Court of Queen’s Bench of Alberta Citation: Royal Bank of Canada v Levy, 2013 ABQB 381 Date: 20130705 Docket: 0901 08873 Registry: Calgary Between: Royal Bank of Canada Plaintiff - and - Ilan Levy, Tracy Levy, Harry Levy, Yuval Levy, Andrea Durnan, Denis Franks, Rachell Franks, David Steed, 1229637 Alberta Ltd., Hilltop Properties Inc., 1418650 Alberta Ltd., New Heights Custom Homes Inc., 1165696 Alberta Ltd., Zimmerman & Company, Foothills Real Estate Appraisals Ltd., B.

Grant Banbury, Michael Davidson, Arlene Wiebe, Ronald Vogel, Kevin Kowbel, Charlene Kowbel, Barbara Sabo, Erik Larsen, Devin Allibone, Edmond Fouillard, Yiu W. Mak, 1235631 Alberta Ltd., Aubrey Fraser, Tim Abel, Karen Abel, Dean Mclean, Laurel Sim, Sascha Bouzaara, Jesse Collins, Jean-paul Fouillard, Michael Rocca, Barbara Rocca, Robert King, Jean King, John Macdonald, Cassandra M. Greve, Paul Thomson, Michael Glossop Defendants _ ________________________________________ ______________ Reasons for Decision of the Honourable Mr. Justice K.D. Yamauchi _________________________________________ ______________ I.

Introduction

[ 1 ] In her decision in this matter reported as 2012 ABQB 310 (the “Romaine Decision”), Romaine J granted the Royal Bank of Canada (“RBC”) leave to re-argue its application for

summary judgment against the Defendant Denis Franks (“Franks”). This is that application. [ 2 ] The Romaine Decision para 56 deals with this matter. It reads: The Bank applied for

summary judgment against Denis Franks. Counsel for Mr. Franks did not file a brief, but appeared at the hearing and made limited submissions, including a last-minute reference to the Land Titles Act . I cannot decide the

summary judgment application against Mr. Franks on the record before me, and I allow leave to the Bank to reargue its application with respect to this defendant, with a brief specific to Mr. Frank [ sic ] and with a responding brief from Mr. Frank's [ sic ] counsel. [ 3 ] It is worth noting a few things that arise from this paragraph. Romaine J was, at the time of the Romaine Decision, the case management justice. The matters that were before her arose while she was sitting in that capacity.

This Court has been appointed as the case management justice in her stead and it is now dealing with issues that arise involving this matter. No judge is seized with matters that they are case managing. It is simply a matter of convenience for the parties not to have to educate judges each time they appear. Accordingly, this Court has the authority to hear the re-argument of this matter. [ 4 ] On May 30, 2013, RBC filed its brief which is specific to Franks. Franks’ counsel has not filed a responding brief.

In fact, Franks’ counsel filed a notice withdrawal of lawyer of record on February 8, 2012, and provided an email address as Franks’ last known address. Franks has not filed a brief. In response to RBC’s brief. [ 5 ] RBC advised this Court that it served Franks with its brief at the address that Franks’ former solicitor provided. Since serving Franks, RBC’s counsel has had telephone discussions with Franks concerning the application that is before this Court. This Court holds that RBC has served Franks. Franks did not appear at the hearing of this matter. Nonetheless, this Court proceeded with it. II.

Background [ 6 ] This is a mortgage fraud action. The defendants in this matter, according to RBC, had various levels of participation in the alleged fraud ranging from planning and organizing, to participating in the plan, to being “straw buyers.” The essence of the transactions involved RBC advancing mortgage funds to purchase real property that was intentionally inflated above reasonable or fair market value.

