HSBC Bank Canada v. Vantreight, 2015 BCSC 1071

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: HSBC Bank Canada v. Vantreight, 2015 BCSC 1071 Date: 20150623 Docket: H120884 Registry: Vancouver Between: HSBC Bank Canada Petitioner And Ian Stuart Vantreight, Michael Geoffrey Vantreight, 0743572 B.C. Ltd., 0868920 B.C. Ltd., Ryan Vantreight and Tarryn Vantreight Respondents Before: The Honourable Madam Justice E.A. Arnold-Bailey Reasons for Judgment Counsel for the Petitioner: Marcel J. Peerson Counsel for the Respondent, Michael Geoffrey Vantreight: Andrew J. Pearson Place and Date of Hearing: Vancouver, B.C.

April 22 and 23, 2015 Place and Date of Judgment: Vancouver, B.C. June 23, 2015 Introduction [ 1 ] This application requires the Court to determine what portion of the net sale proceeds resulting from an $8.75 million purchase price paid for six parcels of land (the “Six Parcels”) sold as a group, is to be allocated as the purchase price for one of those parcels, a 92 acre parcel (the “Development Parcel”).

The Six Parcels are located in Central Saanich, BC. [ 2 ] As the Petitioner in these proceedings, the HSBC Bank Canada (the “Bank”) seeks to have a lower percentage of the total net sale proceeds from the Six Parcels attributed to the Development Parcel (27.04%), whereas the Respondent, Michael Geoffrey Vantreight (“Michael”), seeks a higher percentage (56.92%). The Bank held first and third mortgages on the Development Parcel and Michael held a second mortgage.

Depending on which party is successful, either the Bank retains the $2,516,125.15 (the “Funds”) currently in its lawyer’s trust account, or Michael receives the Funds, together with earned interest, as payment towards the second mortgage he held on the Development Parcel. [ 3 ] The factual matrix underlying this determination is complex.

However, in a nutshell, a restrictive covenant (the “Covenant”) was placed on the title of each of the Six Parcels by their former owner, Ian Stuart Vantreight (“Ian”), Michael’s brother, to facilitate approval by the District of Central Saanich (the “District”) for development of a portion of the Development Parcel. The Covenant led to the successful rezoning of 32 acres of the Development Parcel to permit a 57 lot residential sub-division, thereby substantially increasing its value, and also led to various requirements being placed upon the remainder of the Six Parcels.

However, development did not proceed before foreclosures ensued. [ 4 ] After foreclosure proceedings taken by the Bank and Michael, and the sale of the Six Parcels to one purchaser, the Bank and Michael disagree as to what portion of the total purchase price for the Six Parcels is attributable to the Development Parcel, which in turn affects whether Michael receives any funds pursuant to the second mortgage he held on it.

Therefore, this dispute focuses on a disagreement between mortgage holders on the title of the Development Parcel as to the sale proceeds to be allocated to it. [ 5 ] The position of the Bank hinges on tracing the prorated portion represented by each land parcel into the net sale proceeds of the Six Parcels that includes the Development Parcel. Its position is that the enhanced value in the Development Parcel was only

achieved by virtue of the existence of the other five of the Six Parcels and the Covenant being placed on all Six Parcels.

If one approaches the division of the remaining proceeds in this manner, less of the total sale proceeds (27.04%) are attributable to the Development Parcel. [ 6 ] The position of Michael rests on the state of the title of the Development Parcel and the fact that this was a commercial venture in which the Bank saw a significant “up-side” to increasing the value of its security by virtue of Ian obtaining municipal approval for development of the Development Parcel, such that the Bank agreed to the Covenant being placed on the titles of all Six Parcels.

The Six Parcels have been foreclosed upon and sold for a total value of $8,750,000, with $5,017,330 of that amount being attributed to the Development Parcel by the principal of the purchaser (57.34% of the total purchase price). Accordingly, Michael submits that a higher percentage of the net sale proceeds than the 27.04% sought by the Bank ought to be attributed to the Development Parcel.

Michael relies upon an appraisal report that valued the Development Parcel at $4,980,500 and submits the value of the Development Parcel for distribution of the remaining sale proceeds ought to be $4,980,500 (56.92% of the total purchase price). This approach, based on the value attributed to the Development Parcel at the time of its sale and based on the charges on title, results in a larger share of the remaining net sale proceeds being attributable to the Development Parcel, and thereby payable to Michael as the holder of a second mortgage on that parcel.

Alternatively, Michael submits that the price attributed to the Development Parcel by the purchaser of all Six Parcels ought to be the amount of the total sale proceeds allocated to the Development Parcel, which results in 57.34% of the total net proceeds being attributed to it. [ 7 ] The other named respondents are not involved in this application. Orders sought [ 8 ] The Bank seeks the following orders: 1. an Order that the net proceeds from the sale of the lands pursuant to the Order granted in this proceeding on 11 September 2014 which are attributable to the parcel described as Parcel Identifier: 004-906-969

Section 1, Range 3 East, South Saanich District, except 2.01 acres thereof comprising the former Right of Way of the British Columbia Electric Railway Company Limited as shown on Plan deposited under DD20738 and except that

part in Plan 24673 and 32353 are determined at 27.04% of the total net proceeds from the sale of all of the lands subject of the referenced Order; and 2. that Fasken Martineau DuMoulin LLP is at liberty to distribute the monies held by that firm from the sale of the lands subject of the referenced 11 September 2014 Order on the basis of:

a) the attribution as above set out; and

b) Orders granted in this proceeding, or any agreement made between the Petitioner and the Respondent Michael Geoffrey Vantreight, as to the amounts secured by charges in favour of the Petitioner and charges in favour of Michael Geoffrey Vantreight against the lands sold pursuant to the 11 September 2014 Order. [ 9 ] Michael seeks the following: An order that the Bank’s lawyers, who hold the remaining monies in trust, immediately pay out $2,516,125.15 from those funds (representing 56.92% of the net sales proceeds after deducting the agreed balance on the Bank’s small mortgage) as a payment towards Michael’s Mortgage, together with interest earned thereon while they were in the lawyers’ trust account.

Factual background [ 10 ] Counsel for the Bank and Michael agree that the facts are not in issue. I will set out the facts, relying on the relevant parts of the filed materials. Neither party has sought to cross-examine individuals who swore affidavits. The big picture [ 11 ] These proceedings arise out of foreclosure proceedings involving a total of nine parcels of land in Central Saanich on Vancouver Island. The properties, which included a daffodil farm, were previously owned by Michael, his brother Ian and their father, Geoffrey Vantreight. [ 12 ] Geoffrey Vantreight died in May of 2000.

The relationship between Michael and Ian deteriorated thereafter, and in 2005 each brother commenced legal proceedings to dissolve their partnership. The end result of those proceedings was that Ian agreed to buy out Michael’s interest in the farm, including Michael’s one-half interest in various parcels of land owned by the partnership. The transfer of Michael’s interest to Ian in eight of the nine properties took place by way of transfers registered on November 14, 2006.

Ian did not have the funds to buy out Michael’s interest without going into debt to the Bank and to Michael. [ 13 ] At the time of the 2006 loan transactions there were eight parcels of land over which the Bank and Michael took mortgage security. These were as follows:

PID No. Approximate Size (acres) Address PID 005-761-361 41.60 East Saanich Road PID 005-761-387 34.30 8370 East Saanich Road PID 004-906-969 91.76** 8410 Wallace Drive PID 004-907-264 62.56* 8201 Derringberg Road PID 006-217-770 30.57* Central Saanich Road PID 000-104-027 38.87* 8277 Central Saanich Road PID 000-104-043 25.75* Newman Road PID 005-877-105 41.12 Mt.

Newton Cross Road ** represents the Development Parcel and became one of the Six Parcels * represents other parcels that became four of the Six Parcels. [ 14 ] The last parcel of what would become the Six Parcels was transferred about a year later, by a transfer registered on November 7, 2007, in which Michael transferred his one-quarter interest in the last of the nine properties (PID: 000-103-900) at 8300 Block Central Saanich Road to Ian. With this transaction, Ian became the sole owner of the nine parcels subsequently involved in foreclosure proceedings.

