Bank of Nova Scotia v. Mawer, 2013 ABQB 587

Court of Queen ’ s Bench of Alberta Citation: Bank of Nova Scotia v. Mawer, 2013 ABQB 587 Date: 20131004 Docket: 1103 10669 Registry: Edmonton Between: The Bank of Nova Scotia Plaintiff - and - Bruce Mawer and Stuart Sabtier Defendants Corrected judgment: A corrigendum was issued on October 29, 2013; the corrections have been made to the text and the corrigendum is appended to this judgment. _ ________________________________________ ______________ Reasons for Judgment of L. A. Smart , Master in Chambers _________________________________________ ______________ Introduction

[ 1 ] This is an application for judgment for the balance outstanding in this proceeding after a sale to the Plaintiff of the mortgaged lands described below. [ 2 ] The Bank of Nova Scotia (Bank) has proceeded with foreclosure actions in relation to two residential condominium units and a single family dwelling owned by the Defendants. This decision relates to one of the condominiums.

Parenthetically, I note that the single family dwelling was sold in those proceedings resulting in no deficiency to the Bank. [ 3 ] Stuart Sabatier assigned into bankruptcy and did not defend the action nor participate in this application. Issue [ 4 ] The issue in this matter is whether the Bank is permitted to obtain a personal judgment against Mr. Mawer for the balance outstanding under the loans or does the restriction in s. 40 (1) of the Law of Property Act , RSA 2000, c. L-7 apply.

Facts [ 5 ] The Defendants entered into a Purchase Agreement for the purchase of lands briefly legally described as Unit 403 Condominium Plan 062-1607 (the "Condo") at the stated price of $313,335.52 on December 20, 2006. The Defendants applied for a mortgage in the amount of $235,001.64 (75% of the purchase price). On January 2, 2007, the Condo appraised at a market value of $375,000. In support of the Mortgage Application the Defendants provided income verification. Based on the Notice of Assessment of Mr. Mawer for 2005, and a letter of confirmation from Mr.

Sabatier's employer their collective gross employment income was $114,710. [ 6 ] The Plaintiff and the Defendants entered into a Scotia Total Equity Plan (STEP) in writing on December 22, 2006, which provided for the making of various types of loans by the Plaintiff to the Defendants to be secured by a Mortgage. Although this agreement is not in evidence, it is alleged that it provided that the Defendants were approved for loans limited to the amount approved therein.

Further that each separate loan granted thereunder constituted a separate agreement payable with interest according to the terms of that separate agreement and that the default under any loan or any Mortgage will, at the option of the Plaintiff, be considered default under all loans and the Mortgage.

No issue has been taken with these allegations and I take them to be an accurate representation of the agreement’s content. [ 7 ] Also on December 22, 2006, the Defendants and the Bank entered into a Personal Credit Agreement (PCA) which provided for a mortgage loan for the $235,001.64 with a five-year term, monthly payments of $1,400.42, a 25 year amortization period and interest at a variable rate based on the Bank’s Base Rate less .75%. The PCA indicated that the Security Pledged was the Condo.

On January 8, 2007 the Defendants executed a Retail Collateral Mortgage securing a sum up to a maximum of $235,001.64 over the Condo. The term of the mortgage is stated to be "Payable in Full on Demand" with interest at the Banks prime rate +2% per year. The form indicates that the provisions with respect to High Ratio Mortgages under the Law of Property Act are not applicable. Mortgage insurance was not required under s. 418(1) of the Bank Act S.C. 1991, c. 46 as the loan on the security of residential property did not exceed 75% of the property value.

In addition the mortgage stipulated that the Standard Mortgage registered at Land Titles formed a part of the agreement. Following registration of the mortgage the full amount to be secured was advanced. [ 8 ] On May 4, 2007, the Defendants made application for an increase of their existing STEP limit to be advanced by way of a Scotialine Visa. In that credit application total gross annual employment income for the Defendants was stated to be $94,092. To support the income the identical documentation was provided as had been previously for the earlier mortgage loan.

