Canadian Western Bank v, 2021 ABQB 868

Court of Queen’s Bench of Alberta Citation: Canadian Western Bank v 1364994 Alberta Ltd, 2021 ABQB 868 Date: 20211103 Docket: 1703 16154 Registry: Edmonton Between: Canadian Western Bank Plaintiff - and - 1364994 Alberta Ltd, 1339698 Alberta Ltd, Barbara Jean Fung, Anthony Hon Shing Wong and Keith Barry Watson Defendants _______________________________________________________ Reasons for Decision of L. R.

Birkett, Master in Chambers _______________________________________________________ [ 1 ] A question of priorities arose between two subsequent encumbrancers following a payment into court of excess sale proceeds in the foreclosure action between Canadian Western Bank and 1364994 Alberta Ltd. [ 2 ] The contest is between a private lender, Dang Kam Mui, and the holder of a builders’ lien, Scheffer Andrew Ltd . Mui had both a Mortgage and a caveat securing an Agreement Charging Land registered prior to Scheffer’s builders’ lien. Mui and 136 entered into a Mortgage Amending Agreement to cover the total debt secured.

The Mortgage Amending Agreement was registered subsequent to the builders’ lien.

[ 3 ] Scheffer acknowledges Mui has priority for the amount of debt secured by the original Mortgage registered ahead of the builders’ lien. Scheffer takes the position that the Mortgage Amending Agreement had the effect of advancing funds to pay out and discharge the Agreement Charging Land, leaving the builders’ lien in priority. [ 4 ] Mui takes the position that the Mortgage Amending Agreement had the effect of confirming the funds secured by the Agreement Charging Land and the original Mortgage.

Because both of those instruments were registered prior to the builders’ lien, Mui maintains priority for payment of its secured debt in full. [ 5 ] The Defendants took no position on the application. [ 6 ] To answer the question of priorities between Scheffer and Mui, Counsel referred to cases on the nature of a mortgage security interest, the act of novation, and the equitable principle of subrogation.

Counsel also relied on the priority provisions set out in the legislation for land titles and builders’ liens. [ 7 ] For the reasons that follow, I have determined Mui maintained the priority for the amount secured by the Agreement Charging Land; priority was not lost by registering the Mortgage Amending Agreement subsequent to Scheffer’s builders’ lien.

Background Facts [ 8 ] Canadian Western Bank held a first mortgage granted by the Defendant 1364994 Alberta Ltd (136) which was registered in 2010 for the original principal amount of $9 million against the two pieces of property subject to this action (the lands). The Canadian Western Bank commenced foreclosure proceedings in 2017 and the lands were sold in December of 2019. In February of 2020, after Canadian Western Bank was paid out, the remaining net sale proceeds of approximately $676,000 were paid into court.

The order for sale provided that all subsequent encumbrancers registered on title have the right to claim an interest in the funds paid into court. [ 9 ] On March 2, 2020, an application was filed on behalf of Dang Kam Mui for an order directing the clerk of the court to pay the sum of $623,287.67 plus interest at $205.48 per diem past March 1, 2020 in priority to any subsequent mortgage or judgment creditor that registered an interest in the lands.

The affidavit of Andy Mui, sworn February 26, 2020, was filed in support of that application. [ 10 ] On June 15, 2020, an application was filed on behalf of Scheffer Andrew Ltd for an order that its claim against the proceeds paid into court be paid in priority to the claims of Dang Kam Mui.

Counsel for Scheffer intended to rely on the affidavit of Andy Mui, transcripts from questioning on affidavit and undertakings, and further disclosure from 1364994 Alberta Ltd. [ 11 ] Copies of title to the lands dated December 21, 2017 show the subsequent encumbrancers interests and registrations as follows . [ 12 ] Dang Kam Mui had a second Mortgage registered against the lands on December 12, 2012 in the original principal amount of $400,000. [ 13 ] Dang Kam Mui had a caveat registered against the lands on October 6, 2014 securing an Agreement Charging Land for $150,000. [ 14 ] Scheffer Andrew Ltd had a builders’ lien registered against the lands on August 28, 2015 in the amount of $314,946. [ 15 ] Dang Kam Mui had a caveat registered against the lands on December 22, 2015 for a Mortgage Amending Agreement entered into with 136. [ 16 ] Scheffer Andrew Ltd registered a certificate of lis pendens against the lands on February 11, 2016, and a writ on December 21, 2017 for judgment it obtained against 136 in the amount of $319,552. [ 17 ] This judgment was granted to Scheffer Andrew Ltd pursuant to a Consent Order dated December 5, 2017 in the amount of $314,946.28 plus prejudgment interest from August 7, 2015.

The builders’ lien was declared valid and the Order provided that in default of payment, the lands could be sold pursuant to the Builders’ Lien Act with the proceeds applied in payment of the builders’ lien or other claims against the said property in order of their priority. [ 18 ] Neither Mui or Scheffer took proceedings to sell the land. Once the foreclosure proceedings were concluded by the Canadian Western Bank, they sought payment from the excess sale proceeds held in court. [ 19 ] On July 7, 2020, Master Schlosser directed the priority issue between Mui and Scheffer to be set down as a Master’s Special.

