Rahemtulla v. Kushwaha, 2013 ABQB 136

Court of Queen ’ s Bench of Alberta Citation: Rahemtulla v. Kushwaha, 2013 ABQB 136 Date: 20130301 Docket: 1203 14640 Registry: Edmonton Between: Ramazanali Rahemtulla Applicant - and - Paul Kushwaha, Bank of Montreal and Hudson & Company Insolvency Trustees Inc. Respondents Editorial Notice: On behalf of the Government of Alberta personal data identifiers have been removed from this unofficial electronic version of the judgment. _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice Brian R.

Burrows _______________________________________________________ [ 1 ] The first issue on this application is whether mortgage security granted to Ramazanali Rahemtulla by his sister-in-law

Ezatkhanam Rahemtulla is a preference and void as against Ezatkhanam Rahemtulla ’ s trustee in bankruptcy, pursuant to s. 95 of the BIA. If the mortgage is not void pursuant to BIA s. 95 the second issue is whether Ramazanali Rahemtulla ’ s debt claim is barred by the Limitations Act and therefore unenforceable. [ 2 ] Ramazanali Rahemtulla is the brother of Barkatali Rahemtulla, the brother-in-law of Ezatkhanam Rahemtulla, and the creditor of both. The debt exceeds $240,000.

Ramazanali Rahemtulla is secured by a second mortgage granted by Barkatali Rahemtulla and Ezatkhanam Rahemtulla against their jointly owned house. The security was first granted as an equitable mortgage in January 2004. A legal mortgage was granted in May 2011. It was registered against the title to the house on June 6, 2011. [ 3 ] The BoM is a creditor of Ezatkhanam Rahemtulla. Her debt arises out of her use of a credit card. The BoM recovered judgment against her on June 2, 2011. A writ of enforcement for $29,101.25 which included interest and costs was issued on June 15, 2011.

The writ was registered against the title to Barkatali and Ezatkhanam Rahemtulla ’ s house on June 16, 2011, ten days after Ramazanali Rahemtulla ’ s mortgage interest was registered. [ 4 ] In late July and early August 2011, the BoM filed and served an application to have the mortgage declared void as being a fraudulent preference. The application was returnable August 25, 2011. [ 5 ] Both Barkatali and Ezatkhanam Rahemtulla filed assignments into bankruptcy on August 17, 2011. The BoM ’ s application did not proceed because the bankruptcy proceedings stayed it. The bankrupts ’ house was sold.

After satisfaction of prior claims $117,896.61 remains. The Respondent, Paul Kushwaha, a lawyer, holds the net proceeds of the sale in his trust account. In this application the funds stand in the place of the house. Mr. Kushwaha did not participate in this application. [ 6 ] The Respondent Hudson & Company is the trustee in bankruptcy of both bankrupts. Hudson & Company declined to advance the priority claims of the unsecured creditors (including the BoM) and the bank obtained an order under s. 38 of the BIA permitting it to do so. Hudson & Company did not participate in this application.

The loans made by Ramazanali Rahemtulla [ 7 ] A more detailed articulation of the facts may be helpful. [ 8 ] Ramazanali Rahemtulla made 13 loans to his brother for both business and personal purposes. The total amount loaned was $240,000. The brother signed promissory notes for each of the 13 loans. [ 9 ] The first three of these loans, totalling $130,000, were made in 1996, 1997 and 1998. Each of the three promissory notes signed by the debtor in respect of these three advances contained the following paragraph: If Mr.

Barkatali Rahemtulla does not fulfil his obligation to pay back the principal and the interest payment within the terms and conditions, Mr. Ramazanali Rahemtulla will have the right to secure his debt by way of lien against Mr. Barkatali Rahemtulla ’ s assets. [ 10 ] On January 3, 2004, Ramazanali Rahemtulla invoked the right given to him by this provision. Mr. Barkatali Rahemtulla and his wife, Ezatkhanam Rahemtulla, signed the following letter on that date: We, Barkatali Rahemtulla and Mrs.

