Capital Direct Lending Corp v Howard & Company Real Estate Appraisers and Consultants Inc, 2016 ABQB 545

Court of Queen’s Bench of Alberta Citation: Capital Direct Lending Corp v Howard & Company Real Estate Appraisers and Consultants Inc, 2016 ABQB 545 Date: 20160930 Docket: 1201 10775 Registry: Calgary Between: Capital Direct Lending Corp. and Capital Direct Income Trust Plaintiffs - and - Howard & Company Real Estate Appraisers and Consultants Inc., David Horn, and D.R. (Rick) Howard Defendants _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice B.R.

Burrows _______________________________________________________ [ 1 ] The Plaintiffs, Capital Direct Lending Corp. (“Lending”) and Capital Direct Income Trust (“Income Trust”), appeal the order of Master A. R. Robertson, Q.C. granting

summary judgment dismissing this action. [ 2 ] In their claim, Lending and Income Trust alleged that they relied on a property appraisal provided by the Defendants in advancing a loan on the security of a second mortgage against the appraised property. The property owner defaulted on the loan. In the resulting foreclosure proceedings, the Plaintiffs’ recovery was significantly deficient.

They allege that the Defendants were negligent in the preparation of the appraisal and that their loss resulted. [ 3 ] Master Robertson found that the party to whom the Defendants provided the appraisal, the Defendants’ client, was Lending. The appraisal report expressly provided that it could not be relied upon by any other party without the Defendants’ express permission. Subsequent to Lending making the loan and taking the mortgage security it sold the mortgage to Income Trust. The Defendants’ were never asked to permit Income Trust to rely on the appraisal.

As Lending had sold its interest in the mortgage to another entity, Income

Trust, and been paid the purchase price, it did not suffer any loss as a result of its reliance on the appraisal. Income Trust suffered a loss, but the Defendants’ did not owe Income Trust any duty of care. The appraisal report expressly restricted the Defendants’ duty of care to Lending and expressly excluded a duty of care to anyone else. [ 4 ] The Master considered several other grounds which the Defendants submitted justified

summary dismissal of the action. He rejected all of them. The Defendants cross-appeal and seek

summary dismissal on those other grounds if Lending and Income Trust succeed on their appeal. The Plaintiffs [ 5 ] The Statement of Claim alleges that Lending is a corporation extra-provincially registered in Alberta. The legal status of Income Trust is not stated in the Statement of Claim. The Claim does allege that Income Trust is the beneficial owner of Lending. [ 6 ] The materials filed on the application indicate that a separate corporation, Capital Direct Management Ltd., (“Management”) is the manager of Income Trust.

The materials also indicate that the trustee of Income Trust is Computershare Trust Company of Canada. I understand that the beneficiaries of Income Trust are the investors who have purchased trust units in Income Trust. The materials indicate that Income Trust is governed by the laws of the Province of Ontario. [ 7 ] That Income Trust is a legal person capable of being a plaintiff in an action is perhaps questionable, but neither side has raised this as an issue. Rather, both sides have treated Income Trust as a legal person, separate from Lending, at least for the purposes of this application.

The Property Appraisal [ 8 ] In June 2008, the owner of a property in Caroline, Alberta applied to Lending for a second mortgage. Lending ordered an appraisal of the property through the National Appraisal Service (“NAS”) in the ordinary course of processing the property owner’s mortgage application. [ 9 ] Lending’s order for an appraisal included a document outlining Lending’s requirements for the appraisal. This document was embedded on the NAS website for appraisers to review and was included in Lending’s order for an appraisal when it was sent by NAS to appraisers.

The document was entitled, “Non-Standard Appraisal Requirements – Capital Direct.” The last of several items in the list of “requirements” was: • “Please be aware it is Capital Directs intention to assign its mortgage security to a new mortgagee, after funding.” [This fact – that Lending’s “requirements” included this point – was not in the evidence before the Master. It has been added to the evidence in this de novo “appeal” from the Master.] [ 10 ] NAS selected the Defendants to provide the requested appraisal and sent Lending’s request and requirements to the Defendants.

The Defendants were assigned to carry out the appraisal of the property identified in the mortgage application. [ 11 ] On October 29, 2008, the Defendants issued an appraisal report to Lending. It indicated that the value of the property on August 20, 2008 was $430,000. It contained the following provisions: . . . Intended Use of Appraisal : Assisting in obtaining mortgage financing and for no other purpose. . . . Scope . . . Applications may be made to the appraiser for written approval for use. A fee may be levied in compensation for the letter and transfer of liability for use.