The applications were heard by me on August 25, 2020. [ 20 ] Further details of the financial arrangements between Mui and 136 were provided through the affidavit and questioning of Andy Mui and the records produced. Andy Mui is the son of Dang Kam Mui and her attorney and was involved in assisting her with all of the transactions discussed in his affidavit. [ 21 ] In late 2012, there were discussions between Andy Mui and 136 about 136 borrowing money from his mother. It was agreed Mui would lend up to $400,000 to 136, secured by a mortgage.

As further security, 1339698 Alberta Ltd and Patrick Chan (Chan) were to guarantee the loan. A mortgage document was prepared and registered on December 12, 2012 against the lands. Guarantees were signed. [ 22 ] The advance from Mui to 136 at the time of the mortgage was $350,000. A Promissory Note was signed by 136, 133 and Chan. The loan was for a four-month term with interest at the rate of 15% per annum payable every 30 days commencing January 7, 2013.

[ 23 ] The net funds from the $350,000 loan were assigned by 136 to Edmonton WRC Social Housing Foundation. The interest payments were made by the Guarantor, Chan, through his business. [ 24 ] The mortgage was due April 7, 2013. There were four extension agreements granted with a final payment of principal and interest due December 31, 2014. Interest payments continued to be made by Chan to Mui. [ 25 ] In September 2014, 136 approached Andy Mui about borrowing more money.

Mui loaned another $150,000 to 136 in two instalments, one for $100,000 on September 30, 2014 and one for $50,000 on October 30, 2014, both with interest at 15% per with annum payable every 30 days and with the last payment due October 1, 2015. Promissory Notes were signed by 136, 133 and Chan. [ 26 ] An Agreement Charging Land was also signed for the $150,000 by 136, guaranteed by 133 and Patrick Chan. A caveat was registered against the lands with respect to this Agreement Charging Land on October 6, 2014. [ 27 ] The $100,000 and $50,000 advances to 136 were paid to 133. 133 is the sole shareholder of 136.

The interest payments on these advances were also made by the Guarantor, Chan, through his business. [ 28 ] By October 2015, the principal sum of $500,000 had been loaned by Mui to 136, with interest only payments being made.

A Mortgage Amending Agreement was prepared to amend the original Mortgage of December 7, 2012, effective October 1, 2015, “to provide for a new interest rate, interest adjustment date, principal balance, term, first payment date and maturity date”. [ 29 ] The Mortgage Amending Agreement between 136 and Mui provided: “… that in consideration of the premises, the mutual covenants herein contained, and such advances as may be made by the Mortgagee under and pursuant to the Mortgage, the parties mutually covenant and agree as follows:” [ 30 ] The interest adjustment date was changed to October 1, 2015; the principal balance to $500,000; the term to 12 months (Open); the first payment date to November 1, 2015 and the maturity date to October 1, 2016.

And “That in all other respects the Mortgage shall remain the same and the parties hereto shall be bound by the terms of the Mortgage.” [ 31 ] The Mortgage Amending Agreement was signed on December 2, 2015 by 136 and by 133 and Chan as Guarantors, and signed on December 3, 2015 by Mui. A caveat was registered against the lands with respect to the Mortgage Amending Agreement on December 22, 2015. [ 32 ] Chan continued to make interest payments on behalf of 136 consistently every 30 days until July 10, 2018.

Andy Mui deposes 136 owes Mui $500,000 in principal and $6,164.39 of interest every 30 days from July 10, 2018 to March 1, 2020 for a total of $623,287.67.

He seeks that sum plus interest of $205.48 per diem past March 1, 2020 plus costs on a solicitor and own client basis, all to be paid out of the funds held in court. [ 33 ] Andy Mui states the Mortgage and the caveat regarding the Agreement Charging Land in favour of Mui are in priority position for the full amount of principal and interest, unaffected by the subsequent registration of a Mortgage Amending Agreement. [ 34 ] Scheffer acknowledges the initial loan secured by the Mortgage registered December 12, 2012 in the amount of $350,000 plus interest should be paid out of the funds held in court in priority to builders’ lien. [ 35 ] Scheffer seeks payment of its builders’ lien registered August 28, 2015 in priority to payment of the $150,000 loan.

Although those funds were originally secured by the Agreement Charging Land by caveat registered October 6, 2014, ahead of the builders’ lien, that security was effectively discharged by the subsequent Mortgage Amending Agreement and caveat registered December 22, 2015, thereby losing its priority. Issues [ 36 ] Scheffer submits that, although the $150,000 loan was initially advanced prior to the builders’ lien being registered, the effect of the Mortgage Amending Agreement was to amend the original Mortgage and advance further funds at the time of the amendment and after the builders’ lien.