The participants in the scheme would receive a portion of the mortgage monies. [ 7 ] The Romaine Decision provides a more detailed background of the various transactions that form the subject matter of this action. For the purposes of this decision, the following additional facts are germane to the issues before this Court. [ 8 ] RBC, in its amended statement of claim, alleges that Franks, in his own capacity or as the directing mind of the Defendants New Heights Custom Homes Inc and 1165696 Alberta Ltd, operating as SOS Contracting, knowingly participated in a number of the fraudulent transactions.

For his participation, Franks received at least $2,903,090 from the mortgage proceeds. [ 9 ] Despite these allegations, in this application, RBC seeks a very narrow remedy as against Franks and will likely leave the balance of its claims for the trial. The background to the narrow issue is as follows. [ 10 ] RBC contends that certain of the purchasers of the real estate were simply “straw buyers” or conduits through which the mortgage monies would flow. The straw buyer never had an intention of purchasing the real property. They would qualify for the mortgages, based on the fraudulent scheme.

In most cases, the straw buyers did not pay a deposit or any other funds to the real property’s vendor from their own resources. Nor did they make any mortgage payments after RBC advanced funds. [ 11 ] RBC claims that Franks was not a straw buyer in the alleged fraudulent transactions. In fact, it argues that Franks was involved as one of the organizers of the fraudulent mortgage transactions.

Franks denies his involvement as an organizer, but does not allege he is a straw buyer. [ 12 ] In this application, RBC seeks the deficiency judgment in respect of a mortgage registered against property municipally described as #107, 910-18 Avenue SW, Calgary (the “Property”). With respect to the Property, Franks does not deny that he acquired it. He says in his statement of defence that he acquired it to use as an office condominium. He assumed the mortgage from the Defendants Tim Abel and Karen Abel (the “Mortgage”).

He goes on to state in his statement of defence that the Property “was not used … and was later transferred back to the vendors.” [ 13 ] The Mortgage is a Canada Mortgage and Housing Corporation-insured mortgage, and contains a clause in it referring to the relevant sections of the Law of Property Act , RSA 2000, c L-7 (“ LPA ”) The Romaine Decision at paras 3-6 describes these mortgages as follows: The Bank is a mortgagee with mortgages registered against each of the properties named in the Statement of Claim. Each of the mortgages contains a covenant to pay.

Each mortgage was granted pursuant to the National Housing Act , R.S.C. 1985, c. N-11 and is issued by the CMHC. Each mortgage contains the following term: This mortgage is a high ratio mortgage to which sections 43(4.1) and (4.2) and 44(4.1) and (4.2) of the Law of Property Act apply. You and anyone who, expressly or impliedly, assumes this mortgage from you, could be sued for any obligations under this mortgage if there is a default by you or by a person who assumes this mortgage.

As high ratio mortgages or mortgages given to secure a loan under the National Housing Act , these mortgages do not benefit from the limitation on a lender's right to recovery set out under

Section 40 of the Law of Property Act , R.S.A. 2000, c. L-7, and the lender's common law right of action on the personal covenant to pay remains enforceable.

The Bank submits that the mortgages are all stated to be subject to "Standard Form Mortgage Terms", including the following:

a) each Mortgage is comprised of the registered mortgage, along with any document renewing, amending, or extending the mortgage, along with the Standard Mortgage Terms [section 1]; and

b) all payments made to RBC will be made in full without any set-off or counterclaim and without deductions or withholdings whatsoever, and that the borrower will not cancel, offset, or reduce any payments that he or she makes [section 13.3]. [ 14 ] According to the affidavit he swore on March 8, 2011, Franks made the mortgage payments for one and a half years after which he could no longer afford to pay them. [ 15 ] Ultimately, the Property was sold through a judicial sale, with the net sale proceeds being applied to the outstanding indebtedness under the Mortgage. There is a shortfall owing to RBC under the Mortgage of $136,877.39 as at November 1, 2010 (the “Shortfall”). [ 16 ] RBC seeks

summary judgment as against Franks for the Shortfall, plus interest to the date of judgment pursuant to the terms of the Mortgage. III. Discussion Legislation [ 17 ] The legislation that will guide this Court are the Land Titles Act , RSA 2000, c L-4 (“ LTA ”) and the LPA .