This report shall be considered “marketable” for a period of 90 days from the effective date as noted herein. Release of the report after the “market” period shall be limited to the professional associations of which the Appraisers are members, or by a court of law or any other body with the power to subpoena. . . . Ordinary Assumptions and Limiting Conditions 1. This report is prepared at the request of the client and for the specific use referred to herein.

It is not reasonable for any other party to rely on this appraisal without first obtaining written authorization from the client, the author and any supervisory appraiser, subject to the qualifications in paragraph 11 below. Liability is expressly denied to any person other than the client and those who obtain written consent and accordingly, no responsibility is accepted for any damage suffered by any such person as a result of decisions made or actions based on this report. Diligence by all intended users is assumed. 2.

Because market conditions, including economic, social and political factors change rapidly and, on occasion, without warning, the market value estimate expressed as of the date of this appraisal cannot be relied upon as of any other date except with further advice from the appraiser and confirmed in writing. . . . 11. The contents of this report are confidential and will not be disclosed by the author to any party except as provided for by the provisions of the Canadian Uniform Standards of Professional Appraisal Practice . . . The Client agrees that in accepting this report, it

shall maintain the confidentiality and privacy of any personal information contained herein and shall comply in all material respects with the contents of the appraiser’s privacy policy. . . . 13. Written consent from the author and supervisory appraiser, if applicable, must be obtained before any part of the appraisal report can be used for any purpose by anyone except the client and the other intended users identified in the report. Where the client is the mortgagee, liability is extended to its insurer.

Liability to any other party or for any other use is expressly denied regardless of who pays the appraisal fee. Written consent and approval must be obtained before the appraisal (or any part of it) can be altered or conveyed to other parties, including mortgagees (other than the client) and the public through prospectus, offering memoranda, advertising, public relations, news, sales or other media. Certification . . .

As a result of my analysis of all applicable data and relevant factors, it is my conclusion that the market value of the interest in the subject property as at August 20, 2008, (Effective Date of the Appraisal) is $430,000 (See Extraordinary Assumptions) . . . Extraordinary Assumptions and Limiting Conditions . . . As of the effective date of this report, the property was in a state of renovations due to flooding in the lower level of the property. The concluded market value assumes 100% completion of the building within a reasonable development period between 120 to 150 days.

The value estimate contained herein assumes construction is completed to acceptable standards, in accordance with current building practice, relevant building codes and the specifications and construction plans provide and retained on file. . . .

Transfer of the Mortgage [ 12 ] On January 15, 2009, Lending loaned the property owner $107,490.00 and took a second mortgage on the appraised property as security. [ 13 ] On April 7, 2009, the Defendants wrote to Lending advising that the property had been further inspected on April 1, 2009 and reported that the renovations mentioned in the appraisal report had been completed. [ 14 ] On April 17, 2009, Lending informed Management by memorandum that Lending had arranged for Management to purchase the second mortgage in its capacity as manager of Income Trust. The purchase price was $105,657.31.

Lending forwarded a copy of the appraisal report to Management.

The memorandum requested that certified funds in the amount of the purchase price be sent to Lending’s solicitors who would ensure that a transfer of the mortgage was registered at Land Titles. [ 15 ] The evidence confirms that the purchase price was paid by Income Trust to Lending. (Cross Examination of Derek Ray Tripp, Managing Director of Lending, October 29, 2014, page 36, line 18.) [ 16 ] On May 27, 2009, Lending’s solicitors wrote to Management in its capacity as manager of Income Trust and advised that Lending had instructed them to transfer the mortgage to Management.

The letter indicated that the solicitors would register the mortgage transfer. [ 17 ] In fact, no transfer of the mortgage from Lending to Management was ever registered. It appears that Lending administered the mortgage on Management’s behalf pursuant to an Administration Agreement that had been in place for some years. Subsequent Events [ 18 ] The facts so far outlined are sufficient for my disposition in this appeal. I will, therefore, not outline in any detail events subsequent to those described which have relevance in the Defendants’ cross appeal which it is not necessary for me to address.

These subsequent facts include: a. The second mortgage was renewed at the end of its 1 year term. b. The property owner defaulted on the loan. c. Lending took foreclosure proceedings. d. The appraisal for the foreclosure proceedings, which Lending received on June 4, 2010, indicated that the market value of the property was $250,000 and the forced sale value was $187,500. e. A further appraisal was prepared for the foreclosure proceedings indicated that the property had a market value of $260,000 and a forced sale value of $220,000 as of August 27, 2010. Lending received this appraisal on September 13, 2010. f.