This advance of funds replaced the Agreement Charging Land. [ 37 ] Mui submits that the Mortgage Amending Agreement amended the original Mortgage to include the funds already advanced and secured by the Agreement Charging Land; there were no further funds advanced.

As the Mortgage and Agreement Charging Land were both registered and the entire $500,000 were advanced prior to the builders’ lien, Mui maintains priority for payment of its secured debt in full. [ 38 ] The question of priorities arising between these subsequent encumbrancers is answered by addressing the single issue: what was the effect of the Mortgage Amending Agreement? [ 39 ] If the Mortgage Amending Agreement merely consolidated the existing debt into the one Mortgage document for convenience, the entire $500,000 plus interest retains priority over the builders’ lien. [ 40 ] If the Mortgage Amending Agreement truly amended the original Mortgage to provide for a subsequent advance of $150,000 to payout and discharge the Agreement Charging Land, only the original mortgaged amount of $350,000 plus interest retains priority over the builders’ lien. [ 41 ] To address the effect of the Mortgage Amending Agreement, I will review the statutory provisions for priority of registration on land titles for mortgages, caveats and builder’s liens.

I will then consider the cases on the nature of a mortgage security interest, the act of novation, and the equitable principle of subrogation.

The Legislation The Land Titles Act [ 42 ] The Land Titles Act , RSA 2000, c L-4 ( LTA ) requires the Registrar of Titles to maintain a record of the title of the land or certificate of title and to keep a record containing particulars of every instrument and caveat accepted for registration. [ 43 ]

Section 54 LTA sets out the effect of registration: “So soon as registered every instrument becomes operative according to its tenor and intent, and on registration creates, transfers, surrenders, charges or discharges, as the case may be, the land or the estate or interest in the land or estate mentioned in the instrument.” [ 44 ]

Section 56 LTA provides for the priority of registration: “Instruments registered in respect of or affecting the same land have priority the one over the other according to

section 14 and not according to the date of execution.” [ 45 ]

Section 14 LTA requires the Registrar to endorse on the instrument or caveat the serial number assigned to it and the date on which the serial number is assigned. Section 14(3) LTA states: “For purposes of priority between mortgagees, transferees and others, the serial number assigned to the instrument or caveat shall determine the priority of the instrument or caveat filed or registered.” [ 46 ]

Section 1 LTA sets out the

definitions. A mortgage, an agreement charging land, a builder’s lien and a mortgage amending agreement are all encumbrances charging land, as defined by s 1(

e) of the LTA : “encumbrance” means any charge on land created or effected for any purpose whatever, inclusive of mortgage, mechanics’ or builders’ liens, when authorized by statute, and executions against land, unless expressly distinguished.” [ 47 ]

Section 1 (

o) LTA provides: “mortgage” means a charge on land created merely for securing a debt or loan; (p) “mortgagee” means the owner of a mortgage; and (q) “mortgagor” means the owner or transferor of land, or of any estate or interest in land charged as security for a debt or a loan. [ 48 ] Section 104(1) LTA provides for the priority of mortgages: “On registration of a mortgage for a specific principal sum, the mortgage obtains priority in accordance with

section 14 of this Act for all advances and obligations secured pursuant to the terms of the mortgage, notwithstanding that they are made or incurred subsequent to the registration, on or after January 1, 1983, of any other instrument or caveat.” [ 49 ] However, section 104(4) LTA specifically states that the rights given under the Builders’ Lien Act are not affected by this section. [ 50 ]

Section 129 LTA provides for registration of amending agreements: “Where the registered owner of land and the owner of an interest in that land under an instrument registered under this Act have entered into an agreement amending any of the terms of the instrument, that agreement may be registered as an instrument.” [ 51 ]

Section 130 of the LTA provides for the filing of a caveat: “A person claiming to be interested in land for which a certificate of title has been issued or in a mortgage or encumbrance relating to that land (

a) pursuant to ... (iii) an unregistered instrument, ... may cause to be filed with the Registrar a caveat on the person’s behalf in the prescribed form against the registration of any person as transferee or owner of, or any instrument affecting, the estate or interest, unless the certificate of title is expressed to be subject to the claim of the caveator.” [ 52 ]

Section 135 LTA sets out the effect of a caveat: “So long as a caveat remains in force, an instrument registered subsequent to the caveat and purporting to affect the land, mortgage or encumbrance in respect of which the caveat is lodged is subject to the claim of the caveator.” [ 53 ]

Section 153 LTA provides for notice of builders’ liens: “On receipt of a claim for registration of a lien under the Builders’ Lien Act and the entry and registration of the lien as an encumbrance against the estate or interest in the land described in the claim, the Registrar shall forthwith send a notice of the lien and of the amount claimed (

a) to the registered owner of the land, (

b) to the person alleged on the claim for lien to be the owner of the land, and (

c) to the person for whom the work referred to in the claim for lien was done or proposed to be done, or the materials were furnished or to be furnished.” The Builders’ Lien Act [ 54 ] The Builders’ Lien Act, RSA 2000, c-B-7 ( BLA ) creates a special legal right which does not exist at common law called a builders’ lien and which allows suppliers and others to make a claim for unpaid services or materials with respect to land they have improved. If registered in time, the claimant’s lien becomes a charge against the owner’s interest in the land and is noted on the relevant land title certificate.

