Shire International Real Estate Investments Ltd. (Re), 2013 ABQB 61

Court of Queen ’ s Bench of Alberta Citation: Shire International Real Estate Investments Ltd. (Re), 2012 ABQB 61 Date: 20130124 Docket: 0901 11866 Registry: Calgary In the Matter of Companies ’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 , as amended, the Judicature Act, R.S.A 2000, c. J-2, as amended, and the Business Corporations Act, R.S.A. 2000, C.

B-9 , as amended AND In The Matter of a plan of compromise or arrangement of Shire International Real Estate Investments Ltd., Shire Capital Ltd., Halama Gardens LLC, Shire Asset Management Ltd., Winn River Resort Ltd., Fort McMoney Properties II Ltd., Halama Gardens Ltd., Maples and White Sands Investment Ltd., Fort McMoney Properties Ltd., Chemainus Properties Ltd., Skaha Lake Development Ltd., Tsehum Harvour Ltd., Bearspaw at 144th Avenue Ltd., Bearspaw at 144th Equities Ltd., Bearspaw at 144th Bonds Inc., Tsehum Harbour Equities Ltd., Tsehum Harbour Bonds Ltd., Orillia Investments Ltd., 0726028 B.C.

Ltd., 0675816 B.C. Ltd. and Bosun ’ s Holding Ltd. _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C.A. Kent _______________________________________________________ [ 1 ] The Shire Group originally sought and received CCAA protection. The stay resulting from the initial order was terminated and the properties held by the companies began to be liquidated, first to pay out the DIP financing and then repay the secured creditors.

On March 2, 2010, I made an order which allocated the DIP lender's charge first against unencumbered properties, second to any equity in encumbered properties and then pro rata amongst the remaining value of the encumbered properties. Paragraph 6 of that order sets out the repayment priorities. Paragraph 6(

a) deals with payment from encumbered properties and specifically provides that the DIP is repaid from the equity remaining "...in excess of all valid and duly registered mortgages, charges or encumbrances." [ 2 ] As of December 12, 2012 the DIP Facility totalled just under $2 million and the expected equity from properties not yet sold is from $200,000.00 to $450,000.00.

[3] The property involved in this application is the Sorrento Inn Property. In May, 2008, Maples and White Sands InvestmentLtd. (MAWSIL), one of the Shire properties, issued an offering memorandum whereby mortgage units were offered for sale with the netproceeds from the sale of units going to purchase the Sorrento Inn Property. The mortgage units were to represent undivided interests ina mortgage on the Sorrento Inn Property. Just over $11,000,000.00 was raised from the MAWSIL investors. [4] MAWSIL acquired the Sorrento Inn Property for $2,800,000.00.

In accordance with the Olympia Trust Deed, a mortgagewas placed on the property and held through a trust deed made between MAWSIL and Olympia Trust Company. [5] No mortgage units were provided to Olympia and Olympia did not certify any unit certificates. No register of mortgage unitholders was created. All of these things were required to be done by the documents referred to above. These three factors I refer to as theirregularities. Payments were made by MAWSIL to the MAWSIL investors in accordance with the documents referred to above.

Themortgage was registered against the Sorrento Inn Property. [6] On September 23, 2010, I gave an order declaring that the Sorrento Inn Property was an encumbered property. However, itwas left to this hearing to determine whether the encumbrance was only the administration costs of Olympia Trust or whether it was theadministration costs and the amounts contributed to MAWSIL by the MAWSIL investors.

The Sorrento Inn Property was sold with netsale proceeds of $608,738.00. [7] Counsel for the investors first says that the documents clearly disclose that the intention of MAWSIL was to use the moniesinvested to purchase the Sorrento Inn Property. He refers specifically to Paragraphs 1.2, 2.2, 2.5 and 5.1 of the offering memorandum,all of which refer to the purchase of property and some of which specifically refer to the Sorrento Inn Property. Likewise, the mortgagerefers to the property and sets out the terms of the mortgage.

He refers to a letter to one of the investors which encloses a quarterlyinterest payment for the investment in MAWSIL. The letter specifically says that the "payments are issued to the Registered MortgageUnit holder" and then states the name of that unit holder. [8] Ernst and Young had been appointed the monitor when the CCAA initial order was granted. In the monitor's third report, themonitor reports on its investigations and deals specifically with MAWSIL.