This parcel, sometimes referred to as the ninth parcel, and those marked with asterisks above became the Six Parcels tied together by the Covenant in December 2010. [ 15 ] The total of the declared market values stated in the transfers from Michael to Ian for the transfers of Michael’s partial interests in the eight properties was $10,586,000, not including the later transfer of Michael’s interest in the ninth property. [ 16 ] As indicated, Ian did not have sufficient monies to complete the purchase of Michael’s interest and the funding came from a number of sources: (

a) in part from the proceeds from the sale of certain parcels of the jointly owned lands; (

b) in part from loans by the Bank to Ian; and (

c) in part by way of Ian granting to Michael a $3,000,000 mortgage against the eight properties. [ 17 ] Ian granted security to both the Bank and Michael, including mortgage security against the eight parcels. While some of the monies which the Bank loaned to Ian were used to fund his purchase of Michael’s interest in the land, the balance of the monies lent by the Bank were used as operating capital for the farm. [ 18 ] On March 20, 2009, Ian granted an equitable mortgage against the ninth parcel in favour of the Bank, in first position. Ian did not grant security to Michael with respect to this parcel.

After Michael commenced his foreclosure against Ian and was granted a judgment, Michael registered that judgment against this parcel on February 21, 2012. That judgment relates to the $3,000,000 plus interest. [ 19 ] With the grant of the equitable mortgage to the Bank, the various land charges in favour of the Bank and Michael against the nine parcels of land may be summarized as follows: (

a) the Development Parcel ((PID 004-906-969) as marked with the “**” above), the largest of the nine properties being comprised of 91.76 acres that became one of the Six Parcels in 2010, was charged by: (

i) the Bank’s mortgage in the amount of $2 million in first position, which was registered against the Development Parcel only, sometimes referred to as the “Bank’s Small Mortgage”; (ii) Michael’s mortgage in the amount of $3 million in second position (referred to as “Michael’s Mortgage”) with priority over the Bank’s Inter Alia Mortgage (also referred to as the “Bank’s Large Mortgage”) against the Development Parcel pursuant to a priority agreement; and (iii) the Bank’s Inter Alia Mortgage in the amount of $12 million in third position; all of which were registered on November 14, 2006; (

b) the four parcels (each marked by the “*” above) that in 2010 became part of the Six Parcels, which were each charged by: (

i) the Bank’s Inter Alia Mortgage in first position; and (ii) Michael’s Mortgage in second position; both of which were registered on November 14, 2006; (

c) the parcel transferred in 2007 (PID: 000-103-900) , which in 2010 became one of the Six Parcels, was charged by an equitable mortgage in favour of the Bank, granted on March 20, 2009, in first position; (

d) the three parcels not among the group of Six Parcels were charged by: (

i) the Bank’s Inter Alia Mortgage in first position; and (ii) Michael’s Mortgage in second position;

which were both registered against these titles on November 14, 2006, the date when the land transfers from Michael to Ian were registered. [ 20 ] Thus, the Bank’s loans to Ian were secured primarily by two mortgages: the Bank’s Inter Alia Mortgage in the face amount of $12 million; and the Bank’s Small Mortgage in the face amount of $2 million. The Bank’s Inter Alia Mortgage was secured on eight of the nine parcels.

Ian was required to pay interest on a regular basis to the Bank during the terms with regards to both of the Bank’s mortgages and the Bank received interest payments for much of their respective terms. [ 21 ] Michael’s $3 million loan to Ian was secured by Michael’s Mortgage, registered in the Land Title Office under number FA134739. It had a five year term and was repayable, at the latest, on November 1, 2011. The interest rate on Michael’s Mortgage was Prime plus one percent.

Interest was not payable during the term of the mortgage, instead accruing during the term and being payable at the end of the five year period. [ 22 ] Ian’s stated intention, when he borrowed the monies in 2006, was to construct a residential subdivision on “the Hill” (the 32 acre portion of the Development Parcel), a rocky outcropping with ocean views. In order to develop the 32 acres, the lands had to be rezoned by the District.

Ian proposed to repay the loans to Michael and the Bank out of the increased value created by the rezoning process, thereby allowing him to maintain ownership of the farm lands and to continue to operate the farm. [ 23 ] Michael’s view was that much of the value in the lands lay in the Development Parcel if development approval could be obtained from the District. At the time the loans were made to Ian in 2006, Michael accordingly sought to have, and the Bank agreed to, his mortgage granted priority over the Bank’s Large Mortgage in respect of the Development Parcel.

A priority agreement giving effect to this priority was registered in the Land Title Office under number FA134740 (the “Priority Agreement”) on November 14, 2006. As a result, the charges registered against title to the Development Parcel in order of their priority were the Bank’s Small Mortgage, Michael’s Mortgage and the Bank’s Large or Inter Alia Mortgage. [ 24 ] The Bank’s Small Mortgage was only registered against title to the Development Parcel. As such, the parties’ respective mortgages on the other parcels of land in order of their priority were the Bank’s Large Mortgage and Michael’s Mortgage.

The one exception was the parcel previously referred to as the ninth parcel, against which the Bank held an equitable mortgage granted in March 2009, and which was not charged by Michael’s Mortgage. The plan to develop the 32 acres of the Development Parcel known as “the Hill” and the Covenant [ 25 ] In about 2007, after granting the mortgages to the Bank and Michael, Ian as “Vantreight Farms” brought forward a proposal to develop the 32 acres portion of the Development Parcel known as the Hill into 31 single-family homes, 92 townhomes, and 141 condominiums.

Of the nine parcels, only this 32 acre portion is not designated as farm lands within the Agricultural Land Reserve (“ALR”), and therefore it could be developed in accordance with the applicable local zoning bylaws. The remainder of the lands, designated as farm lands within the ALR, could not. [ 26 ] Ian’s first proposal was not received favourably by the District, and a second proposal for 89 residential units on the 32 acres was advanced.

In March 2010, Ian’s proposal for 89 lots was withdrawn, and a proposal for 58 single-family residences was submitted. (See: Residents and Ratepayers of Central Saanich Society v. Saanich (District), 2011 BCSC 491 [ Saanich 2011 ] at para. 16 .) [ 27 ] As of September 15, 2010, Ian was in default under his mortgages to the Bank. Ian and the Bank entered into a forbearance agreement. That agreement required Ian to provide an appraisal to the Bank by September 30, 2010. [ 28 ] Ian retained a property appraiser, Ray Baker, to appraise all nine parcels of land, which Mr.

Baker did in two ways: if development approval was granted and if no development approval was granted. Mr. Baker prepared two reports, both dated September 2, 2010. In his first report (the “First Baker Appraisal”), Mr. Baker valued the nine individual parcels at a total of value of $22,618,000. In his second report (the “Second Baker Appraisal”), Mr. Baker valued the 32 acre Hill portion of the Development Parcel in isolation.

He concluded that this property alone was valued at $12.35 million, which supported the view that there would be a substantial increase in the overall value if the Bank permitted Ian to pursue the subdivision process. [ 29 ] In or about December, 2010, Ian obtained preliminary approval from the District to create a residential subdivision on the 32 acre portion of the Development Parcel, which involved a change in zoning.

As a condition of the District approving a bylaw to allow the intended project to proceed, the Six Parcels were to be consolidated into a parcel comprised of the 32 acres and two large parcels ( Saanich 2011 , at paras. 23-24). A condition of the subdivision approval was that the Covenant, containing various terms and restrictions, be created pursuant to s. 219 of the Land Title Act, R.S.B.C. 1996, c. 250, and registered against title to the Development Parcel and the titles of the five other parcels, which together comprised the Six Parcels.

The Covenant was registered with the Land Title Office on December 8, 2010. In signing the Covenant, the Bank granted priority to the Covenant over its mortgages and consented to the form of the Covenant. Michael also signed the Covenant and consented to its form. [ 30 ] The registration of the Covenant in favour of the District had the effect after its registration that the Six Parcels could not be sold or transferred separately. The “cannot be sold or transferred separately” provision was effective immediately, regardless of whether any development would in fact proceed.