See Overview pages 1 and 2: Bryan West, Builders’ Liens in Alberta: Procedure, Law and the Annotated Act, 2017- 2018 , 2 nd ed (Toronto, Ont: Thomas Reuters 2018) ( Builders’ Liens in Alberta ). [ 55 ]

Section 6 BLA provides for the creation of a builders’ lien: “… A person who (

a) does or causes to be done any work on or in respect of an improvement, or (

b) furnishes any material to be used in order in respect of an improvement, for an owner, contractor or subcontractor has, for so much of the price of the work or material as remained due to the person, a lien on the estate or interest of the owner in the land in respect of which the improvement is being made.” [ 56 ] A builders’ lien is registered in the land titles office by filing with the Registrar a statement of lien in the prescribed form, in accordance with s 34 of the BLA .

[57] Section 11(1) BLA provides: “A lien has priority over all judgments, executions, assignments, attachments, garnishments andreceiving orders recovered, issued or made after the lien arises.” [58] Section 11(4) BLA states: “A registered mortgage or a mortgage registered by way of a caveat has priority over a lien to theextent of the mortgage money in good faith secured or advanced in money prior to the registration of the statement of lien.” And in s11(5): “Advances or payments made under a mortgage after a statement of lien has been registered rank after the lien…”. [59] The statutory provisions for priority of registration on land titles for mortgages, caveats and builder’s liens are set out above.On the face of the land titles certificate, the priority of one encumbrance over another is determined by serial number assigned on thedate the instrument is registered or filed.

Sections 54 and 14 LTA. [60] The legislation further provides that the mortgage has priority for all advances and obligations secured pursuant to the termsof the mortgage, notwithstanding they are made or incurred subsequent to the registration.

Section 104 LTA. The legislationcontemplates priorities may be affected by the terms of the mortgage not just the order of registration. By analogy, amendments to themortgage subsequent to registration may also affect the priority. [61] This priority protection for all advances under mortgage do not affect the rights given to builders’ lien holders. A registeredmortgage only has priority over a lien “to the extent of the mortgage money in good faith secured or advanced in money prior to theregistration of the statement of lien”. Advances or payments made under a mortgage after the builders’ lien has been registered rank afterthe lien.

Section 11 BLA. [62] On the face of the title to the lands owned by 136, the priority of encumbrances is shown to be: the Mortgage, the AgreementCharging Land, the builders’ lien, then the Mortgage Amending Agreement.

Mui relies on the order of registration and that the entire$500,000 was advanced before the builders’ lien was registered on title. [63] Scheffer relies on the amendment to the Mortgage and submits that only $350,000 was advanced before the builders’ lien wasregistered on title and the remaining $150,000 was advanced under the amended mortgage after the lien was registered. [64] What about the Agreement Charging Land? Mui points out the $150,000 was advanced to 136 and secured by the AgreementCharging Land prior to the registration of Scheffer’s builders’ lien.

Section 11(4) BLA gives priority to a registered mortgage “to theextent of the mortgage money in good faith secured or advanced in money prior to the registration of the statement of lien”. [65] Did the Mortgage Amending Agreement amend the Mortgage such that the priority was maintained to the extent of the$150,000 in good faith secured by the Agreement Charging Land prior to the registration of the builders’ lien?

Or did the MortgageAmending Agreement amend the Mortgage such that the priority was lost to the extent of the $150,000 advanced in money subsequent tothe registration of the builders’ lien? [66] To further address the effect of the Mortgage Amending Agreement, I reviewed the cases submitted by Counsel and othercases in light of the facts. A

summary of the case law on the nature of a mortgage security interest, the act of novation, and the equitableprinciple of subrogation and my analysis follows. The Case Law and Analysis Nature of a Mortgage Security Interest [67] Counsel for Scheffer draws a distinction between the nature of the Mortgage and the Mortgage Amending Agreement and thatof the Agreement Charging Land.

Counsel for Mui submits there is no such distinction as all three instruments are collateral security forthe funds advanced to 136 and claim an interest in the lands. [68] The LTA defines a mortgage as a charge on land created for securing a debt or loan. A mortgage is “a mere accessory to thedebt”. See: Jamieson v London and Canadian Loan and Agency Co, 1899 CanLII 14 (SCC), 30 SCR 14 at pages 16-17: A mortgage was formerly viewed very differently in a court of common law and in a court of equity.

The first regarded it as aconveyance of an estate defeasible on the due performance of the condition by payment at the day specified; a court of equity on theother hand considered it to be a mere security for the debt upon payment of which the estate was redeemable at any time beforeforeclosure though forfeited at law by reason of non-payment according to the tenor of the proviso. Further, the latter courts consideredthe estate mortgaged as a mere accessory which upon the payment or release of the debt the mortgagee was bound to reconvey to themortgagor.