Ezatkhanam Rahemtulla give Ramazanali Rahemtulla full rights to any assets we own individually or jointly, under any monies he has loaned to us or will loan to us in the future.

In any loan from Ramazanali Rahemtulla to either one of us (Barkatali or Ezatkhanam), these loans will be secured by our assets,primarily our home, [...] Candle Place S.W. Any and all loans received from Ramazanali Rahemtulla will be secured loans on thisproperty. Although not registering a mortgage or caveat against the property at this time, we, Barkatali Rahemtulla and EzatkhanamRahemtulla acknowledge that Ramazanali Rahemtulla has full rights of this property in the event of a default.

He is a secured creditorfor any and all amounts of monies given to us in the past and in the future and will not be treated as an unsecured creditor. In the event that we are not able to pay, we give full authority to Ramazanali Rahemtulla to place a mortgage or caveat against theproperty for his money.

We give him permission to place a mortgage or caveat on the property and will assist Ramazanali Rahemtulla inplacing this mortgage/caveat if need be. [11] That this instrument is an equitable mortgage is not challenged. [12] The ten further loan advances by Ramazanali Rahemtulla to his brother occurred between January 2010 and May 2011 andtotalled $110,000.

In each case there was a promissory note which contained the same provision as the original three promissory notes. [13] In his affidavit Ramazanali Rahemtulla swears: In May 2011, it became clear that I was not going to be repaid by my brother or his wife and that I would have to register the Mortgageon the Premises or create a new mortgage to ensure my security.

Accordingly, on June 1, 2011 in exchange for me not enforcing theMortgage and collecting all the loans, my brother and his wife granted a standardized mortgage . . . which was registered on the Premiseson June 6, 2011. [14] The mortgage secures the sum of $240,700 payable on or before May 31, 2016. It provides for interest at 5%. Asmentioned, the mortgage was registered at Land Titles on June 6, 2011.

Severance of the Joint Tenancy [15] Though neither party appears to have recognized it when this application was argued, it appears to me to be beyond disputethat the joint tenancy of Barkatali Rahemtulla and Ezatkhanam Rahemtulla in their house was severed by their assignments intobankruptcy. Re White (1928), (ON SC), 8 C.B.R. 544 (Ont. S.C.). Half of the funds held in trust, $58,948.31, vestedin the trustee in bankruptcy of Barkatali Rahemtulla. Those funds cannot be the subject of this priority dispute.

The priority disputebetween the participants in this application can relate only to Ezatkhanam Rahemtulla’s half of the fund, $58,948.30. Is Mortgage a Void Preference? [16] The BoM submits that the mortgage granted to Ramazanali Rahemtulla was a preference of one creditor over another and thatthe mortgage cannot therefore be set up against the trustee in bankruptcy (or the BoM which stands in the place of the trustee). The bankinvokes s. 95(1)(

a) of the BIA which provides that a charge on property made by an insolvent person in favour of a creditor with a viewto giving that creditor a preference over another creditor is void as against the trustee if made during the three months preceding theassignment into bankruptcy. If the creditor and the insolvent person are not dealing at arm’s length, the preference is void if it is grantedduring the year preceding the assignment. (s. 95(1)(b)). [17] The BoM’s position focuses on the legal mortgage. Clearly it was granted within the three months preceding the assignmentinto bankruptcy.

Assuming, without deciding, that the other requirements of s. 95(1)(a) (insolvency, intent to prefer) are present, theBoM’s position would clearly prevail in respect of the legal mortgage. [18] However, Ramazanali Rahemtulla relies on the equitable mortgage. His equitable charge against the property came intoexistence long before either of time periods set out in s. 95(1)(a) - either the three month period or the one year period. It was granted onJanuary 3, 2004, more that seven years before the assignment into bankruptcy.