The application disclosed three properties with a total collective value of $1,475,000. Attached to the application is the Decision and Verification Worksheet. In the comments the Branch indicates that the application is to increase the original limit "to $337,500 ($450,000 X 75% – subject to appraisal). Both clients has (sic) stable job and income. Total rental income is $7,700 less 30% ($5,390), less mtg/LOC pyts $4,576= $814 surplus.

The new add-on amount would be issued new LOC, extra monthly pyt is $510, therefore, they still have $304 dollar surplus." Subsequently, there is an exchange of comments indicating that the property appraised at $445,000 and the amount of the STEP increase was raised to 80% of the value being $356,000. There is no reference to the reason for the increase in the percentage but it was no doubt more than coincidental that s. 418(1) of the Bank Act was amended on April 20, 2007 to require insurance on loans on the security of residential property that exceeded 80% of the value of the property.

On May 18, 2007, the Bank agreed to provide the Scotialine Visa for $100,000. A PCA was again executed, which included the Condo being described as the Security Pledged. On the same date a second Retail Collateral Mortgage was executed containing the same terms, except that the principal sum secured was up to a maximum of $445,000.

Following registration of this mortgage the earlier mortgage was discharged. [ 9 ] Based on applications by the Defendants in April, 2008, March, 2009 August, 2009 and October 2010, a second Scotialine Visa was established at $27,000 and then increased to $32,000, $35,300 and finally $45,600.

There is little evidence to indicate what the criteria was used for establishing this credit or the increases in the amount except that the PCAs signed in each case indicate the Credit Limit of $356,000 previously established pursuant to the STEP when the Mortgage was given and also refer to the Condo as the Security Pledged. Legislation [ 10 ]

Section of 40(1) of the Law of Property Act states: In an action brought on a mortgage of land, whether legal or equitable, or 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. Discussion [11] The prohibition in s.40 (1) of the Law of Property Act is absolute although there are statutory exceptions albeit none apply inthese circumstances. In addition, the Courts have recognized that there may be factual circumstances where the prohibition ought not toapply. The general principle with respect to the application of s.40 is set out in Clayborn Investments Ltd v.

Wiegert (1977), 1977ALTASCAD 164 , 5 AR 50 (SCAD) at p. 59: The court must inquire into the whole of the surrounding circumstances at the time of the transaction to determine its substance whateverform it may have taken, and the burden of proof that the provisions do not apply to the transaction would be upon him who asserts it. [12] In Royal Bank v. Stallman, 2009 ABQB 766, Master Hanebury thoroughly reviewed the decisions addressing circumstancesboth allowing and restricting enforcement of the covenant for payment in a mortgage. Examples or circumstances where personaljudgment was allowed included: a.

There was a pre-existing basket of securities that were shored up with a second or third mortgage; b. an existing debt was consolidated concurrent with granting of additional security to add to existing security; c. in addition to consolidation there was increasing indebtedness with concurrent granting of additional security to add to existingsecurity; d. the loan was in default and the mortgage taken after default was to shore up the pre-existing loan; e. no appraisal was done or the appraisal disclosed the value well below the loan indicating the lender was looking to the borrowerto pay as opposed to satisfaction from the land; and f. no covenant for payment is contained in the mortgage. [13] It is of note that these post Clayborn decisions were given during the 1980s and early 1990s.

Generally speaking, thosedecisions identified circumstances which differed from what was considered to be the norm and often had one or more of thecharacteristics described in the above examples. [14] The first PAC/STEP on December 22, 2006 sets out terms similar to a conventional mortgage situation. Indeed, the Bank’switness describes the first loan advanced the “Mortgage Debt”.

He states that it was “advanced to purchase the Lands...” and “theMortgage Debt acted as a Mortgage Debt.” This seems to be an acknowledgement that the first PAC combined with the Mortgageobtained at that time would be subject to the prohibition imposed by s. 40(1) and by extension also under the May 18, 2007 Mortgage.The Bank’s witness also stated that “the ScotiaLine Visas were advanced on the basis of the Defendants’ net worth, the appraisal of theLands, the Defendant’s income and the rental income of the Defendant’s investment properties” and "The ScotiaLine Visas acted asrevolving Lines of Credit.” [15] It is also relevant to observe that the form of lending used in this case is a relatively recent product that all banks now offer toconsumers.