Under the present system of judicature all courts are bound to deal with a mortgage as courts of equity always have dealt with it, as amere accessory to the debt.… [69] A typical mortgage contract contains both a covenant by the mortgagor to repay the debt and a covenant that on default ofpayment, the debt can be realized from the sale of the land by or to the mortgagee. [70] Counsel for Scheffer submits that the Mortgage and the Mortgage Amending Agreement are “sealed contracts”, whereas theAgreement Charging Land is a simple contract. [71] Under the “sealed contract rule” the Agreement Charging Land is merged into the Mortgage Amending Agreement, which isa higher form of security.

Counsel relies on Friedmann Equity Developments Inc v Final Note Ltd, 2000 SCC 34 , [2000] 1SCR 842 at paragraph 20: “Where a debtor covenants in a deed to pay a debt antecedently based in simple contract, the right to sue indebt merges in the right to sue on the covenant and is extinguished in law.”

[72] Counsel for Scheffer also relies on Wenbourne v J. I. Case Threshing MacHine Co, (AB QB) and thediscussion of merger at paragraph 6 to conclude where a security of a higher nature is taken for the same debt, it merges the lowersecurity by operation of law independent of the intention of the parties.

Counsel submits that since the Mortgage Amending Agreementwas under seal, it is a higher security and results in the Agreement Charging Land, which is lower security, being extinguished. [73] Counsel for Mui argues the nature of the Agreement Charging Land and the Mortgage Amending Agreement, in substance,both secure the repayment of the $150,000 loan; both serve the same purpose and permit Mui upon default to enforce against the lands;neither is higher security when compared to the other. [74] After reviewing the copies of the documents available, I conclude the evidence does not support Scheffer’s argument that theAgreement Charging Land is a lower form of security and merged into the Mortgage Amending Agreement by operation of the sealedcontract rule.

The Mortgage and the Agreement Charging Land are executed by 136 in the same manner, without the words “under seal”and without obvious evidence of the corporate seal being affixed. Both guarantors executed the Agreement Charging Land under seal.The Mortgage Amending Agreement shows “the parties hereto of hereunto affixed their corporate seals” and there is some evidence ofcorporate seals being affixed. The guarantor Chan doers not appear to have signed under seal.

With these inconsistencies in the executionof the documents, I am unable to invoke the sealed contract rule or the doctrine of merger as advanced by Scheffer. [75] Further, I agree with Counsel for Mui that all three documents were taken as collateral security and form a charge on the landsof 136 for repayment of the funds. Mui had the ability to foreclose on the Mortgage, whereas the Agreement Charging Land does notprovide for sale on default. That distinction was not before me, nor do I find it relevant to my decision on priorities.

Novation [76] Counsel for Scheffer submits that the Agreement Charging Land is rescinded through novation by the parties entering intothe Mortgage Amending Agreement for the same debt, leaving the builders’ lien a second charge after payment of the original Muimortgage. [77] Counsel further submits that the wording of the Mortgage Amending Agreement and the behaviour of the parties is consistentwith the conclusion that the intention was to replace the previous Agreement Charging Land.

The Mortgage Amending Agreement doesnot refer to the Agreement Charging Land or state it is further or other collateral security to the promissory notes. It simply provides “inconsideration of… such advances as may be made by the Mortgagee and pursuant to the Mortgage, the parties mutually covenant andagree as follows: … “Principal balance” means $500,000”. [78] Scheffer argues, with the full $500,000 advanced pursuant to the mortgage as amended, it is reasonable to conclude that theAgreement Charging Land is no longer collateral security to the promissory notes. Mr.

Mui does not state the Mortgage AmendingAgreement is additional security to the Agreement Charging Land; he states that the Mortgage Amending Agreement confirms the$500,000 loaned by Mrs. Mui.

The payments on the loans were not made in separate amounts but as one payment on the full amount ofthe $500,000 once advanced, with no indication the parties considered the $150,000 as separate amounts secured by the AgreementCharging Land. [79] Counsel for Mui submits Scheffer’s assertion that the Mortgage Amending Agreement wholly replaced and discharged theAgreement Charging Land is incorrect. [80] Counsel for Mui acknowledges a mortgage may lose its priority as a result of the registration of a mortgage renewal oramendment where it rescinds and replaces the original mortgage, that is, where novation occurs and the mortgage renewal or amendmentdischarges the prior registered mortgage.

See Credit Foncier Franco-Canadien v 253171 Alberta Ltd, (AB QB) atparagraphs 13 to 21. The issue in that case was whether a mortgage renewal created a new contract between the parties which replacedand discharged the old one.