[19] An unregistered equitable interest has priority over an unsecured debt, even when the unsecured debt is reduced to a writ ofenforcement registered at the Land Titles office. Jellett v. Wilkie (1896) 1896 CanLII 49 (SCC), 26 S.C.R. 282; Price v. MaterialsTesting (1976) (AB KB), 68 D.L.R. (3d) 444 (Alta S.C.T.D.).

Indeed the unregistered equitable charge has priorityeven if the writ is registered prior to anything giving notice of the equitable interest (which the writ in this case was not). [20] There is no evidence that on January 3, 2004, when the equitable mortgage was granted, Ezatkhanam Rahemtulla was ininsolvent circumstances, or unable to pay her debts in full, or knew that she was on the eve of insolvency, or that she intended to giveRamazanali Rahemtulla a preference over other creditors.

The provincial fraudulent preferences legislation, which applies to the extentthe BIA provision does not, would not render the equitable mortgage void as against any other creditor. [21] In these circumstances, Ramazanali Rahemtulla’s equitable interest in the property (and the trust fund which stands in itsplace) has priority to the BoM’s claim represented by the writ of enforcement.

Does the Limitations Act prevent enforcement of the equitable mortgage? [22] The BoM submits that the equitable mortgage of January 3, 2004 is unenforceable because the limitation period in relation toany claim Ramazanali Rahemtulla might have under it has expired. Therefore, the bank submits, Ramazanali Rahemtulla’s claim cannothave priority. [23] Gottlieb v.

Tymkow (2012) 94 C.B.R. (5th) 145 establishes that a creditor can raise a limitation defence of its debtor to defeatthe priority claim of another creditor. [24] The limitation period applicable to Ramazanali Rahemtulla’s claim under the equitable mortgage, pursuant to s. 3(1) of theLimitations Act, would be: (a) 2 years after the date on which the claimant first knew, or in the circumstances ought to have known, (

i) that the injury for which the claimant seeks a remedial order had occurred, (ii) that the injury was attributable to the conduct of the defendant, and (iii) that the injury, assuming liability on the part of the defendant, warrants bringing a proceeding, or (b) 10 years after the claim arose, whichever period expires first . . . [25] The limitation period in respect of a claim under the equitable mortgage in this case would commence to run from the datethat Ramazanali Rahemtulla knew or ought to have known that Ezatkhanam Rahemtulla would not repay the loans.

The evidenceindicates that the first Ramazanali Rahemtulla knew that Barkatali and Ezatkhanam Rahemtulla were not going to pay him was in May2011. This realization prompted the granting of the legal mortgage. In cross examination on his affidavit, Ramazanali Rahemtulla

indicated that up to that time he understood there was sufficient value in the house to cover both the first mortgage and the debts owed to him. The evidence does not establish that Ramazanali Rahemtulla ought to have known that the loans would not be repaid any earlier than May 2011. Two years have not yet expired since May 2011. The limitation period has not expired. Conclusion [ 26 ] Ramazanali Rahemtulla ’ s interest in the net proceeds of the house sale held in trust has priority to the interest of the BoM.

Because Hudson & Company, the trustee in bankruptcy of both bankrupt estates, though a respondent, has not participated in this application, and has not raised any objection to the remedy sought by Ramazanali Rahemtulla, I assume there is no impediment to my ordering that the funds held in trust by Paul Kushwaha be paid by him to counsel for Ramazanali Rahemtulla after deducting his reasonable costs of administration of those funds. [ 27 ] Ramazanali Rahemtulla is entitled to costs of this application as against the BoM. Though he sought costs on a solicitor own client basis I see no foundation for such an order.

To the extent that an allegation of having granted a fraudulent preference is an allegation of fraud, it was not an allegation that Ramazanali Rahemtulla was fraudulent. It was an allegation that his debtor was fraudulent. Costs will be on a party-party basis. Heard on the 14 th day of February 2013. Dated at the City of Edmonton, Alberta this 1 st day of March 2013. Brian R. Burrows J.C.Q.B.A. Appearances: Gregory R. Bentz for the Applicant Coralie Mohr for the Respondents