Although some version of this lending practice was available in the 1980s, it has become a popular and extensively marketedform of credit for individuals. There is no doubt that when the precursor to the current s. 40(1) of the LPA was enacted in The JudicatureAmendment Act, 1939, S.A. 1939, c. 85 lending in this manner was not contemplated or even conceivable. Despite amendments allowingactions to proceed against corporations and exceptions when mortgage insurance is provided, the fundamental aspect of the legislationremains in place.

To quote from the Alberta Law Reform Institute, Report No. 70, Mortgage Remedies In Alberta, at p. 39 where, afterreviewing the legislative history, among the certain points which they say to be obvious is that "The one constant theme has been adogged determination on the part of the Alberta governments of various persuasions to be seen as, and to try to be, in fact, protective ofthe individual homeowner and farmer against the vicissitudes of relatively volatile markets." Indeed, in 1964 (S.A. 1964, c. 40) anamendment was made to what was then still a provision in the Judicature Act by adding language that a waiver of the protection couldnot be given and to purport to do so was expressly contrary to public policy. [16] This form of lending appears to contain some somewhat analogous circumstances which historically have led to theconclusion by the courts that the personal covenant in a mortgage ought to be enforceable.

However, the courts have also cautioned thatit must be aware of the ability of lenders to structure transactions in different ways and must be alert to the issue of whether lenders aretrying to directly or indirectly avoid the restriction found in s. 40(1). The

interpretation of mortgages and, in particular, this

section isbased on an amalgam of legal and equitable principles overlaid by statutory provisions. The court must undertake the appropriatefunctional analysis, bounded by both common sense and commercial reality in order to determine the general application of thelegislation and whether or not earlier principles ought to be equally applied in the current circumstances. As noted the form of lending

used in this case was not contemplated when the legislation was first introduced. The extract from The Law Reform Institute Report setout above notes the dogged determination of the various Alberta governments to protect individuals prescribing a crucial andfundamental aspect of the legislation. To use the words of the Court of Appeal in Tuxedo Savings & Credit Union Ltd. v. Krusky(1987), 1987 ABCA 29 , 49 Alta.

L.R. (2d) 282, the purpose of this legislation is “to frustrate attempts at either directly orindirectly to recover a personal judgment on the personal covenant set out in an agreement for sale or in the mortgage.” [17] Similar to the hypothetical at paragraph 60 of Stallman, in general terms the borrowers in this case were offered a consumermortgage product whereby the Bank took a first mortgage on the Condo.

The residence was appraised and a mortgage placed for the fullvalue of the property although the STEP limited lending to 80% of the loan to value ratio thereby complying with s.418(1) of the BankAct, S.C. 1991, c. 46 restrictions. The mortgagors could borrow by simple application in increments up to the STEP limit and avoid thecost of re-mortgaging. The mortgagors had the advantage of increased flexibility while minimizing legal and other costs of borrowing.The Bank had the peace of mind that it had appraised the property and could at all times look to the mortgage as security for theindebtedness.

In keeping with the conclusion reached by Master Hanebury in the hypothetical, I conclude that in substance such aproduct is first and foremost a mortgage despite its form. In my view this form of mortgage and loan transactions are subject to therestrictions imposed by s. 40(1) of the LPA. [18] Although the foregoing conclusion may be sufficient to dispose of this matter on a

Summary Judgment application, I ammindful that Clayborn tells us that we must look to the substance rather than the form of a particular transaction. It is thereforeappropriate to review the facts in greater detail as to the specific factual circumstances to determine substance and further in the contextof the broader conclusion already reached. [19] The Bank identifies the absence of a covenant for payment contained in the mortgage as a factor or circumstance whenpersonal judgment should be allowed as it is an indication that there is a true collateral mortgage but that is not the case here.

The RetailCollateral Mortgage executed states on its face that it is "payable in full on demand". It is argued that as the mortgage is payable ondemand it differs from the PACs.