LTA s 58 provides: 58(1) In every instrument transferring land for which a certificate of title has been granted, subject to mortgage or encumbrance, there shall be implied the following covenant by the transferee both with the transferor and the mortgagee: That the transferee will pay the principal money, interest, annuity or rent charge secured by the mortgage or encumbrance, after the rate and at the time specified in the instrument creating it, and will indemnify and keep harmless the transferor from and against the principal sum or other money secured by the instrument and from and against the liability in respect of any of the covenants contained in the instrument or under this Act implied on the part of the transferor. [ 18 ] The relevant portions of LPA ss 40, 43 and 44 are as follows: 40

(1) In an action brought on a mortgage of land, whether legal or equitable, or on an agreement for the sale of land, the right of the mortgagee or vendor is restricted to the land to which the mortgage or agreement relates and to foreclosure of the mortgage or cancellation of the agreement for sale, as the case may be, and no action lies (

a) on a covenant for payment contained in the mortgage or agreement for sale, (

b) on any covenant, whether express or implied, by or on the part of a person to whom the land comprised in the mortgage or agreement for sale has been transferred or assigned subject to the mortgage or agreement for the payment of the principal money or purchase money payable under the mortgage or agreement or part of it, as the case may be, or (

c) for damages based on the sale or forfeiture for taxes of land included in the mortgage or agreement for sale, whether or not the sale or forfeiture was due to, or the result of, the default of the mortgagor or purchaser of the land or of the transferee or assignee from the mortgagor or purchaser.

(2) In an action brought on a mortgage of land or on an agreement for the sale of land, (

a) the order nisi in the case of a mortgage, … shall direct that if the defendant fails to comply with the terms of the order, the land that is subject to the mortgage … is to be offered for sale at a time and place, in a manner, after any advertisement of sale, and at any price that the Court considers proper, and (

b) if the land is not sold at the time and place so appointed, the Court may either order the land to be again offered for sale or make a vesting order in the case of a mortgage …, and on the making of a vesting order … , every right of the mortgagee … for the recovery of any money whatsoever under and by virtue of the mortgage … ceases and determines. …

(5) Any waiver or release hereafter given of the rights, benefits or protection given by subsections (1) and (2) is against public policy and void. 43 (2) … [S]ections 40 and 41 apply to an action brought against an individual, as it relates to that individual, where (

a) the action is on (

i) a mortgage of land, whether legal or equitable, given by a corporation … , made before or after the coming into force of this subsection, and (

b) the individual is (

i) a transferee of land that is subject to that mortgage, … whether the transfer or assignment was made before or after the coming into force of this subsection.

(3) Any waiver or release of the rights, benefits or protection given by subsections (2) and (5) is against public policy and void.

(4) Sections 40 and 41 and subsections (2) and (5) of this

section do not apply to a mortgage given to secure a loan under the NationalHousing Act (Canada) or the National Housing Act (Canada), RSC 1952 c188.

(4.1) Sections 40 and 41 and subsections (2) and (5) of this

section do not apply to a high-ratio mortgage, as defined in the regulations, (

a) given to secure a loan under the National Housing Act (Canada), or (

b) insured by an insurer licensed under the Insurance Act to undertake mortgage insurance in Alberta. (4.2) Subsection (4) applies to mortgages entered into before the coming into force of this subsection and to the renewal of thosemortgages and subsection (4.1) applies to high-ratio mortgages entered into after the coming into force of this subsection and to therenewal of those mortgages. … 44(1) In this section, “covenant for payment” means that portion of the covenant referred to in section 58(1) of the Land Titles Act thatcomprises one or more of the following: (

a) the covenants referred to in section 40(1)(

a) and (

b) of this Act; (

b) the obligation that relates to the damages referred to in section 40(1)(

c) of this Act; (

c) the indemnification of the transferor from and against the principal sum or other money secured by a mortgage.

