MCAP Service Corporation v Patterson, 2017 ABQB 742

Court of Queen’s Bench of Alberta Citation: MCAP Service Corporation v Patterson, 2017 ABQB 742 Date: 20171204 Docket: 1612 000062 Registry: Wetaskiwin Between: MCAP Service Corporation Plaintiff - and - James Patterson and Leanne Zellweger Defendants _______________________________________________________ Reasons for Decision of W.S. Schlosser , Master, Court of Queen's Bench of Alberta _______________________________________________________ [ 1 ] This is MCAP’s Rule 9.15 application to open up a Final Order for Foreclosure. [ 2 ] James Patterson co-signed the mortgage with his daughter, Leanne Zellweger.

Leanne and her husband, Kevin Zellweger, lived in the mortgaged property. The mortgage was insured, meaning that the lender is protected and the mortgagors can be liable for the deficiency if the property is worth less than the debt after the mortgage goes into default. [ 3 ] The mortgage went into default. There appeared to be equity and the Defendants were given a six month redemption period. An exterior appraisal initially showed the property to be worth approximately $260,000. [ 4 ] When the property was not redeemed, it went up for sale.

The Defendants argued that the list price should be higher than $260,000. So MCAP obtained a new (interior) appraisal which came in at $281,000. Leanne and Kevin persuaded MCAP to try it on the market at $299,000 for two months, which they did. [ 5 ] The property was listed and re-listed at decreasing prices until April 2017. There were no interested buyers. By then the debt was roughly $230,000 ($227,687.36 plus legals).

A comparative market analysis at that time showed the property to be worth $240,000. [ 6 ] If the house sold at $240,000 there would have been a shortfall after real-estate commissions (etc) were deducted. [ 7 ] James Patterson specifically wanted to limit his risk. MCAP took a Final Order for Foreclosure, April 26, 2017. It was unopposed. The Order was filed May 10, 2017, then sent to the Registrar of Land Titles to transfer title. Possession was obtained June 11, 2017. [ 8 ] When MCAP took possession they found that the Defendants had removed or destroyed significant portions of the house before vacating.

In particular they: (

a) Removed the water filtration system;

(

b) Damaged the wall near where the filtration system had been installed; (

c) Removed the eaves trough downspouts and extensions; (

d) Damaged or disconnected portions of the electrical system; (

e) Removed several light fixtures, plugs, and switch plates; (

f) Destroyed the glass railing in the living room; (

g) Removed all appliances, including built-in dishwasher, the gas range, the refrigerator, and the range hood; (

h) Removed large sections of the drywall on the staircase between the basement and main floor; and (

i) Removed all cabinet doors from the kitchen. [ 9 ] MCAP wants to open up the Final Order for Foreclosure and seek judgement based on the value of the items removed, or the reduced value of the property. James Patterson opposes this, but only on his own behalf. He says he had nothing to do with stripping the property. As a co-mortgager Mr. Patterson would be jointly liable for any shortfall; though he fairly concedes that opening up the Final Order may be ‘all or none’. [ 10 ] The template Final Order in this case provided: ... 2.

The Defendants stand absolutely debarred and foreclosed of and from all estate, right, title, interest and equity of redemption in the mortgaged lands. 3. The mortgaged lands are hereby vested in the Plaintiff, for all the estate, right, title, interest and equity of redemption of the Defendants. ... 6. If the mortgaged lands are or become vacant then the Plaintiff is entitled to immediate possession.

If the mortgaged lands are not vacant then the Defendants, any tenants, and any other occupants, shall deliver up to the Plaintiff vacant possession of the mortgaged lands thirty days after service of this Order upon them. Service of this Order may be made on the occupants by posting same on the main entrance door to the mortgaged lands. A Civil Enforcement Agency has authority, thirty days after service of this order has been effected, to evict any occupant of the mortgaged lands. ... [ 11 ] The effect of the Order is to give the house to the lender. The former owners are given a time to move out.