What the argument disregards is that the Retail Collateral Mortgage also expressly incorporates theterms of the Standard Mortgage form which states that there is an agreement “to pay in accordance with the Agreements and theMortgage...” Furthermore, no mention is made of the apparent overarching Scotia Total Equity Plan (STEP), which sets a borrowinglimit established on the basis of the appraised land value and also ties together the approved loans and the mortgage.

The net result is tocreate a series of documents which must be viewed collectively and their terms combined effectively coalescing into one agreement inorder to give them commercial effect. Notwithstanding, the Bank argues the court should parse the collective so that it is able toovercome the substance of the entire transaction. [20] The Bank also points to Black’s Law Dictionary, 8th ed for the definition of a “conventional mortgage” as: "A mortgage, notbacked by government insurance, by which the borrower transfers a lien or title to the lending bank or other financial institution.

Thesemortgages, which feature a fixed periodic payment of principal and interest throughout the term, are typically used for home financing."The Bank concedes the initial loan was for the purpose of home financing and a conventional mortgage debt protected by s. 40, but saysthat the subsequent Lines of Credit were not for the purpose of home financing and were not advanced for the purpose of purchasing theLands. It argues that the Lines of Credit were personal loans which revolved and contained their own payment requirements.

Theavoidance of a personal obligation arising from the Bank obtaining the "Collateral Mortgage" was not the intended purpose of thesection. As previously noted, this lending arrangement was not contemplated when this legislation was first enacted, however, theintention of the

section is well described in Tuxedo Savings. The legislation does not provide for an exception for mortgages other thanwhat Blacks defines as conventional mortgages. The protection is given for all mortgages and notwithstanding exceptions created bylegislative amendment it has been preserved and unaltered for non-insured mortgages granted by individuals. Case law tells us there arefactual circumstances excepted but when the exceptions were found, what was identified was something outside the ordinary and,indeed, might be said to be most often extraordinary circumstances.

Nothing in the legislation speaks to how funds are to be advanced orrepaid. It is now commonplace for loans and mortgages to provide for multiple advances and variable repayment obligations. So calledconventional mortgages now allow for amortization periods to be changed, lump sum prepayments, payment holidays, and increasedpayments both as to amount and frequency. Even 25 years ago to make loans and take a mortgage as in this case would be consideredextraordinary. It is no longer so, but rather, ordinary. [21] More specifically the Bank points to the lending value ratio.

Reference is made to the market value of $445,000 and thetaking of the Mortgage for the full amount with authorization of $356,000 being 80% of that value under the STEP.

Ostensibly inreliance upon the use of 75% in the hypothetical described by Master Hanebury in Stallmann, and also the Law of Property Regulationwhich provides a definition for "high ratio mortgage" being a circumstance where a loan exceeds 75% of the market value, it is arguedthat because the loan was for more than 75%, it is clear the Bank, not having obtained insurance, viewed the mortgage as collateral.What the definition in the Regulation relates to is a requirement that a mortgage exceed 75% of the value for the exception allowing anaction on a personal covenant on an insured mortgage to apply.

This Regulation was put in place in 2003 when the LPA was amended topermit approved private insurers the same ability to pursue deficiencies as Canada Mortgage and Housing Corporation on insuredmortgage loans when the Bank Act required insurance on loans over 75%. Regardless, there is no insurance here and it simply has noapplication. As noted s. 418(1) of the Bank Act at the time of this loan did not require insurance on Mortgages of 80% or lower so thataspect of the argument breaks down. [22] The Bank also argues that their evidence supports the finding that they were looking to the Defendant’s ability to pay.

Inparticular, they verified the Defendants’ income and employment, confirmed that there was a minimum net worth of $100,000 for eachrental property owned, and verified rental income and obtained an updated appraisal. With respect to verifying employment income andemployment such information is obtained in every case where a bank makes a mortgage loan. Having done so in this case is equivocal.More specifically, the information disclosed gross annual employment income of, at best, $115,000 per annum. Upon this mortgagebeing granted these defendants had a combined indebtedness of about $1,000,000 to the Bank alone.