Justice Purvis found no evidence that the facts of the case before him resulted in a novation or that therenewal agreement could be considered a discharge of the prior mortgage. [81] Counsel refers to the Supreme Court of Canada case of National Trust Co v Mead, (SCC), [1990] 2 SCR 410where the court commented on the application of the doctrine of novation in a mortgage context: A novation is a trilateral agreement by which an existing contract is extinguished and a new contract brought into being in its place.Indeed, for an agreement to effect a valid novation the appropriate consideration is the discharge of the original debt in return for apromise to perform some obligation.

The assent of the beneficiary (the creditor or mortgagee) of those obligations to the discharge andsubstitution is crucial. This is because the effect of novation is that the creditor may no longer look to the original party if the obligationsunder the substituted contract are not subsequently met as promised. Because assent is the crux of novation it is obvious that novation may not be forced upon an unwilling creditor and, in the absence ofexpress agreement, the court should be loath to find novation unless the circumstances are really compelling.

Thus, while the court maylook at the surrounding circumstances, including the conduct of the parties, in order to determine whether a novation has occurred, theburden of establishing novation is not easily met.… [82] Counsel for Mui submits that the wording of the Mortgage Amending Agreement does not contain an express agreement thatit wholly replaces and discharges the Agreement Charging Land nor has Scheffer pointed to any evidence that would substantiate thatassertion.

The Court should be loath to find a novation has occurred. [83] An essential prerequisite to establish novation is that the creditor must accept the new contract in full satisfaction andsubstitution of the old contract thereby discharging the original debtor; novation may not be forced upon an unwilling creditor. Muidenies novation occurred. [84] However, should novation be found to have occurred, the principle of equitable subrogation provides that Mui is secured for

the full $500,000 in any event. Subrogation [85] Counsel for Mui argues that if the Court finds the Mortgage Amending Agreement wholly replaced the Agreement ChargingLand and the Agreement Charging Land was discharged by operation of law, the principle of equitable subrogation provides security forthe full $500,000. The Mortgage Amending Agreement would still take priority to the claims of Scheffer as the funds were advancedprior to the registration of the builders’ lien. [86] Counsel for Scheffer submits the doctrine of subrogation does not apply to the facts of this case.

Subrogation is an equitableremedy invoked by third party, who is not a party to the prior mortgage, and pays out that prior mortgage. Subrogation is an equitableremedy which applies when the relationship of the parties is not covered by contract. The relationship between 136 and Mui is governedby several contracts, being the promissory notes, Mortgage, Agreement Charging Land and Mortgage Amending Agreement. [87] Counsel both rely on Justice Manderscheid’s discussion of subrogation in Gerrow v Dorais, 2010 ABQB 560.

The relevantparagraphs are these (6, 13, 14, 17, 19, and 20): [6] Basically speaking, the equitable doctrine of subrogation allows one party to stand in the shoes of another and advance anyclaims that the original party may have had against another party: Alberta (Treasury Branches) v. Alberta (Public Trustee), 2002ABQB 781, 7 Alta. L.R. (4th) 110. Subrogation is simply asking something in the right of another, which in justice and equity, should beaccorded to the person asking: Goldsmith v. Stewart, (1885) 45 Ark 149 (C.A.) 154.

Application of the doctrine enables: ... the substitution of one person in place of another, whether as a creditor, or as the possessor of any other rightful claim so that he whois substituted succeeds to the rights of the other in relation to the debt or claim and its rights, remedies, or securities. Leavitt v.

C.P.R., (1897) 37 Atl 886, at 888, right column, 90 Maine 153 (C.A.).… [13] In the case of a mortgage, the doctrine of subrogation applies only in a situation where there is a payment that in effectdischarges the earlier mortgage in circumstances where fairness justifies that the payor stand in the shoes of the first mortgagee as if heor she had taken an assignment: Investors Group Trust Co. v. Crispino (2006), (ON SC), 17 B.L.R. (4th) 282, 147A.C.W.S. (3d) 1069 (Ont. Sup. Ct. Just.) at para. 35. [14] Master Laycock in Bank of Montreal v.

Suitor, 2009 ABQB 203 addressed subrogation in the context of registered securityinterests holders’ priorities (at paras.14-15): … The Ontario Court of Appeal in Midland Mortgage Corp. v. 784401 Ontario Ltd. (1997), (ON CA), 34 O.R. (3d)594, 12 R.P.R. (3d) 14, 102 O.A.C. 226 (Ont. C.A.) discussed the doctrine of subrogation. Firstly the court determined that the doctrineof subrogation applies to the Land Titles system. Next they accepted the statement of law as contained in Crosbie-Hill v. Sayer, [1908] 1Ch. 866 (Eng. Ch.

Div.) at page 877: ... where a third party at the request of a mortgagor pays off a first mortgage with a view to becoming himself a first mortgage of theproperty, he becomes, in default of evidence of intention to the contrary, entitled in equity to stand, as against the property, in the shoesof the first mortgagee.… [17] The doctrine of subrogation came into existence for the express purpose of rendering justice where an injustice wouldotherwise be permitted. Confirmation of this conclusion can be seen in Morrison v.