The Covenant was a condition of the District passing the bylaw, which would, subject to the terms of the Covenant, permit the development, but neither required that any development proceed. However, if any development was to proceed, the Covenant imposed (and presumably still imposes) a number of conditions on the Six Parcels, including the following: (

a) the Six Parcels would have to be consolidated and re-subdivided into: (

i) Lot A – comprised of the 32 acre Hill portion of the Development Parcel outside of the ALR;

(ii) Lot B – comprised of 178.6 acres, resulting from a consolidation of three of the Six Parcels, plus the remaining 59 acres of the Development Parcel after Lot A was subdivided out. Lot A and Lot B could only be sold or transferred together until the Covenant was fulfilled and a plan of subdivision for Lot A was registered; and (iii) Lot C – comprised of the remaining two parcels of the Six Parcels; (

b) the Covenant contained a number of other requirements, including a further covenant preventing any future subdivision of Lot B and Lot C, a requirement for a dedication of a roadway to be constructed by the owner, possible additional roadway dedications, a council resolution to exempt the subdivision from a highway frontage requirement, a requirement that water supply, sanitary sewage collection and disposal of wastewater utilities be constructed privately and operated as private utilities (to be constructed within Lot A but possibly extending over Lot B), the construction of a public pathway with a related statutory right of way and maintenance obligations on the part of the owner, a prepaid 25 year lease for no less than three hectares (about 7.5 acres) for a community garden (with the development permit for such lease being an obligation of the owner), and an obligation on the part of the owner to obtain approval of the Agricultural Land Commission, where such approvals are required; and (

c) the Covenant did not contain any terms imposing any obligations on the District or affecting any of the District’s discretion, rights or powers. [ 31 ] Thus, for practical purposes after the registration of the Covenant on December 8, 2010, the nine land parcels were divided into two groups: 1) three “standalone” parcels, which could be sold individually (the two properties on East Saanich Road and the property on Mt.

Newton Cross Road); and 2) the Six Parcels that could only be sold together because of the Covenant, being comprised of mainly agricultural lands in the ALR and the 32 acres known as the Hill that were not within the ALR and could be developed. [ 32 ] On December 14, 2010, Ian applied to the District for a preliminary layout assessment for the proposed subdivision.

He received a letter dated March 21, 2011 from the District, summarizing the conditions that were required to be met in order to get formal subdivision approval. [ 33 ] The overall tone of the District’s letter was positive, although it set out numerous items to be attended to and conditions to be met. The writer noted the bylaw that would allow the proposed further subdivision of Lot A (the 32 acres) to RE-5 zoning was under legal challenge and if the challenge succeeded then he would not have the authority to approve that further subdivision.

However, the letter indicated that Ian could “now proceed with meeting the conditions of acceptance and with other subdivision details in consultation with the undersigned” and the municipal engineer, and then summarized what Ian was required to submit “[p]rior to final approval of the subdivision plan by the undersigned.” [ 34 ] Later, in 2013, Bill Randall, the realtor chosen by the Bank, indicated that the re-zoning for the Hill project was “basically cast in stone unless the owner makes an application to down zone the property,” and that the only way to “unravel the

section 219 covenant is for the owner to request a downzone of the property to its original zoning.” Otherwise, he concluded that the preliminary layout assessment and the s. 219 covenant would stay in place. Foreclosure and sale [ 35 ] Michael’s Mortgage became due and payable on November 1, 2011. Ian failed to pay the amount owing and had not in fact paid any amount on the mortgage.

On December 2, 2011, Michael commenced foreclosure against Ian, naming the Bank as a respondent in that proceeding. [ 36 ] On January 31, 2012, Master Bouck granted an order nisi in Michael’s favour in Michael’s foreclosure proceedings. Master Bouck ordered an amount of $3,759,944.55 owing on Michael’s Mortgage as of that date, with a per diem at that time of $328.76, together with costs. Currently, the amount owing on Michael’s Mortgage exceeds $4.1 million.

To date, no amount has been paid on Michael’s Mortgage by Ian or from the sale proceeds of any of the nine properties sold in the present proceedings. [ 37 ] On August 10, 2012, the Bank commenced the present proceedings. On September 19, 2012, Master Taylor granted an order nisi in the Bank’s favour. The order was made by consent. Under the terms of the order nis i , Michael and the Bank were given joint conduct of sale of each of the nine properties, which included the Six Parcels. [ 38 ] One of the “stand-alone” properties (the Mt. Newton Cross Road Property) was sold by court order, dated July 23, 2014.

The Bank received the net proceeds from this sale in the amount of $973,908.70. [ 39 ] On July 24, 2014, the Bank, acting alone, purported to accept an offer from 0983590 B.C. Ltd. (“Conwest”), a numbered company associated with the Conwest Group of Companies, to purchase the Six Parcels for $7 million. Michael advised the Bank that he objected to the Bank purporting to act alone and that he opposed the Conwest offer on the basis that it was too low.

He also opposed the fact that the offer was conditional, as Conwest had the option not to complete the purchase unless it was satisfied with its due diligence investigations at the end of a 75 day period, or if it could not obtain certain development approvals in a one year period. In neither event would Conwest forfeit its deposit. [ 40 ] The Bank sought court approval for the Conwest offer. In August 2014 it filed an application scheduled to be heard on September 4, 2014.

Through legal counsel, the Bank took the position in response to Michael’s objection that the Conwest offer of $7 million was “...the best there is. In fact it’s all there is.” [ 41 ] In the face of the Bank’s application, Michael was able to obtain another offer for the Six Parcels. On September 3, 2014,

Michael received an offer of $8 million for the Six Parcels from OCL Contracting Ltd. (“OCL”). The offer from OCL was unconditional.

At the September 4, 2014 hearing, other parties attended court and indicated that they were interested in bidding on the Six Parcels. [ 42 ] After OCL agreed to increase the amount of its deposit from $100,000 to $200,000, the parties agreed that the Bank’s application would be adjourned by consent until September 11, 2014 to permit the revised offer from OCL to be formally placed before the court, and to allow other potential bidders to consider their positions in light of OCL’s offer. [ 43 ] Michael sought court approval of the OCL offer of $8 million on September 11, 2014 before Master Muir.

At the hearing, a representative of another bidder, Westerkirk Capital Inc. (“Westerkirk”) presented a competing bid for the Six Parcels in the amount of $8,050,000. In the face of the competing bids for the Six Parcels, Master Muir directed that Westerkirk and OCL present sealed bids, which they both did. [ 44 ] Westerkirk’s bid of $8.75 million was the successful bid for the Six Parcels, beating out OCL’s offer of $8.6 million in the sealed bid process. Despite having lost the sealed bid process, OCL remained interested in proceeding to develop the residential subdivision.

Prior to the closing of the sale of the Six Parcels to Westerkirk on October 31, 2014, OCL offered to take an assignment of Westerkirk’s rights under the contract by offering up to a further $750,000. Westerkirk refused, saying that it was interested in developing the Hill

section of the properties. [ 45 ] After the September 11, 2014 court approval of the sale of the Six Parcels, two of the three stand-alone properties remained for sale, as the third, the Mt. Newton Cross Road property was previously sold on July 31, 2014. Offers were received for the remaining two “stand-alone” properties on East Saanich Road. The sale of those two remaining properties to 1016666 B.C. Ltd. was approved by the court on October 20, 2014, with a closing date of October 31, 2014.

Counsel for the Bank pointed out that Westerkirk, the purchaser of the Six Parcels, has one director, and that director is one of two directors of 1016666 B.C. Ltd.

That director was involved in signing documents relating to the purchase of the Six Parcels and the two stand-alone properties. [ 46 ] According to the September 11, 2014 order of Master Muir, approving the sale of the Six Parcels to Westerkirk for a price of $8,750,000, the net proceeds from the sale stand in the place and stead of the sold lands and the net proceeds were only to be paid to the Bank and to Michael, as those two parties may agree or, failing agreement, may be ordered by a further order of the court.

Pending such agreement or further order, the net proceeds were to remain in trust with counsel for the Bank. [ 47 ] The sale of the Six Parcels to Westerkirk, pursuant to Master Muir’s order, closed on October 31, 2014. As part of the closing of the sale of the Six Parcels, Westerkirk’s solicitor filed Form 17 Fee Simple transfer documents with the Land Title Office transferring each of the Six Parcels to Westerkirk.

The Form 17 Transfer documents allocated the total $8,750,000 purchase price amongst the Six Parcels as follows: the Development Parcel: $5,017,330 PID 000-104-027 $1,752,493 PID 004-907-264 $ 897,550 PID 006-217-770 $ 438,589 PID 000-104-043 $ 369,436 PID 000-103-900 $ 274,602 Total: $8,750,000 [ 48 ] After payment of the applicable real estate commission, the Bank’s solicitors received $8,521,963.24 in trust as the net sales proceeds from the Six Parcels. [ 49 ] In early November 2014, the Bank’s solicitors, with Michael’s consent, paid $4,392,492.45 of the net proceeds from the sale of the Six Parcels to the Bank.