The effect of the Final Order is to extinguish the debt in exchange for the land. [ 12 ] MCAP’s security is only over the land. Some things in the house, such as some appliances, are personal property, or chattels, not covered by the mortgage security. Unlike fixtures, which are attached or built-in, appliances sometimes fall into something of a grey area in the foreclosure process but not things like built-in water filtration systems or kitchen cabinet doors. [ 13 ] Chattels are one thing that Real Estate Purchase Contracts usually address (eg who gets non-fixtures such as the fridge or the drapes).

They are usually dealt with in residential real estate Appraisals only in the most superficial way. They are usually not mentioned in a CMA and they are not specifically addressed by a Final Order for Foreclosure. [ 14 ] The standard appraisal form used in this case has a fill-in-the-box

section for “Built-ins/Extras”. The dishwasher and reverse osmosis filter were noted in this

section but not the gas range, or the fridge. This suggests two things: first that the appraised value didn’t include the fridge and the stove and, possibly, that they weren’t fixtures and hence not part of the mortgage security. Without more, Leanne and Kevin would be free to take these things but not the others. [ 15 ] There appear to be three ways to deal with this issue: (

i) Restitution [ 16 ] Stripping a mortgaged property is a criminal offence.

Section 441 of the Criminal Code of Canada provides: 441. Occupant injuring building Every one who, wilfully and to the prejudice of a mortgagee or an owner, pulls down, demolishes or removes, all or any part of a dwelling-house or other building of which he is in possession or occupation, or severs from the freehold any fixture fixed therein or thereto is guilty of an indictable offence and liable to imprisonment for a term not exceeding five years. [ 17 ] In theory, the file could be referred for prosecution. MCAP could apply for an Order for restitution before sentencing, if there were a conviction.

Then a strong message could be sent. Leanne and Kevin might also go to jail. [ 18 ] Given that the interest in the land has passed to the lender by virtue of the Order, there is also an element of theft in stripping foreclosed property, which is also a tort. [ 19 ] That is possibility number one.

(ii) Opening up the Final Order [ 20 ] Possibility number two is the Rule 9.15 application presently before the Court. [ 21 ] The law of opening up judgments was carefully reviewed by Slatter J (now JA) in Edwards v Ferris , 2001 ABQB 1125 . In that case, there was a default judgment in a motor vehicle liability case that did not include the damages for personal injury.

The application was to open up what was, by then, a fully satisfied judgment. [ 22 ] In Edwards , the learned Justice noted that the themes of mistake, prejudice, preservation of vested rights and fairness recur in decisions about opening up judgments. He said: [56] There must be some cases where the importance of the finality of judgments overrides the interests of the plaintiff in setting aside a default judgment, whether the plaintiff’s interests are viewed based on mistake, prejudice, fairness or the vesting of rights. Two of those situations are: (

a) Where an attempt has been made to take some advantage from the default judgment, for example by way of execution, suspension of driver’s licenses, or the commencement of bankruptcy proceedings, and (

b) where the judgment has been wholly satisfied. It is not necessary for me to decide whether one alone of these factors would be sufficient to deny the plaintiff his relief, because they are both present in this case. [57] Where neither of these factors are present, it is probably appropriate to balance the prejudice to both parties in deciding whether or not to set aside the default judgment. However, in that balancing process the prejudice to the administration of justice by undermining the finality of judgments and allowing the fragmentation of litigation must always be considered as well.

Even if the test is always a balancing of prejudice, I believe that the Appellant wins that contest in this case. Even if not conclusive, the garnishee proceedings against him, and his satisfaction of the judgment are significant items of prejudice. The mere fact that a judgment was entered against him weighs in the balance because of the importance of finality of judgments. The fact that the Respondent might have a remedy against his previous solicitor is also something that weighs in the balance.

I would not place much weight on the fact that the Appellant is uninsured, because his being in that situation is a breach of statute on his part. Master Laycock varied a Redemption Order on the basis of Rule 9.15, applying Edwards , in; HSBC Bank of Canada v Billett , 2012 ABQB 782 . [ 23 ] The starting point is that there is strong public policy favouring the Plaintiff’s position; especially in view of the fact that what Leanne and Kevin did was potentially a crime.