Canadian Surety Co., where Coyne J.A. stated atpara. 114: The term "subrogation", which in ordinary language as well as in legal parlance means "substitution", has appeared in English law for along period. First it was applied at common law in favour of an insurer in a policy of indemnity and gradually extended to other fields. Ithad a wider reach in Equity.

It was invented as a means to avoid injustice by enabling a person, not previously entitled, to sue in law orequity by giving him a status to assert against a person or property a claim recognized as fair and just but not maintainable as acontractual or tortious claim. It was a device necessary to avoid injustice, by imposing on the unjust, as a matter of law or equity, anobligation quasi ex contractu to do right where no obligation ex contractu existed.

It was first adopted without realizing the broaderconception of quasi-contract.… [19] Furthermore, “under the doctrine of subrogation, all of the circumstances must be balanced, and the Court must be satisfiedthat no injustice will be done through the substitution of one party in the place of another via a subrogation arrangement”, Alberta(Treasury Branches) v. Alberta (Public Trustee), at para. 50, Cairns J., quoting Brown v. McLean, (1889), 18 O.R. 533 (H.C.J.), at 536. [20] Lastly, in Coupland Acceptance Ltd. v.

Walsh, (SCC), [1954] S.C.R. 90, [1954] 2 D.L.R. 129, the SupremeCourt of Canada confirmed that the doctrine of subrogation is not confined to matters of priority between mortgages, but applies as wellto the relationships between mortgages and other prejudicial instruments such as builders' liens and executions. In this respect, Kellock J.,stated (at para. 6): While s. 13(1) of The Mechanics Lien Act , R.S.O., 1950, c. 227, gives priority to the lien over all payments or advances made under amortgage after registration of the lien, the

section is not to be construed as affecting the right relied upon here by the appellant. Theappellant does not rely upon its mortgage for priority as to the moneys here in question but upon the equitable right to stand in the placeof the Kerbel mortgagees whose priority to the lien is unquestionable. The position of the lienholder remains the same as it was before

the appellant intervened and it would, in my opinion, require more than is to be found in the

section to bring about a result so unjust thatit would, to paraphrase the language of Parker J., in the Crosbie-Hill case, permit the lienholder, by a mere accident, to obtain priority atthe expense of people who never intended to benefit him. Had the appellant been in fact aware of the registration of the lien, it couldhave purchased the Kerbel mortgage, in which event no possible question could have arisen. [88] Counsel for Mui highlights the Coupland case referenced in paragraph 20 of Justice Manderscheid’s decision to argue thedoctrine of subrogation does apply to the facts of this case.

Scheffer’s position as lienholder remains the same as it was before theMortgage Amending Agreement was registered and it would be unjust to permit Scheffer to “obtain priority at the expense of peoplewho never intended to benefit him.” I agree. [89] Counsel also refers to the case of Midland Mortgage Corp v 784401 Ontario Ltd, (ON CA). Quoting fromthe headnote: “The application judge erred by failing to apply the doctrine of subrogation.

The doctrine applies to a first mortgagee whorenews, replaces, refinances, amends, or increases its mortgage.” The court found Midland Mortgage Corp was entitled to priority for theamount of its new mortgage advanced to retire the old charge with interest at the old interest rate. “Structuring the subrogation in thisway prevented the [intervening encumbrancer] from being prejudiced by the increase in the amount of the debt ahead of them, and theyare not worse off than they were before the new charge was registered.” [90] The facts of this case are unique as the focus is on the effect of the Mortgage Amending Agreement on the AgreementCharging Land, not on the original Mortgage.

Mui submits that even if the Mortgage Amending Agreement paid out the AgreementCharging Land, the doctrine of subrogation allows Mui to maintain the priority the Agreement Charging Land had over the builders’lien. Scheffer submits that the Mortgage Amending Agreement amended the original Mortgage such that proceeds were advanced underthe Mortgage after the registration of the builders’ lien.

The Agreement Charging Land was effectively replaced and discharged. [91] Counsel for Scheffer relies on the Nova Scotia Court of Appeal decision dismissing an appeal from the trial decision: NovaScotia (Housing Commission) v Ellen Cooperative Housing Ltd, (NS SC), affirmed (1981), 15 R.P.R. 201, 41N.S.R. (2d) 547, 76 A.P.R. 547 (C.A.).

The Court of Appeal found “… any arguments based on subrogation or other equitablepreservation of the initial priority fail because their base, the initial mortgage, was released and legally disappeared as if that it had neverexisted.” [92] However, the Nova Scotia courts in this case and subsequent cases, draw a distinction between the situation where the priormortgage was paid out by a subsequent mortgage but remained registered on title and the situation where the prior mortgage had alsobeen discharged from the land title registry.

The foundation required for the application of the equitable doctrine of subrogation is foundin the undischarged original mortgage; absent registration of a release, the mortgage has not “legally disappeared” from the registrysystem. See: Dover Financial Corporation v. Basin View Village Ltd, (NS SC). [93] The Agreement Charging Land remains registered on title ahead of Scheffer’s builders’ lien.

