Canadian Western Bank v. Proland Corp., 2013 ABQB 331

Court of Queen ’ s Bench of Alberta Citation: Canadian Western Bank v. Proland Corp., 2013 ABQB 331 Date: 20130606 Docket: 0903 15624; 1103 09708 Registry: Edmonton Between: Canadian Western Bank Applicant - and - Proland Corp., Gocan Corp., Serengetti Developments Ltd. And U Construction Ltd. Respondents _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice J. J.

Gill _______________________________________________________ Introduction [ 1 ] This is an application to determine entitlement to monies from the Permanent Area Contribution fund ( “ the PAC funds ” ) paid into Court by the City of Edmonton (the City). Background [ 2 ] These court actions and claims arise from a land development known as the Maple Ridge Industrial subdivision in southeast Edmonton( the subdivision). The developer of that subdivision was the Defendant, Proland Corp. ( “ Proland ” ). The owners of

the lands being developed were the three defendants, Gocan Corporation, Serengetti Developments Ltd., and U Construction Ltd. ( “ the Owners ” ). [ 3 ] The Plaintiff, Canadian Western Bank ( “ CWB ” ), was the principal lender on the subdivision. CWB ended up foreclosing to obtain payment of its outstanding debt. [ 4 ] The origin of the PAC funds is described in the filed Affidavit of Mr. Steve Jensen Development Engineer with the City, dated June 22, 2011. [ 5 ] The City entered into a Servicing Agreement dated February 27 th , 2008 ( “ the Servicing Agreement ” ) with Proland.

Proland agreed to construct storm and sanitary drainage infrastructure in excess of what would be required solely for the lands covered by the Servicing Agreement. In consideration of Proland providing these construction services, the City agreed to require future developers to contribute towards the cost of such services and to refund Proland all PAC payments obtained by the City pursuant to this agreement. [ 6 ] As of June 30, 2011, the total PAC funds to which Proland were entitled pursuant to the Servicing Agreement was $1,077,306.11 including interest.

The PAC funds were paid into court pursuant to an Order of Mr. Justice Michalyshyn, dated June 23, 2011. [ 7 ] This decision addresses an application by Venture Financial Corporation in action number 0903 15624, filed May, 2012, seeking, among other things, a declaration that Venture Financial Corporation ( “ Venture ” ) has a prior security interest on the PAC funds, and directing that the PAC funds be paid to it.

Ventures claim is based on a General Security Agreement, dated May 31, 2006, executed by Proland and the Owners in favour of Venture ( “ the Venture GSA ” ). [ 8 ] A number of other parties who were involved in the Maple Ridge Subdivision project also make a claim on the PAC funds: Sprague-Rosser Contracting Co. Ltd ( “ Sprague-Rosser ” ), Waiward Construction Management Inc. ( “ Waiward ” ), and O ’ Hanlon Paving Ltd. ( “ O ’ Hanlon ” ).

These three parties provided significant amounts of construction work, materials, services and improvements to the subdivision . [ 9 ] Sprague-Rosser, Waiward and O ’ Hanlon did not contract directly with Proland. Sprague-Rosser contracted with the general contractor MGN. Sprague-Rosser filed several builder ’ s leans which were removed from title when CWB foreclosed on the lands. Waiward and O ’ Hanlon contracted with Jo-Di, a company brought in to finish the subdivision after it got into financial problems.

Waiward had a form of security memorandum on two of the subdivision lots and a promissory note. [ 10 ] The claims of Sprague-Rosser, Waiward and O ’ Hanlon are based on the equitable doctrine of marshalling. [ 11 ] Ventures ’ claim to the PAC funds is opposed by Sprague-Rosser, O ’ Hanlon and Waiward.. The Owners oppose the claims of Sprague-Rosser, O ’ Hanlon, and Waiward but not the claim of Venture. Submissions Venture [ 12 ] Venture submits that the PAC funds are part of the collateral secured by their GSA.

[ 13 ] The Venture GSA was executed by Proland and the Owners in favour of Venture on May 31, 2006 and registered at the Personal Property Registry on August 31, 2006. Venture postponed this security interest in favour of CWB on November 8, 2006. [ 14 ] Paragraph 1(

e) of the Venture GSA describes the collateral which is secured as follows: e) “ Collateral ” means all present and after-acquired personal property and Real Property of the Debtor of whatever kind situate at, or used in connection with the lands legally described as Plan 4192RS Lot G and Lot H, including, without limiting the generality of the foregoing, those specific terms, if any, described on the attached

Schedule “ A ” , together with all documents, writings, papers, books of account and records relating to the foregoing and all rights and interests therein ” . [ 15 ] Sprague-Rosser, Waiward and O ’ Hanlon submit that this definition of collateral does not capture the PAC funds. They also submit that the evidence of Venture relating to the indebtedness is deficient. Sprague-Rosser, Waiward and O ’ Hanlon [ 16 ] Sprague-Rosser, Waiward and O ’ Hanlon argue that the circumstances of this case support the application of the equitable remedy of marshalling . [ 17 ] They point to the following circumstances.