The same public policy considerations also strongly favour sending a message to mortgagors to discourage this type of behaviour. [ 24 ] MCAP has acted on the Final Order, having taken title. The house has now been sold to a third party for $210,000. In a manner of speaking, the Order has also been fully satisfied. There is also an element of prejudice to James Paterson, who followed the proceedings with the primary intention of avoiding personal liability.

Opening up the judgment would change that in circumstances that were outside his knowledge or participation. [ 25 ] If the Final Order were opened up, there is a problem with the evidence establishing the loss. I am not prepared to determine the harm based on the CMA, or on the sale price to the third parties. [ 26 ] A sale at $210,000 would not have been approved, with a deficiency judgment, against a qualified appraisal at $281,000 and (a hearsay) CMA at $240,000; certainly without better evidence of the value of the things removed.

In other words, MCAP has not proved that the value (or effect) of removing these items is $70,000 against the appraisal or even $30,000 against the CMA. ‘All or None?’ [ 27 ] I acknowledge the difficulty with opening up a judgment against some defendants but not others. The problem is magnified because James Patterson would otherwise be jointly and severally liable as a co-signer on the mortgage with his daughter. [ 28 ] His evidence is that he had nothing to do with the loss and no knowledge of it.

He also raises the issue of prejudice in his affidavit which itself is a factor in determining whether to open up a judgment. [ 29 ] I am disinclined to open up the judgment on the basis of the evidence presented at this application. Even if I were willing to do so, in an amount to be proved, I would be inclined to stay it against James Patterson based on s 17 of the Judicature Act which provides: 17(1) In a proceeding (

a) for the recovery of a debt or liquidated demand, (

b) for the enforcement of a security or charge on land, (

c) for the determination or specific performance of an agreement for the sale of land, or (

d) for the possession of land,

the Court in its discretion may at any stage of the proceeding grant a stay of proceedings on any terms that the Court may prescribe, and in like manner the Court in its discretion may with or without imposing terms, after final judgment in any proceeding whatsoever, grant a stay of execution of an order for sale or of other similar process, including a stay of an order for possession of land, and may by an order granting the stay extend the time for payment of a judgment debt or the time for doing any act or making any payment prescribed by a previous order of the Court.

Tort of Waste/Theft [ 30 ] MCAP sought to recover their loss against the mortgagor and his tenant in another case: MCAP Service Corporation v Chiang , 2011 ABQB 477 . The particular problem in that case was that the mortgage was conventional, unlike the insured mortgage in this case. There was also a tenant. He was the one that ran a marijuana grow-op that damaged the houses. After a thorough and helpful review of the law, Madam Justice Shelly gave Judgment against both Defendants in tort. [ 31 ] In the present case, MCAP is not confronted with a bar to recovery under the mortgage as it was in the Chiang case.

The virtue of the tort remedy is that it would permit recovery against Kevin Zellweger – who otherwise has no liability under the mortgage and it would probably provide a defence to James Patterson who had no involvement in the loss. [ 32 ] The measure of damages is different for a tort claim, as is the scale of costs but, in my view, it is a much more precise and satisfactory way of addressing the loss especially with some of the problems noted above. Disposition [ 33 ] The application to open up the Judgment is dismissed in the somewhat unique circumstances of this case.

The Applicant has leave to reapply on fresh evidence, if they do not proceed with the tort claim against Leanne and Kevin Zellweger. [ 34 ] If there is a moral to this application, it is that the evidence and the current practice may need some revision and improvement. At the very least, appraisals should specifically address chattels like a real estate offer so everyone knows where they stand. It also emphasizes the deficiencies in the CMA valuations which are of limited assistance and, usually, have even less evidentiary value.

I note that some lenders are now asking for a specific provision allowing them to apply for an adjustment in Orders for Sale in exactly these circumstances. [ 35 ] The parties may speak to costs. Heard on the 16 th day of November, 2017. Dated at the City of Wetaskiwin, Alberta this 4 th day of December, 2017. W.S. Schlosser M.C.Q.B.A. Appearances: Kari Sejr Bishop & McKenzie LLP for the Plaintiff Patrick Kirwin Kirwin LLP for the Defendant, James Patterson