The balance of $4,129,470.79 was held pending agreement between the parties as to how much, as between Michael and the Bank, was owed on the Bank’s Small Mortgage and pending the allocation of the balance of the monies between the amounts owing under Michael’s Mortgage and monies owing under the Bank’s Large ( Inter Alia ) Mortgage. [ 50 ] On December 5, 2014, counsel for the Bank and Michael agreed that the amount owing in respect of the Bank’s Small Mortgage was $2,334,576.32.

The parties agreed that this full amount had been included as part of the $4,392,492.45 previously paid to the Bank a month earlier, in November 2014. [ 51 ] Michael and the Bank agree that the Bank’s Small Mortgage has been fully paid out, leaving Michael’s Mortgage in first priority over that portion of the net sale proceeds attributable to the Development Parcel, after subtracting $2,334,576.32 (the agreed balance of the Bank’s Small Mortgage). [ 52 ] On October 31, 2014, the East Saanich Properties were sold pursuant to an order of Master Harper, dated October 20, 2014.

The net sales proceeds from the sale of the East Saanich Properties were $1,801,165.96, which the Bank received. [ 53 ] To date, the Bank has received more than $7.2 million under its security over the lands. In addition to the $2.334 million that the Bank received in payment of the Bank’s Small Mortgage, the Bank has received payments totaling a further approximately $4.88 million, consisting of the following: $973,908.70 from the sale of the Mt.

Newton Property; $1,801,165.96 from the sale of the East Saanich Properties; $2,057,916.13, being the difference between the $4,392,492.45 paid to the Bank in early November 2014; the

amount of $2,334,576.32 agreed by the Bank and Michael to be the balance owing under the Bank’s Small Mortgage; and approximately $47,000 through enforcement of its guaranteed security agreements over chattels. [ 54 ] In addition to the above amounts, the Bank received a payment of $379,999 in respect of an insurance settlement arising from a fire on the Six Parcels. Ian contested the Bank’s receipt of these funds. In order to settle Ian’s objection, the Bank agreed that it would be deemed to have received a payment from Ian of $760,000, reducing his indebtedness to the Bank by this amount.

This arrangement was confirmed by an order made by Master Baker on December 8, 2014. [ 55 ] There also remains a small amount of money in Court subject to garnishing orders previously issued by the Bank and Michael. The Bank’s position is that its security gives it priority over these monies. The issue [ 56 ] The sole issue to be decided is how the net proceeds from the Six Parcels should be allocated to each of the Six Parcels, as that allocation determines the amount available to pay the charges on title against the Development Parcel; in particular, Michael’s Mortgage in second place.

The Bank’s position [ 57 ] I have considered the Bank’s detailed and thoughtful submissions. I will refer to aspects of them and will address their submissions on the law in my analysis and findings. [ 58 ] The Bank submits the following: Before the registration of the Covenant, each of the parcels that comprise the Six Parcels could have been dealt with separately and foreclosed on separately.

In the event that potential development on Development Parcel was pursued, the 32 acres would be capable of development at the end of a process which involves: tying the Six Parcels together (which was done through the Covenant); consolidating the Six Parcels and then re-subdividing them into Lot A, Lot B and Lot C as referenced in the Covenant; complying with the development requirements and filing a subdivision plan for the 32 acres so that the newly-created lots could then be dealt with separately.

Whether a subdivision on the 32 acres, which could become Lot A, would actually proceed was unknown at the time of foreclosure and sale. There had been no consolidation and/or subdivision of the Six Parcels into Lot A, Lot B and Lot C, although Ian had some preliminary studies done with respect to the properties.

The expectation was that the value of the Six Parcels after the completion of the process would be greater than the total of the individual values before that process. [ 59 ] Counsel for the Bank submits that if one looks at a particular physical portion of the land and the value of that portion before and after the completion of the above development process, particular parcels increase in value, while others decrease. With respect to the portion of the Development Parcel that constitutes the 32 acres comprising the Hill, the before and after values show an increase in its value.

In contrast, the before and after values of the remaining portions, comprised of the remainder of the Development Parcel and the other five parcels, show a decrease. [ 60 ] It is submitted on behalf of the Bank that the benefit of the increase in value, and the burden of the decrease in value that flow from the described process should be for the benefit of, or a burden upon, all of the Six Parcels because the benefit could not have been achieved without the associated burden unless all Six Parcels were part of that process. [ 61 ] Counsel for the Bank points out the flaw that he submits arises if the Court adopts Michael’s approach.

It is that the benefit of the increase in value that would flow from the described process would benefit only the 32 acre portion of the Development Parcel on which future development could be carried out (subject to complying with development-related requirements), and the burden of the decreases in value that would flow from that process would only be visited upon the remainder of Six Parcels.

This would be so even though the benefit could not have been achieved, and the burden would not have been suffered, unless all of the Six Parcels were involved. [ 62 ] Prior to the registration of the Covenant, each of the Six Parcels could have been sold separately with their own separate realizable value. The mortgagees of the land parcels could have enforced their security against the separate parcels on which they held their mortgages and no allocation issues would have arisen because recovery by a mortgagee on any particular parcel would be determined by how much that particular parcel sold for.

In particular, with respect to the Development Parcel, the charges against that parcel could have been paid out based on its sale price. [ 63 ] Counsel for the Bank stressed that once the Covenant to the District was granted by Ian, and the mortgagees granted the priority to the Covenant over their mortgages, the effect was that the Six Parcels could only be sold together such that the rights of the mortgagees became subject to the Covenant. The mortgagees could not enforce their rights by way of sale against the individual parcels.

From the point of view of a sale, the Bank submits that the Covenant turned the Six Parcels into one.

In the event that development proceeded as contemplated by the Covenant (into Lots A, B, and C as previously described), the appraisals show an expectation that the total of the expected values of Lots A, B and C, after the completion of the development process, would be greater than the total of the individual values of the Six Parcels by an amount between approximately $3.7 million to $7 million. [ 64 ] Counsel for the Bank pointed out that when Michael sold his interest in the land parcels to Ian in 2006, and the Bank and Michael registered their mortgages, there was no covenant affecting any dealings with the properties.

The valuations at around the time of the transfers and the granting of the mortgages were all on an individual parcel basis. A November 2005 appraisal identified the highest and best use for the Development Parcel as a single-estate home site. The bylaw passed by the District with respect to the potential project on the 32 acres of the Development Parcel was only introduced in 2010 within the context of an official community plan that had been adopted in 2008.

Therefore, until December 2010, when the Covenant was registered as part of the process of approving the bylaw that would permit the development, each of the Six Parcels could have been foreclosed upon and sold on individually: Saanich

2011 at paras. 3, 20, 23, 24, 26 and 43. [ 65 ] I have also reviewed the submissions on behalf of the Bank with regards to value-related information and comparisons of overall stand-alone and post-consolidation/re-subdivision values. Counsel provided a detailed review of the valuations and a number of comparisons. Specifically, there have been a number of valuations of the Six Parcels individually. Some were done before the registration of the Covenant and some were done subsequently, as if the Covenant did not exist or was removed.

Valuations were also done on the proposed Lots A, B, and C, as if the Six Parcels had been consolidated and subdivided into the lots that could be sold separately. [ 66 ] Based on counsel’s review, it is clear based on the First Baker Appraisal (September 2010), the Colliers Appraisal (May 2011), and the Gordon March 2012 and the Balderston Appraisals, that the development of the 32 acres of the Development Parcel, and the creation of Lots A, B, and C, as permitted by the District’s bylaw and the Covenant, was expected to significantly increase the overall value of the Six Parcels.

Keeping in mind that the Bank and other charge holders, including Michael, agreed to the Covenant taking priority on the titles and the Covenant was filed in December 2010, this occurred at a time when the development plan embodied by the Covenant was anticipated to have a positive effect on the overall value of the Six Parcels. [ 67 ] Specifically, the First Baker Appraisal totalled the individual values for the Six Parcels at $17,959,000; the total for the proposed development of Lots A, B and C at $25,079,000; with an expected overall value increase of $7,120,000.