CWB and Sprague-Rosser, Waiward and O ’ Hanlon were creditors from their involvement in the development of the subdivision. CWB was the principal lender. [ 18 ] CWB had access to the subdivision lands and the PAC funds to satisfy its debt . Waiward and O ’ Hanlon had a secured interest on two lots that were subsequently foreclosed by CWB. Sprague-Rosser filed builders liens which were also discharged when CWB foreclosed. [ 19 ] CWB satisfied it ’ s debt from the lands.

Sprague-Rosser, Waiward and O ’ Hanlon submit that they would still be secured creditors if CWB had realized on the PAC funds as opposed to the lands. Since the lands are no longer available, the marshalling doctrine provides them access to the PAC funds to satisfy their debt .This claim take priority to that of Venture. Analysis Sprague-Rosser, Waiward and O ’ Hanlon [ 20 ] The principle of marshalling is described in the decision of Manderscheid, J in Gerrow v. Dorais 2010 ABQB 550 .

Commencing at paragraph 22: [22] Belzil J.A. went on to adopt the formulation in Snell's Principles of Equity, (28 th Ed), by P.V. Baker and P. St.J. Langan (London : Sweet and Maxwell, 1982) at p. 416, which provides that where there are two creditors of the same debtor, and one creditor has a right to resort to two funds for payment of his debt, and the other a right to resort to one fund only, the court will 'marshal' or arrange the funds so that both creditors are paid as far as possible.

The authors of Snell's noted that the doctrine has several applications, but marshalling as between mortgagees is perhaps the most usual. Snell's continues that the doctrine of marshalling is not allowed to prejudice the first mortgagee. Relying on the Blackacre/ Whiteacre forumla, Snell's noted: If, for instance, a person having two estates, Blackacre and Whiteacre, mortgages both estates to A, and afterwards mortgages only Blackacre to B, either with or without notice of A's mortgage, the proper course is for A to realise his debt first out of Whiteacre and to

take only the balance out of Blackacre, in order to leave as much as possible of Blackacre to satisfy B... A can therefore realisehissecurities as he pleases, for A is not a trustee for B.

But if A pays himself out of Blackacre, B is allowed to resort to Whiteacre to theextent to which Blackacre has been exhausted by A, and to have the same priority against Whiteacre as A had. ...In the above example, B's right to marshal will be enforced not only against the original mortgagor but also against all persons claimingthrough him as volunteers, as where the mortgagor dies and Blackacre and Whiteacre pass to different persons. But it is not allowed toprejudice purchasers or mortgagees of one of the estates.

Thus if in the above example the mortgagor had created another mortgage ofWhiteacre in favour of C. B would have no equity to throw the whole of A's mortgage on Whiteacre, and so destroy C's security." [21] Belzil J.A. also accepted the definition of marshalling from the judgment of Orde, J. in Ernst Brothers Co. v.

Canada Permanent Mortgage Corporation (1920), 47 O.L.R. 362, affirmed 48, O.L.R., 57 D.L.R. 500 (C.A.) that include the following qualification at para. 22: ...This right is always subject to two important qualifications: first, that nothing will be done to interfere with the paramount right of thefirst mortgagee to pursue his remedy against either of the two estates; and, second, that the doctrine will not be applied to the prejudice ofthird parties. [22] In this case one of the pre-conditions for the application of the marshalling doctrine is absent: two creditors of a single debtor.Proland was a debtor of CWB.

However, there is no evidence to support the assertion that Proland was a debtor of Sprague-Rosser,O’Hanlon or Waiward. None of these companies had any direct contractual relationship or held security with Proland . [23] There is also no evidence to support the suggestion that Sprague-Rosser, O’Hanlon or Waiward have some type of subrogated claim. [24] Subrogation is described in Gerrow v.

Dorais at paragraph 6: [6] Basically speaking, the equitable doctrine of subrogation allows one party to stand in the shoes of another and advance any claimsthat the original party may have had against another party: Alberta (Treasury Branches) v. Alberta (Public Trustee), 2002 ABQB 781, 7Alta. L.R. (4th) 110. Subrogation is simply asking something in the right of another, which in justice and equity, should be accorded tothe person asking: Goldsmith v. Stewart, (1885) 45 Ark 149 (C.A.)154.

Application of the doctrine enables: ... the substitution of one person in place of another, whether as a creditor, or as the possessor of any other rightful claim so that he who is substituted succeeds to the rights of the other in relation to the debt or claim and its rights, remedies, or securities. Leavitt v. C.P.R., (1897) 37 Atl 886, at 888, right column, 90 Maine 153 (C.A.) [25] A common feature of subrogation is that the party asserting the right of subrogation has contributed to the payment of anobligation owed by the party against whom subrogation is asserted. Examples are found in Gerrow v.