I conclude from the case law thatif the $150,000 was advanced by virtue of the Mortgage Amending Agreement subsequent to the builders’ lien in satisfaction of theAgreement Charging Land, the doctrine of subrogation will apply to maintain priority payment to Mui. [94] I also find support for this conclusion from the legislation itself.

Section 11(4) BLA states: “A registered mortgage or amortgage registered by way of a caveat has priority over a lien to the extent of the mortgage money in good faith secured or advanced inmoney prior to the registration of the statement of lien.” (emphasis added). [95] As I had posed above: Did the Mortgage Amending Agreement amend the Mortgage such that the priority was maintained tothe extent of the $150,000 in good faith secured by the Agreement Charging Land prior to the registration of the builders’ lien?

Or didthe Mortgage Amending Agreement amend the Mortgage such that the priority was lost to the extent of the $150,000 advanced in moneysubsequent to the registration of the builders’ lien? [96] Guidance can be found in Royal Bank of Canada v Donsdale Development Ltd, (AB QB). JusticeAndrekson reviewed the

definitions in the LTA and BLA and concluded at paragraph 63: “In my view, the wording of the Act and theauthorities in regard to the effect of registration of a caveat supports the position that an equitable mortgage registered by way of caveatis a registered mortgage and I so find.” In paragraph 64, Andrekson J considered “mortgage money in good faith secured or advanced inmoney”: … The British Columbia Court of Appeal in the case of Casson v. Dunsmuir Const.

Ltd. [(1961), (BC CA), 35 W.W.R.521] defined “mortgage moneys” in the Mechanics’ Lien Act (British Columbia) as meaning moneys owing under the mortgage;however those moneys may have been owing originally, once they became secured by a mortgage, they assumed the character of andbecame “mortgage moneys”.

The British Columbia Act used the words “bona fide secured” and the court held that that meant “in goodfaith, not as a sham or a mere paper transaction, not collusively or as a part of a scheme to defraud anybody, but being in fact what is inform, a genuine transaction.” I believe that “bona fide secured” and “good faith secured” have the same meaning. [97] From this, I conclude the $150,000 mortgage money, arguably advanced in money subsequent to the registration of thestatement of lien under the Mortgage Amending Agreement, was the same mortgage money in good faith secured by the AgreementCharging Land prior to the registration of the statement of lien.

It has priority over the lien. Conclusion [98] The question of priorities between the subsequent encumbrancers to the excess sale proceeds paid into court in the foreclosureaction between Canadian Western Bank and 1364994 Alberta Ltd is resolved in favour of the private lender, Dang Kam Mui. Mui,having registered both a Mortgage and a caveat securing an Agreement Charging Land prior to the builders’ lien registered by SchefferAndrew Ltd is entitled to be paid in priority to Scheffer. Priority was not lost by Mui registering the Mortgage Amending Agreementsubsequent to the builders’ lien.

[ 99 ] What was the effect of the Mortgage Amending Agreement?

Practically, in the circumstances of this case, it had no effect. [ 100 ] I conclude, after review of the cases provided on the nature of a mortgage security interest, the act of novation, and the equitable principle of subrogation, as well as the priority provisions set out in the legislation for land titles and builders’ liens, Mui maintained the priority for the amount secured by the Agreement Charging Land; priority was not lost by registering the Mortgage Amending Agreement subsequent to Scheffer’s builders’ lien. [ 101 ] Dang Kam Mui is entitled to be paid the principal balance of $500,000, plus contractual interest to the date of hearing of this application, August 25, 2020, and costs from the remaining net sale proceeds of approximately $676,000 held by the clerk of the court.

Scheffer Andrew Ltd is entitled to the balance of the funds in court. [ 102 ] Mr. Mui’s evidence is 136 owes $500,000 in principal and $6,164.39 of interest every 30 days from July 10, 2018 to March 1, 2020 for a total of $623,287.67. Mui also seeks interest of $205.48 per diem past March 1, 2020. I direct interest be calculated only to the date of the hearing, being August 25, 2020. This would have been the result had this decision been given then. [ 103 ] Costs were not discussed at the hearing.

If Counsel cannot agree on costs, I will consider the issue through written submissions or a morning Chambers application. Heard on the 25 th day of August, 2020. Dated at the City of Edmonton, Alberta this 2 nd day of November, 2021. L. R. Birkett, Q.C. M.C.Q.B.A. Appearances: Richard J. Cotter, Q. C. Kurtis P. Letwin Dentons Canada LLP for the Applicant/Cross-Respondent, Dang Kam Mui, Subsequent Encumbrancer Sid J. Kobewka Kobewka Stark for the Respondent/Cross-Applicant, Scheffer Andrew Ltd, Subsequent Encumbrancer Grayson Bateyko Emery Jamieson LLP for the Defendants