During the foreclosure proceedings, Lending became aware that the mortgage had been registered on the wrong title. The title on which it was mistakenly registered was for a vacant lot. Lending claimed against its title insurance coverage. The title insurer and

Lending settled the claim for $44,745.84. g. Lending and Income Trust commenced this action on August 24, 2012 claiming damages of $136,200.64. Did the Defendants owe a Duty of Care to Income Trust? [ 19 ] Though both Lending and Income Trust are Plaintiffs, it is beyond dispute that Lending suffered no damages. Assuming that the Defendants were negligent in preparing the appraisal and that that was breach of contract or actionable negligence, Lending had sold its interest in the mortgage to Income Trust well before the alleged negligence was discovered.

Lending received payment of the price it had required from Income Trust. When that payment was made, Lending was in the position it had been before any breach of contract or negligence (if there was any) occurred. There can be no doubt that it suffered no loss and therefore has no cause of action against the Defendants. [ 20 ] Income Trust has no cause of action for breach of contract because, as is also beyond dispute, Income Trust was not a party to any contract with the Defendants. There is no suggestion that Lending was acting as Income Trust’s agent or trustee when it made the mortgage loan.

Indeed the evidence surrounding the sale by Lending of the mortgage security to Income Trust establishes very clear that it was not. The documents in relation to that sale appear to have been prepared in such a way as to emphasize that Income Trust and Lending were separate entities acting entirely independently of each other in that transaction. There is nothing in the circumstances to justify relaxation of the principles of privity of contract.

Income Trust cannot tag on to the contractual duty or the duty of care owed by the Defendants to Lending. [ 21 ] The only remaining question is whether the Defendants owed Income Trust a duty of care as a party who was reasonably in the Defendants’ contemplation as someone who would reasonably rely on the appraisal. [ 22 ] The Plaintiffs submit that the Defendants owed Income Trust a duty of care because one of the requirements Lending imposed on the Defendants when it ordered the appraisal was, “Please be aware it is Capital Directs intention to assign its mortgage security to a new mortgagee, after funding.” The Plaintiffs submit that by accepting the assignment, the Defendants must be taken to have accepted that “requirement” as a term of the contract governing the retainer.

The Plaintiffs further submit that the limiting conditions in the appraisal report are at most a proposal by the Defendants for the amendment of a contract already made. Lending did not accept the proposal. Therefore the contract remains the one formed when the Defendants accepted the assignment – one which contained the “requirement”: “Please be aware it is Capital Directs intention to assign its mortgage security to a new mortgagee, after funding.” [ 23 ] This submission, like the evidence concerning the “requirement” upon which it is based, was not made to the Master.

It is a fresh argument advanced in this “appeal de novo ” from the Master. [ 24 ] I do not accept the submission. [ 25 ] The Plaintiffs’ submission seeks to give the words of the “requirement” a meaning they simply cannot bear.

The Plaintiffs’ seek to have the requirement read as if it said, “Please be aware it is Capital Directs intention to assign its mortgage security to a new mortgagee, after funding, and therefore, Lending requires that it be at liberty to provide the appraisal to any potential assignee of the mortgage security so that the potential assignee may rely on the statement of value contained in the appraisal in the same manner and to the same extent as Lending will rely on it when making the loan and accepting the mortgage security it later assigns to a new mortgagee.” [ 26 ] The words of the requirement as actually communicated by Lending are incapable of extending the liability of the Defendants to an assignee from Lending. [ 27 ] The fresh submission made by the Plaintiffs on the appeal does not justify a result different from that reached by the Master. [ 28 ] The Plaintiffs organized their money lending operation using various separate entities.

The materials demonstrate that it was very important to the Plaintiffs that the separation and exclusivity of these several entitles be absolute. I assume that the purpose was to ensure that the tax advantages obtainable through the use of the income trust mechanism were not jeopardised.

Third parties with whom the Plaintiffs had dealings were equally entitled to rely on the absolute separation and exclusivity of those entities. [ 29 ] The Defendants also submit that even if they somehow owed a duty of care to Income Trust, the provisions of the appraisal report which limited the time during which any reliance could be placed on the opinion expressed in the report – “the market value estimate expressed as of the date of this appraisal cannot be relied upon as of any other date except with further advice from the appraiser and confirmed in writing” – rendered it incapable of being relied upon by anyone as of the date when Income Trust bought the mortgage, which was about 9 months after the effective date of the appraisal.

In my view, that limitation also justifies

summary dismissal of this action. [ 30 ] The appeal is dismissed. It is not necessary for me to consider the issues raised on the cross-appeal. Heard on the 17 th day of August, 2016. Dated at the City of Edmonton, Alberta this 30 th day of September, 2016.

B.R. Burrows J.C.Q.B.A. Appearances: John R. Cusano and Tracy A. Van Brunt for the Plaintiffs Bryan Kickam, Q.C. and Philip Carson for the Defendants