(2) No action shall be brought against any individual who is a transferee of land that is subject to a mortgage, whether the transfer wasmade before or after the coming into force of this section, on the basis of (

a) the covenant for payment, or (

b) any obligation that exists at law, in equity or by agreement that is in substance the same as the covenant for payment.

(3) Any waiver or release of the rights, benefits or protection given by subsections (2) and (5) is against public policy and void.

(4) This

section does not apply in respect of a mortgage given to secure a loan under the National Housing Act (Canada) or the NationalHousing Act (Canada), RSC 1952 c188.

(4.1) This

section does not apply in respect of a high-ratio mortgage, as defined in the regulations, (

a) given to secure a loan under the National Housing Act (Canada), … (4.2) Subsection (4) applies to mortgages entered into before the coming into force of this subsection and to the renewal of thosemortgages and subsection (4.1) applies to high-ratio mortgages entered into after the coming into force of this subsection and to therenewal of those mortgages. … [19] LPA s 41 deals with redemption orders and is not relevant to the issue that is before this Court. [20] Finally, rule 7.3(1)(

a) of the Alberta Rules of Court, Alta Reg 124/2010 [Rules] provides: 7.3(1) A party may apply to the Court for

summary judgment in respect of all or part of a claim on one or more of the following grounds: ... (

a) there is no defence to a claim or part of it; Case Law [21] Many Alberta courts have held that the various tests that the courts established under rule 159 of the Alberta Rules of Court,Alta Reg 390/68 [Former Rules], were not changed with the promulgation of Rule r 7.3. See e.g.

Quadrangle Holdings Ltd v Coady,2012 ABQB 22 at para 28; Manufacturers Life Insurance Co v Executive Centre at Manulife Place Inc, 2011 ABQB 189 at para 11.Accordingly, this Court will articulate the tests it will apply to this case, with periodic reference to Former Rules r 159. [22] In Pioneer Exploration Inc (Trustee of) v Euro-Am Pacific Enterprises Ltd, 2003 ABCA 298 at paras 18-19, 27 Alta. L.R.(4th) 62, Wittmann JA, as he then was, approved a two-step process that Hutchinson J set out at paragraphs 27-34 in Royal Bank vMcLean (1997), (AB KB), 211 AR 297 [McLean].

Wittmann JA said at paras 18-19: First, the plaintiff bears the evidentiary burden of proving its cause of action on a balance of probabilities. Each and every fact necessary

to support the claim must be proven … After the plaintiff has proved its case on a balance of probabilities, the evidentiary burden shifts to the defendant but the ultimate burdenremains, as always, with the plaintiff. The defendant can avoid a

summary judgment in favour of the plaintiff by proving that there is agenuine issue for trial. If the defendant meets this evidentiary burden, the plaintiff fails to meet its ultimate burden.

It must be beyonddoubt that no genuine issue for trial exists. [Other citations excluded]. [23] Rules r 7.3(2) says the following: 7.3(2) The application must be supported by an affidavit swearing positively that one or more of the grounds described in subrule (1)have been met or by other evidence to the effect that the grounds have been met. [24] This differs from the wording of Former Rules r 159(1), which required the person who provided the affidavit in support ofthe application to “swear positively to the facts, verifying the claim or part of the claim and stating that in the deponent’s belief there isno genuine issue to be tried and that the only genuine issue is as to amount.” [25] Rules r 7.3(2) might be more stringent than the requirements of Former Rules r 159(1).

Whereas under the latter, the deponentmerely had to believe that there is no genuine issue to be tried, now, the deponent must swear positively that “there is no defence to aclaim or part of it.” Of course, Rules r 7.3(2) added that the application could be supported by “other evidence to the effect that thegrounds have been met.” [26] It should also be pointed out that the plaintiff bears no burden to disprove defences that the defendant raises.