The Colliers’ Appraisal totalled the individual values for the Six Parcels at $11,550,000; the total for the proposed development of Lots A, B and C at $15,625,000; with an expected overall value increase of $4,075,000.

The Gordon March 2012 and Balderston Appraisals totalled the individual values for the Six Parcels at $12,665,000; the total for the proposed development of Lots A, B and C at $16,451,000; with an expected overall value increase of $3,786,000. [ 68 ] Counsel for the Bank also provided comparisons in relation to the pre- and post- consolidation/re-subdivision values of Lots A, B and C as they would be configured from the Six Parcels.

If one examines the lands that could become Lots A, B and C, and looks at their values before and at the end of the proposed development process, and if they are viewed in isolation from the development process, the overall increase in value of the Six Parcels would occur as a result of combining an increase in the value of the 32 acres that could become Lot A and a decrease in the value of the lands that could become Lot B and Lot C, representing the remaining lands in the Six Parcels. [ 69 ] Drawn from the same three sets of appraisals referenced above (keeping in mind their different times of valuation), counsel for the Bank set out values for the 32 acres of the Development Parcel permitted to be developed (the anticipated Lot

A) that represent 34.87% of its value (as the 32 acres make up 34.87% of the 91.76 acre Development Parcel), values for Lot A, and changes in value as a result of the proposed development process, reminding the Court that an increase in value in relation to the Development Parcel required the participation of the other five parcels. [ 70 ] The First Baker Appraisal valued the Development Parcel at $4,856,000, resulting in 34.87% of that value being $1,693,287; a valuation of the proposed Lot A (comprised only of the 32 acres permitted to be developed for the residential sub-division) amounted to $12,350,000; resulting in $10,656,713 in increased value if developed as proposed.

The Colliers’ Appraisal valued the Development Parcel at $2,475,000; resulting in 34.87% of that value being $863,032; a valuation of the proposed Lot A amounted to was $7,850,000; resulting in $6,986,968 in increased value if developed as proposed.

The Gordon and Balderston Appraisals valued the Development Parcel at $3,500,000; resulting in 34.87% of that value being $1,220,450; a valuation of the proposed Lot A amounted to $8,560,000; resulting in $7,339,550 in increased value if developed as proposed. [ 71 ] Counsel for the Bank made similar submissions drawing in the appraisal valuations with respect to the four of the Six Parcels that would comprise Lot B if development went ahead.

The remainder of the Development Parcel, excluding the 32 acres designated as Lot A, would be a 59.76 acre portion that would be part of Lot B, combined with three other parcels from the Six Parcels. An individual value for the proposed Lot B was obtained by taking the total of the four parcels to become Lot B, including the value of the Development Parcel, and then deducting from that total 34.87% of the individual value of the Development Parcel.

Using the same appraisals previously referred to (except using the Gordon March 2012 Appraisal in place of the Gordon and Balderston Appraisals), comparisons showed that the totals of the individual values (for the four parcels less the 32 acres) were significantly greater than their combined value as Lot B, and changes in value as a result of the proposed development resulted in a loss of value ranging from $2,996,713 based on the First Baker Appraisal, $2,461,986 based on the Colliers Appraisal and $2,958,550 based on the Gordon March 2012 Appraisal. [ 72 ] The remaining two of the Six Parcels were to comprise the proposed Lot C if development went ahead.

The total of their individual values were greater than the values attributed to the proposed Lot C, and the changes in value as a result of the proposed development resulted in a loss of value ranging from $440,000 to $595,000. [ 73 ] Counsel for the Bank’s main points may be summarized as follows: • if the value increase that flows from the proposed development benefits only the 32 acres that remain as part of the Development Parcel (that could become Lot

A) and the burden is visited on the remainder of the Six Parcels (that could comprise Lots B and C), then the benefit to the portion of land upon which the 32 acres is situate ranges from just under $7,000,000 to over $10,600,000, and the burden in terms of decrease in value on the remainder of the Six Parcels ranges from approximately $2,900,000 to slightly over $3,500,000; • unless all Six Parcels participated in the process, there could be no development on the 32 acres of the Development Parcel and the anticipated increase in the overall value could not be achieved; • the appraisals referred to the consolidation of the Six Parcels and its re-subdivision into Lots A, B and C as being the highest and best use for the Six Parcels.

If the consequences of the consolidation/subdivision would only benefit the 32 acres while burdening the others, then the proposed development would only be the highest and best use for the 32 acre portion of the Development Parcel that would become Lot A, but would not be the highest and best use of the remainder of the Six Parcels that would become Lots B and C;

• if the Six Parcels are valued on the basis of a potential consolidation/re-subdivision as being their highest and best use, then the consequence of that consolidation/re-subdivision and development must apply to all of the lands in the group of Six Parcels for them to benefit as a whole; • although the sale price reflects the net combination of the benefit and the burdens in a situation where all Six Parcels were owned by the same person, who was not concerned with the benefit and burdens as shared between the Six Parcels, it does matter to the charge holders on the individual parcels; • had the Six Parcels been owned by six different owners, the proposed development would not have been able to proceed without the agreement of all six and no owner of the parcels that could become Lots B and C would have agreed to the consolidation/sub- division; • the granting of the Covenant, which tied the Six Parcels together so that they could only be sold as one, is comparable to an agreement by all the owners to proceed to deal with the Six Parcels in combination so as to capture the expected increase in net value arising from their combination and to prevent an owner or a mortgagee of an individual parcel from seeking a premium if theirs was the last parcel required to complete the proposed development; • the benefit and the burden of the consolidation/sub-division must relate to all Six Parcels because they were all indispensable to the creation of the group of Six Parcels, and as such the ultimate selling price of the Six Parcels represents the net effect of the benefit and the burdens; • the Covenant on all Six Parcels meant that they could only be sold as a group and the effect of any mortgagee granting priority to the Covenant meant that any mortgagee could only enforce its/his mortgage in the context of a sale of all Six Parcels together and not through the sale of one parcel only.

If there had been different owners they could have agreed on the distribution of the sale proceeds of the Six Parcels. As there was only one owner this did not matter from the owner’s point of view. It did however, matter from the point of view of the mortgagees as there were different mortgages on different parcels.

Thus, before registration of the Covenant the mortgagees could have agreed on the distribution of proceeds from the sale of the Six Parcels, but there was no such agreement; • Absent an agreement between mortgagees as to distribution of the proceeds of sale from the Six Parcels, the only logical basis upon which to distribute the proceeds is on the basis of the contributions of the individual parcels to the group of Six Parcels, resulting in an allocation of the sale proceeds to the individual parcels in proportion to the values each contributed to the creation of what was sold, namely the Six Parcel group with potential for development on the 32 acre portion of the Development Parcel; • The 32 acres could not be subdivided from the rest without the Six Parcels first being tied together, consolidated and re- subdivided.

Once the Six Parcels were tied together via the Covenant, it is no longer a question of the 32 acres being subdivided from the Development Parcel, but rather the 32 acres being sub-divided from the group of Six Parcels itself; • As development had not yet occurred, Lots A, B and C were not what was sold; rather, what was sold was the group of Six Parcels.

Therefore, to allocate the sale proceeds based on the “after-the-process” value of the Development Parcel would be to ignore the process by which that value was achieved and that it could not have been achieved without the participation of the other five of the Six Parcels; • Any benefit flowing from that potential development must flow to the group of Six Parcels and each is entitled to a share of the benefit.

Therefore, any change in the value of the Six Parcels once the Covenant ties them together, as compared to the total of the “individual” values of the parcels which were contributed to create the group of Six Parcels, accrues to the group as a whole, and not simply to any particular parcel, including the Development Parcel. None of the Six Parcels can individually claim, or be burdened with, the effect flowing from the combination to the exclusion of the other parcels; • The pre-process values of the individual parcels are known and considered in the appraisals.

The development potential of the Development Parcel prior to being bound by the Covenant was reflected in that parcel’s individual value; • The contribution value of the Development Parcel, out of the total of the individual values of the Six Parcels, ranges as follows: o $5,500,000 out of $17,724,000, or about 31% (parcel values determined from the transfers from Michael to Ian, all of which were registered on November 14, 2006, except for one registered November 7, 2007); o $4,856,000 out of $17,959,000, or 27.04% (First Baker Appraisal - September 2, 2010); o $2,475,000 out of $11,550,000, or about 21% (Colliers appraisal - May 19, 2011); and o $3,500,000 out of $12,665,000, or 27.64% (Gordon March 2012 appraisal). • The correct percentage to represent the contribution value of the Development Parcel in relation to the total of the individual values of the Six Parcels is from valuations at the time when the Six Parcels were tied together through the Covenant, as that is when the individual contributions of the Six Parcels were made to the proposed development.