Counsel for the investors argues that the information that themonitor obtained regarding MAWSIL is further confirmation that the intention was to have the investment secured by the Sorrento InnProperty. [9] The investors argue that because of the irregularities, the documents evidence an equitable charge or mortgage which givesthe investors a priority to the sales proceeds. They argue that I must look beyond the form of the transaction to discover its truemeaning: Ziff, Principles of Property Law, 4th ed. (Toronto: Thomson Carswell, 2006).

Here the language of the documents reflects anagreement that the investors' money would be secured by a mortgage against the Sorrento Inn Property. Furthermore, the failure ofOlympia to certify the unit certificates is not fatal to the creation of a valid equitable charge. In Re: Cadwell Ltd., (ONCA), [1934] 2 DLR 341 (Ont CA), the Royal Bank held bonds of Cadwell which had become bankrupt. The bonds provided that they"...shall not become obligatory until it shall have been certified by or on behalf of the trustee". The deed of mortgage contained the sameprovision.

The bonds were never certified, although the mortgage was properly registered. The trustee in bankruptcy sought adeclaration that the bonds were null and void because they were not certified. The Court of Appeal found that the bonds were valid,relying on equitable principles. The court found that the acts of the parties created a valid charge in favour of the bank, even though thebonds were not technically enforceable. The investors say that as in Cadwell the evidence here discloses an agreement and thereforecreates a valid charge against the land.

That evidence includes the fact that the Sorrento Inn Property was purchased, the mortgage wasregistered, some interest payments were made and those interest payments specifically referenced the payee as a registered unit holder. [10] A case that both parties relied upon is the decision of the Ontario Court of Appeal in Elias Markets Ltd. (Re), (ON CA), [2006]OJ NO 3689. The facts in the case are complex, but for the purposes of consideration here, it is relevant to knowthat RBC took a mortgage that was not registered against all three of the properties pledged so that by operation of law, the mortgageswere void.

Subsequently, BMO granted a line of credit and took as security a guarantee and a GSA. That security was registered a yearlater, about the time that BMO realized that the RBC mortgage was defective. BMO admitted that when it gave the line of credit it knewabout the RBC financing. The investors rely on the decision for two things. First, the court reviewed the nature of an equitablemortgage and said the following at para 64: The concept of an equitable mortgage would seem to find its foundation in the equitable maxim that "equity looks on that as done whichought to be done".

Historically, the courts of equity mitigated the rigour of the common law, tempering its rules to the needs of particular

cases on principles of justice and equity. The common law courts were primarily concerned with enforcing the strict legal rights of the parties, whereas equity was a court of conscience; it would step in to prevent an injustice that would otherwise arise from the strict application of the law. [ 11 ] Second, the investors point to comments made about the effect of the rules of priority on the facts in that case. At para 69, the court sets out the equitable rules.

The third rule is that as between a first equitable mortgage and a second legal mortgage, the second mortgage has priority if the mortgagee has acquired the legal estate in good faith for value and without notice. The court then says at para 80: “ ... the equitable mortgage would have been enforceable in priority to BMO’s GSA. This is because, as already discussed, BMO acquired its legal charge with notice of RBC’s mortgage financing. In this context, it makes no difference that BMO was not aware of the equitable mortgage, given its knowledge of the registered, albeit invalid, mortgage.

As a result, and in accordance with the third rule of priorities already described, the equitable mortgage would rank in priority to BMO’s subsequent legal interest.” [ 12 ] The investors also argue that the requirements for an equitable charge or mortgage are present: there is a debt, identified with an interest rate and repayment date, there is a specifically enforceable agreement whereby MAWSIL will issue mortgage units to the investors and there is clearly identifiable collateral, namely the Sorrento Inn Property. [ 13 ] Finally, the investors say that in balancing the equities, the investors ought to be preferred because they were victims of fraud whereas Romspen benefitted from a 5% super priority for repayment of the debt. [ 14 ] Romspen argues that the only money secured by the mortgage was the Olympia administration costs because of the irregularities.