All it must proveis its cause of action: Treasury Branches v Wenley Enterprise & Sales Ltd (1985), (AB KB), 66 AR 232 at 241(Master). [27] To respond to the plaintiff’s evidence, the defendant must produce evidence on which the court can make a ruling on whetherto grant the plaintiff

summary judgment. As Master Funduk said in Tucson Properties Ltd v Sentry Resources Ltd (1982), (AB KB), 22 Alta LR (2d) 44 at paras 17-19 (Master): In some cases the evidence necessary to meet the burden might come from the defendant himself. In some cases it might be found withinthe evidence of the plaintiff. In some cases it might be found in a cross-examination on affidavit. By whatever means the evidence comesbefore the court, there must be evidence which lends some support to the defences raised.

If there is no evidence to support the issues the defendant raises in his defence, there is nothing for the court to weigh. The scales tipentirely in one direction, that direction being in favour of the plaintiff. If there is some evidence to support the issues the defendantraises, the court must then weigh that evidence and decide whether the plaintiff's claim is beyond all doubt. If, after weighing the evidence supporting the defendant's position, the court is satisfied beyond all doubt that the plaintiff is entitled tojudgment, then judgment should be given for the plaintiff.

If, however, after weighing the evidence supporting the defendant's position,the court is not satisfied beyond all doubt that the plaintiff is entitled to judgment, then the matter must proceed to trial. [28] This Court must examine the evidence that is before it to determine whether the Defendants have met their onus to meet thetests that the Rules require. In Canada (Attorney General) v Lameman, 2008 SCC 14, [2008] 1 SCR 372, the Supreme Court of Canadasaid at para 10: A

summary judgment motion cannot be defeated by vague references to what may be adduced in the future, if the matter is allowed toproceed. To accept that proposition would be to undermine the rationale of the rule. A motion for

summary judgment must be judged onthe basis of the pleadings and the materials actually before the judge, not on suppositions about what might be pleaded or proved in thefuture. [29] As well, if the respondent makes mere allegations of fact or raises suspicions without any supporting evidence, this is notenough to show that there is a genuine issue to be tried: Holmes v Bank of Nova Scotia Trust Co, 2006 ABQB 43, 2006 CarswellAlta68 at para 26; Dasilva v McLean, 2011 ABQB 618, 527 AR 307 at para 19.

Said differently, by making mere allegations of fact orraising suspicions without any supporting evidence, the respondent will not have met its evidentiary burden. The Supreme Court ofCanada said in Guarantee Co of North America v Gordon Capital Corp (SCC), [1999] 3 S.C.R. 423 at para 31, 178D.L.R. (4th) 1, “a self-serving affidavit is not sufficient in itself to create a triable issue in the absence of detailed facts and supportingevidence.” [30] Finally, the Rules r 7.3(1)(

a) permits this Court to grant

summary judgment for “a claim or part of it” [emphasis added]. InCanadian Imperial Bank of Commerce v Godziuk (1996), (AB KB), 182 AR 145 at para 11 (Master), the courtsaid that “it is appropriate to give

summary judgment for part of a claim with the balance of the claim going to trial.” In fact, that is whatRules r 7.3(3) contemplates, when it says: 7.3(3) If the application is successful the Court may, with respect to all or part of a claim, and whether or not the claim is for a singleand undivided debt, do one or more of the following: (

a) dismiss one or more claims in the action or give judgment for or in respect of all or part of the claim or for a lesser amount; … (

b) if judgment is given for part of a claim, refer the balance of the claim to trial or for determination by a referee, as thecircumstances require.

Application to the Facts [31] In his affidavit, which he swore on March 8, 2011 (the “March Affidavit”), Franks acknowledges that the Property wastransferred to him and that he assumed the Mortgage: March Affidavit para 15. He also acknowledges that he used the Property as anoffice: ibid. He made the mortgage payments for about one and a half years: March Affidavit para 16. The Property was eventuallytransferred back to the vendors and they re-assumed the Mortgage: March Affidavit para 17. [32] Based on reasoning in the Romaine Decision, Franks is not a straw buyer. He assumed the Mortgage and made payments onit.