As the First Baker Appraisal (dated September 2, 2010) and the Colliers appraisals were both done within months of the registration of the Covenant and the First Baker Appraisal has the higher percentage, the Bank seeks to utilize that figure of 27.04%; and • Therefore, the amount to be allocated to Development Parcel from the overall net sale proceeds should be 27.04%. Michael’s position [ 74 ] Michael’s position is that the net proceeds from the sale of the Six Parcels should be allocated among the individual parcels of

land, and in particular to the Development Parcel, in accordance with the expert opinion of the real estate appraiser, Mr. Richard Gordon. It is Mr. Gordon’s opinion that 56.92% of the net sales proceeds ought to be allocated to the Development Parcel, resulting in an allocation of $4,850,701.48. This would leave the funds presently held in trust remaining from the net sale proceeds in the amount of $2,516,134.16 available to make a payment on Michael’s Mortgage after the payment of $2,334,576.32 on the Bank’s Small Mortgage, which has already been made.

Michael would still be left with a shortfall in excess of $1.4 million on Michael’s Mortgage. [ 75 ] With regards to why the Court ought to accept the expert opinion of Mr. Gordon, counsel for Michael pointed out that Mr. Gordon and his firm are very familiar with the Six Parcels, having had considerable experience with all nine of the properties originally involved in these proceedings.

He has appraised them in connection with the original dispute between Ian and Michael in 2005/2006, in 2007 when an interest in a single parcel was sold to Ian, in 2012 and again in 2014, prior to delivery of his March, 2015 report. [ 76 ] In Mr. Gordon’s March 4, 2015 report, he originally opined that 58.13% of the $8.75 million purchase price should be allocated to the Development Parcel. However, he acknowledged that the report contained an error insofar as he had included a building valued at $150,000 that should have been attributed to a parcel other than the Development Parcel. Mr.

Gordon corrected the error by backing out the $150,000 figure, the effect of which was a slight reduction of the percentage of the net sale proceeds from the Six Parcels attributed to the Development Parcel, from 58.13% to 56.92%. [ 77 ] His opinion is that the highest and best use of the lands is to develop the 32 acre Hill portion of the Development Parcel as a 57 lot subdivision.

Given that portion of the Development Parcel is outside the ALR, and that a significant amount of work and expense have already been expended towards this development, this accords both with common sense and the Colliers Appraisal (May 2011) prepared by Mr. James Glenn and obtained by the Bank. Mr.

Glenn’s opinion regarding the highest and best use for the nine properties was the same, whether “As if Vacant” or “As Improved”, “Continued agricultural use, along with the subdivision of the 32-acre portion of Parcel #3 [the Development Parcel] into 57 residential lots.” [ 78 ] Michael submits that the Bank recognized that significant additional value was being created by the proposed development and that is why it chose to permit development plans to proceed, creating additional value in the Development Parcel. The Colliers and the Second Baker Appraisal supported this view.

His counsel points out that while the Bank also sought to play up the development potential for the Six Parcels, with the potential for a 57 unit sub-division in the marketing materials, when it comes to allocating value amongst the Six Parcels, it seeks to downplay the potential of the development. As an example, the Bank includes affidavits from Mr. Marinelli speaking about the possible hurdles to development. Mr. Marinelli was the principal of Conwest, who sought to acquire the Six Parcels for $7 million, which was $1.75 million less than the final purchase price.

His affidavits were filed when seeking court approval of Conwest’s offer that was then withdrawn in the face of OCL’s offer for $1 million more. Clearly, Mr. Marinelli had an incentive to downplay the prospects of development approval in order to attempt to obtain the Six Parcels for a low price. [ 79 ] Michael submits that Mr. Gordon’s allocation of value of $4,980,500 to the Development Parcel is consistent with the valuation of $5,017,330 attributed to the Development Parcel by Westerkirk in its purchase as one of the Six Parcels. Mr.

Brad Erickson, Chief Financial Officer for Westerkirk, deposed in his affidavit sworn March 12, 2015, that Westerkirk intends to develop the Hills

section into a housing development once consolidation occurs. Mr. Erickson also deposed as follows: 5. In allocating the $8.75 million purchase price amongst the six parcels, Westerkirk relied heavily upon an appraisal that had been prepared by Richard Gordon of D.R. Coell & Associates Inc. dated August 15, 2014, which had been filed in the Court proceedings. A chart that Westerkirk prepared showing the allocation of the $8.75 million purchase price that Westerkirk made is attached […] The value of $5,017,330 that Westerkirk arrived at for the Development Parcel was taken by adding the value of the 32 acre Hills

Section of the Development Parcel ($4,159,952), to the land value of the remaining approximately 60 acres of the Development Parcel ($857,378). [ 80 ] It is also consistent with the value of “at least $5 million” attributed to the Development Parcel by OCL, the unsuccessful bidder for the Six Parcels, as deposed to by Nigel Thomson, who did due diligence on the Six Parcels for the principals of OCL. Mr. Thomson deposed the following in his affidavit dated February 10, 2015: 10. On September 3, 2014 OCL presented a written offer of $8,000,000 to purchase the Properties.

That offer contained a non- refundable deposit of $100,000. Although we did not designate a specific percentage in the offer to the Development Parcel, in coming to the $8 million figure, OCL placed great importance on the fact that OCL would be acquiring the Development Parcel if it purchased the Properties. If OCL acquired the Properties, it intended to move forward with efforts to create the residential subdivision on the Development Parcel.

But for this residential subdivision development potential of the Development Parcel, OCL would have offered considerably less for the Properties than the $8 million which was offered. As a preliminary basis for planning, I attributed a value of at least $5 million to the Development Parcel. [ 81 ] Michael’s counsel also submits that Mr.

Gordon’s allocation of $4.98 million (56.92%) to the Development Parcel, is also consistent with the allocation proposed by the Bank’s chosen realtor, Bill Randall, when he originally suggested that the Bank allocate $5.1 million out of a total of $11.2 million to the Hill portion (i.e. 32 acres out of 92 acres) of the Development Parcel alone. To this 45.5% allocation, one would have to add the value for the remaining 60 acres in order to obtain the total allocation.

This is also far greater than the 27% value allocation that the Bank seeks. [ 82 ] The alternative position advanced by Michael is that the amount allocated to the Development Parcel by the purchaser, Westerkirk, should govern. As previously stated, Westerkirk made an allocation amongst the parcels when it filed Form 17 land transfers, in which it allocated $5,017,330 of the total purchase amount for the Six Parcels to the Development Parcel, as confirmed by the affidavit evidence of Mr. Erickson.

Michael’s counsel submits that where a purchaser has allocated a given amount of the purchase price amongst different assets, the court will typically give effect to the purchaser’s allocation. The amount allocated by Westerkirk is also supported by the evidence of Mr. Thomson, the representative for the unsuccessful bidder, OCL. [ 83 ] The only authority that counsel was able to find to assist him with this submission is Roynat Inc. v. Gallagher’s Restaurants Ltd. (1983), B.C.L.R. 270 (S.C.), a brief decision of McKinnon J. on a foreclosure matter where he determined that it was not for the court to

reallocate amounts on an offer to purchase land and a business other than as allocated by the prospective purchaser and approved the sale. [ 84 ] Michael also submits that the September 2, 2010 appraisal report prepared by Mr. Ray Baker, referred to as the First Baker Appraisal, upon which the Bank relies on its figure of 27%, was not tendered as an expert report, but rather simply attached to an affidavit of a legal assistant.

It does not purport to allocate the $8.75 million purchase price amongst the Six Parcels as it was prepared four years prior to their sale in the foreclosure proceedings and three months before the Covenant was registered against the titles.

He submits that it was based on a comparison of the parcels as if they were not developable. [ 85 ] The First Baker Appraisal also predated the letter of the District dated March 21, 2011 that set out the conditions that must be met before approval of the subdivision “will be considered.” Counsel for Michael also points out that the Bank failed to include it in its materials or refer to the Second Baker Appraisal, also dated September 2, 2010, which was also required by the forbearance agreement, and was complimentary to his other report. In the Second Baker Appraisal Mr.

