on the open market or makes a proposal that is accepted by theCourt, it is still a sale, though one specifically authorized by the Court. [33] Both a Final Order and an Order for Sale to the Plaintiff take the value of prior encumbrances into account in determining theredemption period and, in the case of a Final Order, in determining whether the land value, compared to the amount of indebtedness,justifies first offering of the property for sale. A Mortgagee who takes a Final Order ‘is not given credit’ for prior encumbrances in thesame way a purchaser might be.

In a manner of speaking, a foreclosing mortgagee simply takes the land in exchange for the debt. Thevalue of prior encumbrances often only determines how long this process will take. [34] The Applicant for an Order for Sale is treated the same as a Third Party tenderor. The value of prior encumbrances is one ofthe things subtracted from the credit of the purchase price to determine the deficiency. This is one of the reasons it is important that thisinformation be disclosed to the Court. [35] In both cases, the Plaintiff takes title. The Defendant is put off the land and loses control of it.

In both cases, the Plaintiff getsthe benefit of rising values. But here the opposite happened. The land declined in value. [36] If the encumbrances remaining on title are high-ratio mortgages, or the type of security that would attract personal liability,the original Mortgagor remains liable to the encumbrancer. In the case of a mortgagee taking a Final Order for Foreclosure, neither theforeclosing mortgagee nor persons purchasing from them are liable to the remaining encumbrancers. That is what Bailey decides.

[37] However, a mortgagee who takes title by way of a court ordered sale to the Plaintiff is in a different position, and ought not tobe treated any differently from any other purchaser. The vital difference between an Order for Sale to the Plaintiff and a Final Order forForeclosure is that when there is a court ordered sale to the Plaintiff, the foreclosing mortgagee takes the land and a judgment. Otherwisethere is no point to it. In determining the value of the judgment, the value of the encumbrances remaining against title are taken intoaccount as if they had to be paid.

This is essentially no different from a purchaser being given credit for not getting clear title. In thissense an Order for Sale to the Plaintiff is not just a mechanism to put title into the name of the mortgagee and extinguish the equity ofredemption. Because the lender who takes by way of Order for Sale gets 'credit' for the encumbrances on title, the equitable principle ofWaring v. Ward applies, as does the plain meaning of

section 58. Conclusion [38] A court ordered sale to the Plaintiff is outside the fact situation in Guarantee Trust Company of Canada v. Bailey et al butthe reasoning applies. If we look behind the legislation, as the Court did in Bailey, a Court of conscience would find a Court approvedpurchaser is liable to indemnify the former owner for the encumbrances they were given credit for, even if the purchaser is the lender. (The dicta in Northland Bank v. Bank of B.C., [1984] A.J. No. 40 at para. 27 per Funduk M. is not conclusive.) Courts of Equity do notallow litigants to have their cake and eat it too. [39] The implied covenant in

section 58 can be expressly excluded. If a foreclosing mortgagee wishes to do this when they taketitle by way of court ordered sale, prior encumbrancers can have their say. In this fashion, the issue should not arise again. [40] Judgment is given against TD in the amount of $39,288.97. There is conflicting authority about whether judgment is several: Netherlands Investments Co. v. Des Brisey (AB CA), [1928] 1 W.W.R. 461 and Bank of Montreal v. Askar, 2011ABQB 52, at para. 32 (Hanebury, M), or whether the TD Bank is only a surety for Miller: Devenish v. Connacher (AB CA), [1930] 2 W.W.R. 254 (Alta.

AD), Re Forster (AB KB), [1941] 3 WWR 449 (and Price and Trussler, p. 157-8). I will leave this to the parties to argue if they wish. [41] The TD Bank’s cross application is dismissed. [42] I am indebted to counsel. This is a nice question, very ably argued. Heard on the 20th day of September, 2012. Dated at the City of Edmonton, Alberta this 18th day of December, 2012. W. S. Schlosser M.C.C.Q.B.A. Appearances:

Dusten Stewart Minsos Stewart Masson for the Plaintiff/Applicant Jennifer Oakes, Q.C. Field LLP for the Respondent, Toronto Dominion Bank [1] Trust and Guarantee Company Limited v. Monk, supra, note 144. [2] Guarantee Trust Company of Canada v. Bailey, supra, note 151, and Collingwood Invt. Ltd. v. Bank of Amer. Can. Mtge.Corp. (1988), 58 Alta. L.R,. (2d) 1 (C.A.) [3] See Patterson v. Tanner (1892), 22 O.R. 364; Royal Trust Corporation v. Turner (1985), (AB KB), 5W.W.R. 362 (Alta. Q.B.).

In the latter case, the lender accepted payout in bankruptcy in full satisfaction of the debt of the mortgagor.Since the lender could not compel the corporate mortgagor to pay the mortgage, the mortgagor had no right to indemnity from thetransferee. Therefore, no covenant arises under

section 62 between the transferee and the lender. [4] Franser v. Fairbanks (1894), 1894 CanLII 97 (SCC), 23 S.C.R. 79; Evans v. Ashcroft (1915), (AB KB), 8W.W.R. 899 (Alta. S.C.T.D.); Gilbert v. Nestor, (AB KB), [1923] 3 W.W.R. 15 (Alta. S.C.T.D.), B.C. Land &Investment Agency Ltd. v. Montreal Trust Company, (UK JCPC), [1935] 3 W.W.R. 566 (P.C.) Laurentian Bank ofCanada v. Chu, (AB KB), [1991] 6 W.W.R. 563 (Alta. Q.B.), aff’d (Sept. 8. (1992), Edmonton 9103 0746-AC (Alta.C.A.). [5] Davis v. Cavers, (AB KB), [1923] 1 W.W.R. 274, Wong v. Pandora Developments Ltd., (1989), (AB KB), 101 A.R. 1 (Q.B.). [6] Walker v.

Dickson (1892), 20 OAR 96; Fullerton v. Brydges (1895), 1895 CanLII 140 (MB CA), 10 Man. R. 431 C.A.;Campbell v. Douglas (1916), (SCC), 54 S.C.R. 28, Welsh v. Popham, (SCC), [1925] S.C.R. 549. [7] Anderson v. Stasiuk, (SK CA), [1927]1 W.W.R. 49 (Sask. C.A.)