He also used the Property. The evidence before Romaine J was that the straw buyers had no intention of occupying the property. Theydid not personally intend to make the mortgage payments, nor did they make the mortgage payments themselves. [33] The Mortgage was signed by Tim and Karen Abel. Franks assumed the mortgage on the transfer of the Property to him. Hethen purported to transfer the property back to the Abels. Does he remain liable on the personal covenant to pay? Certainly, the Abels, asthe original mortgagors, would remain liable. See e.g.

Forster v Ivey [1901] 2 OLR 480 at 483-84 [Forster], Monarch Trust Co v Low1993 CarswellOnt 4019 at para 8 [Monarch Trust]. However, there is no privity of contract between Franks and RBC and so “themortgagee does not gain the personal responsibility of the purchaser”: Forster at 483. LTA s 58 creates an implied covenant that thetransferee will pay the principal money and interest secured by the mortgage and will indemnify and keep harmless the transferor fromand against the principal sum or other money secured by the instrument.

This creates a nexus between the purchaser and the mortgageethat did not exist as a result of the obiter dictum in Forster. Does Franks subsequent transfer back to the Abels exonerate him? Hisliability to RBC crystallized when he became the transferee from the Abels. As Master Funduk said in First City Trust Co v Krusky (AB KB), 1986 CarswellAlta 351 at para 14, 70 AR 187 (Master), what is now LTA s 58, “is not a statutorynovation.” In this case, there was no novation, as Frank, and then the Abels, simply transferred the Property and the transferee assumedthe obligations under the Mortgage.

RBC was not involved in these transactions, so the crucial “constituent elements” of a novation werenever complied with: Monarch Trust at para 4. [34] RBC advises this Court that it did not foreclose on the Property. Rather, it undertook a judicial sale, which Romaine Joversaw. As well, Franks’ then counsel was served with all documents and pleadings under which the judicial sale was effected andcompleted.

As the Privy Council said in Gordon Grant & Co v Boos, (UK JCPC), [1926] AC 781 at 786-87: But, if the mortgagee does not use the remedy of foreclosure but sells under a power of sale given to him by the mortgage deed andbrings into account the whole sum thus received and then proceeds to sue his debtor for the balance and the balance only, there is noquestion of double payment, and there would seem to be no reason in principle why he should not recover the balance. … Now, if instead of the mortgagee exercising a power of sale given to him in the deed, he, when he brings an action to enforce hissecurity, asks the Court for a sale instead of a foreclosure, why should not the same principle apply?

The sale ascertains the value of theproperty, the mortgagee gets no more from the property than what the sale brings to him. If the property realizes more than what is dueto him, the mortgagor gets the balance. If the property realizes less, the mortgagee is pro tanto unpaid and should be allowed to sue onthe personal covenant. See also Central Trust Co v Bartlett, 1983 CarswellNS, 30 RPR 267 (NSSC, App Div). [35] As a result, pursuant to LTA s 58 and LPA s 43 Franks has become and remains personally liable on the covenant to pay. IV. Conclusion [36] In conclusion, RBC shall have

summary judgment as against the defendant Franks for the deficiency on the Mortgage, plusinterest to the date of judgment pursuant to the terms of the Mortgage. [37] As well, RBC shall have its costs of this application. [38] It is important to note that the result of this application does not deal in any way with the other allegations that the RBCmakes as against Franks. It deals only with the narrow issue discussed in these reasons. Heard on the 28th day of June, 2013. Dated at the City of Calgary, Alberta this 5th day of July, 2013.

K. D. Yamauchi J.C.Q.B.A. Appearances: Ellery Lew Witten LLP for the Plaintiff The Defendant Denis Franks did not appear