Baker valued the land component of the 32 acre Hill portion of the Development Parcel at $12.35 million, assuming that it was rezoned to RE-5, which it later was. [ 86 ] If the First Baker Appraisal and Second Baker Appraisal are cross-referenced, it is submitted that Mr. Baker clearly envisaged a substantial increase in value if subdivision of the Development Parcel was possible. This is shown by the fact that at pp. 35-36 of the First Baker Appraisal, under the heading “Proposed Consolidated Properties”, Mr.

Baker concluded that the value not including the Hill portion of the Development Parcel was $17.388 million. However, when the land value of $12.35 million that Mr. Baker calculated for the Hill portion of the Development Parcel in the Second Baker Appraisal is added back in, it results in a total value of $29.738 million ($17.388 million + $12.35 million), compared to the value of the $22.618 million for the properties without development being factored in.

Michael submits that the effect of this is to substantially skew the numbers away from the 27% allocation to the Development Parcel sought by the Bank. [ 87 ] In addition, counsel for Michael points that the Bank in its affidavit material seeks to give legitimacy to the Bank’s use of the number in the First Baker Appraisal, by noting that a copy of that appraisal had been placed in the “data room [created by Cushman & Wakefield] with the concurrence of both HSBC Bank Canada and Michael Geoffrey Vantreight.” However, in making this statement, no mention is made to the fact that the 2011 Balderston Appraisal was also put into the data room with the Bank’s agreement.

The Balderston Appraisal valued the 32 acre Hill portion of the Development Parcel alone at $8.56 million. [ 88 ] Therefore, counsel for Michael submits that each of the Second Baker Appraisal, the Balderston appraisal and the Colliers appraisal undermine the Bank’s proposed allocation of approximately 27% of the $8.75 million purchase price to the Development Parcel.

Analysis and findings The Bank’s submissions [ 89 ] In support of the Bank’s position that 27.04% of the total net sale proceeds from the Six Parcels be attributed to the Development Parcel (as opposed to the 56.92% Michael is seeking based on the Gordon appraisal or the alternative of 57.34% based on the actual sale price), the Bank relies on the doctrine of tracing tied to the pre-Covenant values attributed to the individual parcels. Counsel for the Bank referred the Court to the following authorities: Foskett v. McKeown and Others , [2000] U.K.H.L. 29 ; [2000] 3 All ER 97 [ Foskett ] ; and B.M.P.

Global Distributions Inc. v. Bank of Nova Scotia , 2009 SCC 15 . He draws an analogy between the present case and how tracing was applied in Foskett . [ 90 ] In Foskett , a man named Mr. Murphy purported to be involved in land development. He used funds entrusted to him by prospective property buyers to pay several annual premiums on a life insurance policy he took out on his own life. The policy provided that in consideration of the first premium that was paid, and of the further premiums, the insurer would pay the benefits to the policyholder or successors. Five premiums were paid in the years 1986-1990.

The first two premiums were paid by Mr. Murphy from his own resources, the last two premiums were paid out of money that was misappropriated from the purchasers/plaintiffs and the source of the 1988 premium was not determined. As the plaintiffs’ funds were used to pay two out of the five premiums that had been paid, the Court held that the plaintiffs had a two-fifths interest in the policy as a matter of property rights and, accordingly, the plaintiffs were entitled to two-fifths of the insurance proceeds when Mr. Murphy died. [ 91 ] Counsel for the Bank submits that the fact Mr.

Murphy was a rogue was irrelevant to the property rights asserted by the plaintiffs, whose money that was being held in trust, and instead was used in part to acquire an asset, namely the insurance policy. He draws an analogy between the contributions to the insurance policy premiums in Foskett and the contributions of six separate parcels of land in the present case, being amenable to tracing into the combined group of the Six Parcels and then into the proceeds of sale. His main points are: • The combined Six Parcel group is the asset that is the substitute for the prior six separate parcels.

Each parcel can be traced into that combined parcel; • Each individual parcel contributed to the creation of, and can be traced into, the combined parcel, without the contribution of each there would be no combined six lot parcel; therefore, no one individual parcel can claim only for itself the effect resulting from the combination of the Six Parcels; • Contributors to the creation of the whole must be treated equally among themselves and where the claim of one competes with claims of others, there is no basis on which any can be subordinated to the others, and where the resulting fund is deficient, all gains and losses are to be borne rateably by the contributors;

• The individual contributors (the Six Parcels) do not trace their contributions directly into the ultimate proceeds (the $8,750,000sale price); they trace them first into the asset acquired (or created) through the contributions (the combined Six Parcel group) and thenfrom there into the proceeds from the sale of the Six Parcel group; • Each contributed parcel can claim a portion of the proceeds from the sale of the combined parcel and the holder of a securityinterest in a contributed parcel can claim a security interest in the proceeds relating to the contributed parcel; and • The values of the parts (the individual Six Parcels) that were contributed to create the whole (the combined Six Parcel group) maybe ascertained at the time when the contributions are made (here, at the time of the registration of the Covenant) in circumstances whenthe future was unknown.

This was the case when the mortgages were granted and the Covenant was registered. Therefore, the presentproceeds ought to be divided based on the values of the contributions that created the whole that was then sold. [92] Counsel for the Bank stressed that in the present case there is a direct causal link between the contribution of each parcel andthe ultimate outcome, which is stronger than on the facts in Foskett, because without the contribution of each parcel, there would be noSix Parcel group, and without the Six Parcel group there could be no value increase on the 32 acres that could become Lot A.

Thus, thereis a direct causal link between each of the Six Parcels, acting in combination with each other, and the final outcome (being the Six Parcelgroup that has been sold) because each was required to achieve that outcome. [93] He stressed that once the Covenant was registered, the Six Parcels could not be dealt with separately and any post-combinationvalue changes could only be changes to the value of the combined Six Parcel group as a whole.

Counsel submits that all effects resultingfrom the combination, both gains and losses, accrue to the benefit of, and are to be borne by, all of the contributing parcels rateably;therefore, the proceeds from the sale of the combined parcel must be attributed to the individual parcels in proportion to the values of theindividual parcels when they were contributed.

The effect of the Covenant was to create an asset in which different parties (here, themortgagees) had different interests in the parts which, when combined, created the whole. [94] Counsel for the Bank submits that a similar scenario sometimes arises in a matrimonial context where the former spouses madedifferent contributions in relation to an asset, usually the matrimonial home, and that asset is not capable of being partitioned between theparties, leaving a sale of the asset as the only the option.

Therefore, he submits that when different parties have different interests in aproperty, such as the present case between the two mortgagees, and that property is sold, there are different options in terms of how todivide the proceeds. They can simply be split equally between the parties, which here would mean dividing the proceeds equally amongthe contributing Six Parcels, or return to each party the value of their contributions and then split the remainder equally, or distribute thesale proceeds (or losses) proportionate to the initial contributions of each party.

In this regard he relies upon the following authorities: McArthur v. Dodgson, 2010 BCSC 1172; Aleksich v. Konradson (1993), (BC CA), 5 B.C.L.R. (3rd) 240 (C.A.); and Miles v.

Conkin, (BC CA), 24 R.F.L. (4th) 211 (B.C.C.A.). [95] Therefore, the Bank seeks a distribution of the net proceeds as between the Six Parcels proportionate to the contribution of each,relying on cases where common law spouses sought distributions of proceeds from the sale of family property to reflect their respectivecontributions, sometimes contrary to the state of the title of the property. [96] Counsel submits in these cases the resolution was to make the distribution of the proceeds from the sale of such assets on thebasis of returning the parties’ contributions to them, with both monetary and the values of non-monetary contributions being considered,and dividing the excess equally.

He points out that in these cases there was an excess to be divided as the proceeds exceeded individualcontributions. [97] In the present case, counsel for the Bank submits that: there is no issue of comparing monetary and non-monetary contributions,as all contributions made to create the combined parcel were of the same kind; the contributions were made at the same time when theCovenant was registered; and the totals of the individual values of the Six Parcels that created the group have been, on any valuation,greater than the final sale price of the group of Six Parcels.