It is clear from the May 4, 2007,Decision and Verification Worksheet that the Bank was looking to the rent to service the mortgage from the property they were lendingagainst. Without the rent the Defendants clearly would not qualify for almost a $1,000,000 in loans. There was according to theappraisals sufficient equity to satisfy the above mentioned equity condition. In sum, what the Bank was looking to was the value in theproperties they were lending against and the income to be generated from those properties. Any realization against the land concurrentlywiped out the so-called ability to pay.

Furthermore, the creation of the second Scotia VisaLine and the increases in credit were made with

no reference to these conditions or updates of financial status of the Defendants being obtained. These extensions of credit appear to bebased entirely on the STEP limit established at the time the Mortgage was taken and the availability of the Mortgage as security. [23] It is argued that the Defendants’ had a personal net worth of $1.9 Million based on that statement made in a Decision andVerification Worksheet completed by Bank employees. The difficulty with this purported reliance is that the Credit Applications don’tcome close to supporting it.

At the time the application for this mortgage was made it disclosed assets of $1,550,000. In reality as theBank had current appraisals on all three properties that set the value of their real estate at $1,240,000 which when combined with theother assets totalled $1,315,000. Quite apart from any other indebtedness the Defendants may have had, once you deduct the almost$1,000,000 in mortgage loans granted or to be granted to the Bank, their net worth was about $365,000. [24] I will also address two points not specifically raised by the Bank. First is the face amount of the Mortgage being $445,000.

Itis the full appraised market value of the Condo but no explanation or rationale is given for using that amount. The limit in the STEP wasestablished at 80% percent of that amount which appears to have been the governing factor for amounts to be lent under the mortgage.Without more the difference can only be described as form not substance. Secondly, the property is clearly revenue property and it mightbe argued that the mortgage and loans were for business purposes. As noted it is not the purpose of the loan that determines theapplicability of s. 40(1) of the LPA.

Nonetheless, some authorities have found liability on the basis that the mortgage was given as part ofa business enterprise but on an examination of those authorities it has been in the context of commercial operations or farm businessesconducted by the mortgagor and where there were various forms of additional security taken as part of an extensive financing packageoften cross collateralizing the security for all loans. This is not such a circumstance.

In fact with these defendants there is a separate loanpackage with a separate STEP established and a separate mortgage in each case. [25] Finally, I note that this was not a circumstance where there was a pre-existing basket of securities being shored up by a secondor third mortgage, this was not a consolidation of debts, nor was there a default or anticipation of a default with the mortgage taken toshore up a pre-existing loan(s), there was an appraisal completed that showing significant equity and the covenant for payment was partof the Standard Mortgage terms of the Bank.

Conclusion [26] This is an application for

Summary Judgment under Rule 7.3 on the basis that Mawer has no defence to the claim of the Bank.The Bank sets out the tests in its brief as follows: 26. The test on an Application by

Summary Judgment or Dismissal has been summarized in Murphy Oil Co. v. Predator Corp, (2004), 2004 ABQB 688 , 365 A.R. 326 (Q.B.) affirmed (2006), 2003 ABCA 260 , 22 Alta. L.R. (4th) 1 (C.A.): 1) A party bringing a motion for

Summary Judgment bears the legal onus of showing no genuine issue for trial; 2) There is no onus on the responding party to prove a genuine issue for trial; 3) If the Applicant for

Summary Judgment discharges his/her onus on the material filed, a Respondent who does not resist theApplication through admissible evidences risks Judgment against him/her. That is an evidentiary burden; 4) There is no obligation on the Respondent to file material. He/She can accept the risk described above. If the Application fails todischarge his/her legal onus, the Application will fail; 5) More commonly, a Respondent will provide admissible evidence opposing the motion.