Romspen says that the key to this issue is the wording of my March 6 order, specifically paragraph 6(

a) where priority is given to ‘valid and duly registered mortgages, charges and encumbrances’. Insofar as the investors’ funds are concerned, there is no valid mortgage registered. [ 15 ] Rompsen notes that Olympia was of the view that only the administration costs were secured by the mortgage. That contrasts with the Ernst and Young report which did not have Olympia’s evidence, was preliminary and based only on information from Shire. [ 16 ] Romspen too relies on Elias .

First, at para 63, the court notes the distinction between a legal and an equitable mortgage is that an equitable mortgage does not transfer the legal estate in the property to the mortgagee but creates an equitable charge. [ 17 ] Second, at para 66, Elias sets out the different ways an equitable mortgage can be created, including where a legal mortgage is not signed or sealed or is otherwise not sufficient to transfer legal title. [ 18 ] Romspen argues that

section 2.6 of the Deed of Trust creates a condition precedent that was not fulfilled.

Section 2.6 says that no mortgage unit will be issued until the unit certificate is certified by Olympia. Romspen says that the evidence of one investor that that investor received an interest payment is not sufficient evidence of what the mortgage secured. Romspen argues that the investors do not dispute that an essential feature of an equitable mortgage is a common intention that property be made security for a debt due or for future advances.

Here there is no evidence MAWSIL’s intention and the securities sought to be purchased, and money advanced was to MAWSIL, not the owner of the property. [ 19 ] Romspen says that any issue of priorities must be considered in light of s. 29 of the Land Title Act , R.S.B.C. 1996, c. 250. Subsection 2 reads:

(2) Except in the case of fraud in which he or she has participated, a person contracting or dealing with or taking or proposing to take from a registered owner (

a) a transfer of land, or (

b) a charge on land, or a transfer or assignment or subcharge or the charge,

is not, despite a rule of law or equity to the contrary, affected by a notice, express, implied, or constructive, of an unregistered interest affecting the land or charge other than (

c) an interest, the registration of which is pending, (

d) a lease or agreement for lease for a period not exceeding 3 years if there is actual occupation under the lease or agreement, or (

e) the title of a person against which the indefeasible title is void under section 23(4). [ 20 ] Finally, Romspen argues that the equities do not favour the investors.

They were prepared to make a speculative and high risk investment and should not be in a better position than other Shire victims. [ 21 ] The investors respond by saying that paragraph 6 of the March 6 order does not exclude an equitable mortgage. [ 22 ] Before going further, it is necessary to comment on the investors’s argument that the Ernst & Young report is evidence that there was an intention that the property secured the investors’ money and Romspen’s argument that Olympia’s opinion that the mortgage did not secure the investments is evidence of that fact. Neither is helpful.

Ernst & Young had imperfect knowledge; Olympia’s opinion was simply that, a legal opinion. [ 23 ] If the investors’ funds are no more than an equitable mortgage, then s. 29 provides a full answer. Absent fraud, the DIP takes priority. Notice is not sufficient. Had it not been for s. 29 , then the rules set out in Elias would apply and the investors would succeed. For the investors to take priority over the DIP, their interests must be contained within the mortgage that was registered. The mortgage was a duly registered mortgage as required by paragraph 6 of my March order.

The real question is whether the mortgage includes the investors’ interest, or put another way, whether any or all of the irregularities result in these interests not being included. [ 24 ] There is no doubt that the offering memorandum specifically identified the Sorrento Inn Property as the land that was to be purchased with the invested funds. That money was linked to the property through the trust deed which in turn was secured by the mortgage. In my view, that is sufficient to find that the mortgage secured the investors’ money.

The failure to identify mortgage units, have Olympia certify these units and create an investors’ register do not detract from the fact that the money was properly secured by the mortgage. These are truly irregularities and are irrelevant to the fact that the money from the investors was the money which was used to purchase the property and was secured by the mortgage. Heard on the 18 th day of December, 2012. Dated at the City of Calgary, Alberta this 24 th day of January, 2013.

C.A. Kent J.C.Q.B.A. Appearances: Dean A. Hutchinson / Jeffrey M. Lee MacPherson Leslie & Tyerman LLP for the Applicant Scott Stephens Owen Bird for the Respondent