He submits that the holder of an interest in each contributing parcel wouldhave a claim to the return of the value of that contribution and here, as there is nothing to distinguish a claim related to one parcel from aclaim related to another parcel, all claims could only be paid proportionately. [98] Therefore, the Bank submits, relying on Foskett, where the overall actual proceeds from the sale of the combined group of SixParcels are less than the total of the contribution values of the individual parcels and there is no excess to be divided after the return ofany contributions, it follows that where there is such deficiency, all contributors must share rateably in the available funds.

Applying thatprinciple and based on values in the First Baker Appraisal that the proportion of the Development Parcel bore in relation to the valuationof the Six Parcels should determine the allocation, the Bank seeks to have the Court find that only 27.04% of the net sale proceeds fromthe sale of the Six Parcels be attributed to the Development Parcel. As previously indicated, this approach results in Michael receivingnothing on his mortgage, second in priority, on the Development Parcel.

Findings with regards to the Bank’s tracing argument [99] I find that I am unable to accept the positon of the Bank. [100] First, the concept of tracing employed in a manner so as to override the priority of registered charges as between individualparcels of land is ill-founded in law.

Employed as the Bank submits, it would serve to undermine the certainty as to priority of charges ontitle in the land registry system in general, and with regards to the Development Parcel in particular. [101] Division of the proceeds of sale of real property in family law cases based on statutory provisions, trust principles or quantummeruit, or the tracing of proprietary rights where a fraudster has co-mingled the funds of innocent parties, are not analyses applicable in acommercial setting such as exists here, where mortgagees have registered their charges against individual titles of land. [102] The Bank’s analysis with regards to tracing is also premised on an analysis of a situation that did not exist.

The Six Parcels all

belonged to the same party, Ian, when the various charges were made. There were not six separate owners of the Six Parcels, and there were not six separate mortgagees such that the placement of the Covenant represented an agreement by all of the owners. Then the Six Parcels were all sold to one party, Westerkirk. [ 103 ] I find that the Bank, in the face of a default by Ian and the execution of a forbearance agreement dated September 15, 2010, made a conscious decision to agree to the registration of the Covenant against the titles of the Six Parcels.

I find that this represents a business decision made by a sophisticated party, a bank, with both the Baker Appraisals (dated September 2, 2010) available to the Bank prior to it consenting to the Covenant being placed on title of each of the Six Parcels. The Bank must be presumed to have decided that by permitting the Covenant to be given priority over the charges on each title of the Six Parcels, it increased its chances of maximizing the return available to it by virtue of the mortgages it held that were then in default.

At that time, the Bank could have proceeded to foreclose as opposed to consenting to the Covenant. The terms of the Covenant made it crystal clear what the potential benefits and detriments to the individual Six Parcels were when it was placed on their titles. By its terms, the Covenant explicitly tied the Six Parcels together in relation to the proposed scheme for development in the context of the bylaw passed by the District.

It was obvious that further increase in value to the 32 acre Hill portion of the Development Parcel could be achieved by the creation of the subdivision and involved participation of the remainder of the Six Parcels, which would not see increases in their values. [ 104 ] The Bank consented to the Covenant when Michael’s Mortgage over the Development Parcel stood in second position behind only approximately $2.334 million owing under the Bank’s Small Mortgage. Michael’s Mortgage stood in priority to all claims under the Bank’s Inter Alia or Large Mortgage over that property.

This too was obvious at the time the Bank consented to the Covenant. I find that to now permit the Bank to resile from that position would be contrary to the legal rights of the parties that were clearly reflected in the consents given and the priority of charges as agreed upon. [ 105 ] I find that it is particularly significant that at the time the loans were made to Ian in 2006, the Bank agreed to Michael’s Mortgage being granted priority over the Bank’s Inter Alia Mortgage in respect of the Development Parcel only, as reflected in the priority agreement registered in the Land Title Office on November 14, 2006.

Michael’s position was premised on there being additional value in the Development Parcel due to the fact that it could potentially be developed. This transaction clearly demonstrates that both the Bank and Michael were alive to the potential additional value in the Development Parcel at a time when the conditions attached to potential development were unknown and agreed to structure their debt accordingly. As Michael’s counsel pointed out, the Bank’s position ignores the reality that there were six legal titles.

It also ignores the fact that, at any time, it was open to the Bank to redeem Michael’s Mortgage and then deal with the Six Parcels in any manner that it saw fit.

To do this, the Bank would have had to pay the full amount owing on Michael’s Mortgage, which the Bank chose not to do. [ 106 ] For these reasons, I reject the claim made by the Bank, based on tracing, that the values of the proportionate contributions of each of the Six Parcels based on the First Baker Appraisal prior to the granting of the Covenant should determine the proportion of net sale proceeds available to satisfy the mortgages on title of the Development Parcel, in particular Michael’s Mortgage.

With regards to the Development Parcel, the parties’ priorities to the sales proceeds are contractually and statutorily determined by the terms of the mortgage contracts and their priority by virtue of registration under the Land Title Act . What is the proper percentage of the net sale proceeds to attribute to the Development Parcel? [ 107 ] The next question to be considered is what is the proper percentage of the net sale proceeds from the sale of the Six Parcels to be attributed to the Development Parcel?

This will determine the amount to be paid out on Michael’s Mortgage from the remaining funds. [ 108 ] The lands having been foreclosed upon and sold, and the Six Parcels having been sold for a total value of $8,750,000, with $5,017,330 of that amount being attributed to the Development Parcel by the principal of Westerkirk (57.34% of the total purchase price).

Michael submits that a significantly higher percentage of the sale proceeds than that asserted on behalf of the Bank (27.04%) ought to be attributed to the Development Parcel. [ 109 ] Michael relies upon the Gordon appraisal, dated March 4, 2015, (with its one subsequent correction) that valued the Development Parcel at $4,980,500. Relying on that opinion, counsel for Michael submits that 56.92% of net sale proceeds for the Six Parcels ought to be attributed to the Development Parcel.

Alternatively, Michael submits that the purchase price attributed to the Development Parcel by Westerkirk in the Form 17 land transfer documents, when it allocated the total purchase price as between the Six Parcels, represents the correct value to be attributed to the Development Parcel in relation to the other five of the Six Parcels, which results in 57.34% of the purchase price being attributed to it. [ 110 ] Much emphasis in this hearing has been placed on the various appraisals over time of the Six Parcels, and in particular the Development Parcel.

At the risk of oversimplification, the appraisals evaluate aspects of the Six Parcels over time, either with or without consideration of the development potential of the 32 acre portion of the Development Parcel, taking into account its increase in value and the restrictions imposed on it and the remainder of the Six Parcels by virtue of the District’s bylaw and the Covenant.

From the outset, as evidenced by the priority agreement, the Development Parcel was considered to be more valuable than the other five of the Six Parcels, hence the placement of the Bank’s Small Mortgage in first position, Michael’s Mortgage in second position, and then the Bank’s Inter Alia Mortgage in third position. [ 111 ] By the time foreclosure and sale occurred in 2014, the realistic possibility of development of the 32 acre Hill portion had been achieved by virtue of the District passing a bylaw rezoning that portion to permit the creation of a residential sub-division; and by the District indicating that, depending on the outcome of the court challenge, further steps could be taken by Ian or a subsequent purchaser to develop it, albeit upon the future fulfillment of numerous conditions.

At that point, the additional value created by the reasonable prospect of creating the residential sub-division on the Development Parcel encompassing the 32 acres existed. When the Six Parcels came up for sale, this enhanced permissible use of the 32 acre portion of the Development Parcel was reflected in the amount that prospective purchasers were prepared to pay for the Six Parcels for the opportunity to achieve such a result. This enhanced permissible use was also reflected in a higher price being paid and attributed to the Development Parcel than otherwise.

[ 112 ] Although sometimes court-ordered sales pursuant to foreclosure proceedings result in a price being paid for properties that is lower than fair market value, this does not appear to have occurred in the present case. Once Michael stepped in to oppose the first proposed sale to Conwest for $7 million and OCL came forward, interest in the sale of the Six Parcels was generated, fuelled by the prospects of developing the 32 acre Hill portion of the Development Parcel.

Not only did the sale process involve multiple prospective purchasers, but sealed bids were proffered by OCL and Westerkirk, the latter being successful. The overall value of the Six Parcels for the amount paid by Westerkirk ($8,750,000) is supporte

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