In that event, the Court will consider allthe evidence to determine whether the Application has shown that there is no genuine issue for trial. Murphy Oil Co. v. Predator Corp. (2004), 2004 ABQB 688 , 365 A.R. 326 (Q.B.) affirmed (2006), 22 Alta. L.R. (4th_ 1(C.A.), para. 17. 27. Where the factual background is not under dispute and the Courts is asked to interpret and issue of law, the test for

summaryjudgment is whether the issue of law can be fairly decided on the record before the court. Tottrup v. Clearwater (Municipal District) No. 99, 2006 ABCA 390 at para. 11 [27] Mawer agrees with the tests but says that there remains factual discrepancies and that the law with respect to the application ofs. 40(1) to Lines of Credit remains an undeveloped area. [28] I am satisfied that the factual background is not disputable.

The question is whether the facts are sufficient to satisfy theBank’s onus to establish that s. 40(1) of the LPA ought not to apply. [29] It is plain that first and foremost in substance this was a mortgage transaction. Appraisals were express requisites and lendinglimits established by reference to the appraised values. This is not a question of whether the covenants in the PCA’s are co-extensive withthat in the mortgage. The mortgage expressly incorporates the PCA covenants by reference. Although there are some characteristicssimilar to circumstances where it has been found that the

section ought not to apply, it is not sufficiently clear that the factual matrix

presented satisfies the onus that the Bank must meet to be successful in the context of a

summary judgment application, that is, that there is no genuine issue as to the application of s. 40(1) of the LPA in the circumstances [ 30 ] Furthermore, I concluded above that this transaction, despite having some analogous aspects which have led to enforcement of the covenant previously, is subject to the restriction in s.40(1) of the LPA regardless. Prior to and at the time this mortgage was being granted significant and rapidly increasing values of real estate across Canada created substantial equity for property owners and a potential source of funds not previously available to many individuals.

Financial institutions aggressively marketed and promoted mortgages to individuals to take advantage of this new found wealth. They were encouraged to mortgage the equity to make home improvements, buy boats, cars and other luxuries, and even to take that dream holiday. But as we know that equity later evaporated as the world and Canadian economies slid rapidly into recession. There were many events and factors that caused this to occur but it is now evident that much of the “value” was created as a consequence of regulatory policies and the liberal lending environment springing from those policies.

In addition Canadian financial institutions seized on the opportunity to capitalize on the new found source of profit fueling the upward spiral in real estate prices although I should note that there is nothing inherently improper in pursuing profit nor is the underlying purpose of s. 40(1) to deprive financial institutions of profits. [ 31 ] Mortgage lending including this particular form of lending on residential real estate was eventually subjected to limiting regulation arising from the changes in government policy intending to have a chilling effect on real estate markets.

Real property values have yet to fully recover as the economy struggles and the more recent policies and regulations have had their intended affect consequently putting downward pressure on prices. [ 32 ] The Bank faces a shortfall on its mortgage. It now wishes to avoid or minimize that consequence by characterizing this mortgage lending vehicle as firstly loans and only collaterally or secondarily a mortgage. I have expressed my view that this type of mortgage transaction is properly subject to s. 40(1) of the LPA. Given the commercial realities of the day this

interpretation is a proper incremental adjustment and modernization of the common law as it applies to exceptions to the protection given by s. 40(1) of the Law of Property Act . The legislature clearly intended that individuals continue to be protected against the vicissitudes of a volatile market and that principle is preserved. [ 33 ] Accordingly, the application of the Bank is dismissed. Dated at the City of Edmonton, Alberta this 3rd day of October, 2013. L. A. Smart M.C.C.Q.B.A. Appearances: Andrea Willey Duncan & Craig LLP for the Plaintiff Kunal Nand Chomicki Baril Mah LLP for the Defendants

_______________________________________________________ Corrigendum of the Reasons for Judgment of L. A. Smart , Master in Chambers _______________________________________________________ The following amendments have been made to the Reasons for Judgment as set out below: Paragraph 16, line 2- lead has been amended to read “led”; Paragraph 24, line 8 - s. 44(1) has been amended to read “s. 40(1)”; Paragraph 26, line 1- Rule 73 has been amended to read Rule 7.3; Paragraph 26 (2) - trail has been amended to read “trial”; Paragraph 30, line 1 - Futhermore has been amended to read “Furthermore”; Paragraph 30, line 2 - lead has been amended to read “led”.