Dorais at paragraphs 11: [11] More recently, the doctrine of subrogation was addressed by our Court of Appeal in Rainbird Sprinkler Manufacturing Co.(Canada) Ltd. v. Elpat Holdings Ltd.) (1996), 1996 ABCA 316 , 187 A.R. 222, 42 Alta. L.R. (3d) 328 (CA) where the Court, indiscussing the application of subrogation in terms of the position of a guarantor held that the guarantor, although not the principle debtor,was entitled to be paid as he stepped into the shoes of the creditor and was entitled to pursue its remedies and realize on its security on the basis of equitable principles.

The Court went on to quote G.H.L. Fridman, Restitution, (2nd Ed.) (Scarborough, Ont.: Carswell, 1992)at pp. 402-3 (at para. 12):

A surety who pays off the debt to the principal creditor owed by the principal debtor is entitled to succeed to all claims which the principal creditor has against the debtor in order to prevent an unjust enrichment. The surety stands in the place of the creditor not as a matter of contract but by operation of law. Hence, he is entitled to every remedy which the creditor might have enjoyed against the debtor.

See also Maudsley, Hanbury's Modern Equity (8 th Ed.) (London: Stevens & Sons Ltd.,1969) at page 429; Sidney Arthur Taylor Rowlatt, Rowatt on The Law of Principal and Surety (4th ed.), (London: Sweet & Maxwell,1982) at page 145; George W. Brandt, The Law of Suretyship and Guaranty (3 rd Ed.) (Chicago : Callaghan & Co., 1905) at page 613. This includes the right by subrogation to enforce every security and all means of payment. ... Thus mortgage securities held by a creditor under a mortgage must be transferred to the surety on payment of the debt.

The surety, when making such payment, is presumed to keep the mortgage alive for his own bene-fit. [26] In

summary a common debtor is a precondition for the doctrine of marshalling to be applied. Sprague-Rosser, O ’ Hanlon or Waiward have not established that Proland is their debtor. [27] There is another barrier to applying the doctrine of marshalling in this case. Marshalling will not be applied to the prejudice of a third party. In this case, Venture is a secured third party and applying the doctrine of marshalling in this case would prejudice Venture. [28] Finally there was a suggestion that Proland was somehow not a legitimate claimant to the PAC funds as it was an alter-ego or sham company for the Owners.

There was no evidence to support this position. [29] In conclusion the circumstances in this case do not support the application of the doctrine of marshalling. The claims of Sprague-Rosser, Waiward and O ’ Hanlon to the PAC funds are dismissed.

Venture [30] In the Venture GSA “ Collateral ” is defined to mean “ all present and after-acquired personal property and Real Property of the Debtor of whatever kind situate at, or used in connection with the lands legally described as Plan 4192RS Lot G and Lot H, including.....all documents, writings, papers, books of account and records relating to the foregoing and all rights and interests therein ” . [31] Personal property in the Personal Property Security Act, R.S.A. 2000 c P-7 is defined as “ goods, chattel paper ,investment property, a document of title ,an instrument, money or an intangible. ” [32] The Servicing Agreement that created the obligation for the City to pay Proland the PAC funds includes the lands legally

described as Plan 4192RS Lot G and Lot H. The PAC funds arise from work done by Proland in connection with lands covered by the Servicing Agreement. [33] I find that the PAC funds fit the within the meaning of “ personal property ” of Proland under the definition of “ Collateral ” in the Venture GSA .Consequently I conclude that the PAC funds are secured to Venture by the GSA. [34] The Affidavit of Mr. Patrick dated May 8, 2012 provides proof of the loan by Venture to Proland and the fact of a default on that loan. The outstanding indebtedness is approximately $2,436,654. 49.

Conclusion [35] I find that Venture has proven it ’ s claim to the PAC funds. [36] Venture ’ s application for a declaration of entitlement to the PAC funds in Court and to future PAC funds is granted. [37] If the parties cannot agree on costs, they may speak to them within 60 days. Heard on the 21 st day of May, 2013. Dated at the City of Edmonton, Alberta this 5th day of June, 2013. J. J. Gill J.C.Q.B.A. Appearances: Mr.Jeremy Hockin Parlee McLaws LLP for Venture Financial Corp. Mr.Ryan F. T. Quinlan, and Mr.Lyle B. Brookes Dentons Canada LLP for Sprague-Rosser

Mr.Robert D. Gillespie Robert D. Gillespie Law Office for 1265534 Alberta Inc. Mr.A.D. (Tom) Schmit Chomicki Baril Mah LLP for O ’ Hanlon Paving Ltd. and Waiward Construction Management Ltd. Mr.James Culkin for Gocan Corp., Serengetti Developments Ltd. and U Construction Ltd. Mr.Jason Thomas Hladun & Company for Instant Storage and 572750 Alberta Ltd.