Finley et al. v. Tines, 2012 MBCA 33

Citation: Finley et al. v. Tines, 2012 MBCA 33 Date: 20120424 Docket: AI11-30-07638 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Barbara M. Hamilton Mr. Justice Martin H. Freedman Mr. Justice Richard J. Chartier BETWEEN : RONALD EARLE FINLEY, ) P. Halamandaris NORMAN WAYNE MENNIE and ) for the Appellant ANNA BEATRICE WALL ) ) R. H. Johnston, Q.C. (Plaintiffs) Respondents ) for the Respondents ) - and - ) Appeal heard: ) February 16, 2012 PETER TINES ) ) Judgment delivered: (Defendant) Appellant ) April 24, 2012 HAMILTON J.A. 1 The defendant signed as covenantor under a mortgage. He appeals the dismissal of his motion, pursuant to Queen’s Bench Rule 20.01(3), for

summary judgment dismissing the plaintiffs’ claim based on his covenant. He asserts that the covenant was extinguished when the mortgage was paid in full and a discharge of the mortgage registered in the land titles office. 2 The mortgage (sometimes referred to as the Jansen mortgage), which was in favour of Hans Jansen, was registered against the certificate of title of a commercial property in Brandon. It was discharged from the title in conjunction with the sale of the property by the registered owner, Iran Management Ltd. (Iran).

The plaintiffs are the directors and shareholders of Iran. 3 I agree with the defendant that the judge erred when he concluded that there was a genuine issue for trial as to whether the plaintiffs intended “to pay off the mortgage and discharge it or ... to keep the mortgage for their own benefit” pursuant to an assignment of the mortgage made after the mortgage was discharged. 4 I would allow the appeal and grant the defendant

summary judgment dismissing the plaintiffs’ claim. Background 5 Iran was the registered owner of the property at two different times and sold it twice. 6 The first sale occurred in 2004. At that time, Iran provided a second mortgage back (the Iran mortgage) to the purchaser’s nominee, Massey Harris Building Development Company Inc. (Massey), in the amount of $310,000.

The Iran mortgage was subject to the prior Jansen mortgage, which was in the amount of $85,000. 7 The defendant was the principal of Massey and he signed the Jansen mortgage as covenantor. 8 Massey defaulted under the Jansen mortgage and the Iran mortgage. Iran commenced foreclosure proceedings under the Iran mortgage, pursuant to which it became the registered owner of the property in 2007, subject to the Jansen mortgage. 9 Iran had questions as to the amount owing under the Jansen mortgage.

At the end of 2007, it filed a notice of application in the Court of Queen’s Bench to determine the amount owing, but it never proceeded with its application. 10 In February 2009, Iran agreed to sell the property to a third party. 11 On April 29, 2009, in conjunction with the sale, Iran’s lawyer, Robert Johnston, forwarded $125,607.58 (the amount Jansen

claimed was owing) to Karen Webb, Jansen’s lawyer, along with a discharge of the Jansen mortgage. He forwarded the funds in trust that the discharge be signed by Jansen and returned to his office.

As well, the funds were not to be released to Jansen until there was agreement as to the exact amount owing under the Jansen mortgage. 12 Jansen signed the discharge, in which he stated that “all money due or to grow due on same has been paid” and “the above instrument has not been assigned.” 13 The discharge of the Jansen mortgage was filed in the land titles office on May 27, 2009. 14 On August 4, 2009, Johnston wrote to Webb in conjunction with finalizing the amount owing under the Jansen mortgage and the release of the trust funds.

At the end of the letter, he wrote: Prior to the release of the trust funds, we will require that Hans Jansen sign an assignment of the mortgage to Iran Management Ltd. as it is the intention of Iran Management Ltd. to pursue [the defendant] on the personal covenant contained within the Jansen mortgage. [emphasis added] 15 On October 19, 2009, Johnston forwarded to Webb an assignment of the Jansen mortgage in favour of the plaintiffs (not Iran) for execution by Jansen, which read in part as follows: NOW THIS ASSIGNMENT WITNESSES that in consideration of $125,607.58 paid by the assignees to the assignor, the assignor assigns to the assignees ... each an undivided one-third (1/3) interest of the assignor in the mortgage and personal covenant of [the defendant] ... effective April 30, 2009.

And the assignor grants and assigns to the assignees ... all of his interests and rights contained within said mortgage and personal covenant effective April 30, 2009. 16 The plaintiffs filed their statement of claim on November 6, 2009. 17 On January 7, 2010, they filed a motion to strike the defendant’s statement of defence or for

summary judgment in favour of the plaintiffs. 18 On March 24, 2010, Johnston wrote Webb to advise that the plaintiffs were pursuing an action against the defendant, as covenantor of the Jansen mortgage, and that Jansen was “withhold[ing] a critical piece of evidence being a signed Assignment of the Mortgage as required.” In the letter, he stated: I began to research Mr. Finley et al’s cause of action against Mr. Jansen and note that The Mortgage Act Section 6(1) requires the Mortgagee (Jansen) to assign the mortgage to a third party (Finley et al) and that the Mortgagee (Jansen) is bound to assign and convey accordingly. 19 On January 28, 2010, the defendant filed his motion for

summary judgment. The plaintiffs’ motions were adjourned, pending the outcome of the defendant’s motion. 20 On June 17, 2010, the master heard the defendant’s motion for

summary judgment. He dismissed the motion in written reasons released July 6, 2010. 21 The defendant appealed the master’s decision.

Before the appeal was heard, the plaintiffs produced the assignment document that had been forwarded to Webb, signed by Jansen, but undated. 22 The motion judge heard the appeal and pronounced his decision on December 16, 2010. 23 On August 31, 2011, the plaintiffs, with the consent of the defendant, amended their statement of claim to seek a “declaration as to the meaning” of the discharge and an order rectifying the discharge, if necessary, because it “does not reflect the true intentions of the Plaintiffs, nor the Mortgagee, and that same was drafted, signed and registered by mutual mistake” and does not reflect the “whole agreement.” The Evidence

24 In his affidavit sworn January 27, 2010, in support of his motion, the defendant sets out most of the facts that I have just summarized. 25 In response, the plaintiffs relied upon two affidavits of Ronald Finley. The first, which was sworn on January 6, 2010, was originally in support of the plaintiffs’ motions.

The second Finley affidavit, sworn on May 25, 2010, was in response to the defendant’s affidavit. 26 In his first affidavit, Finley’s evidence included the following with respect to the assignment: Effective April 30, 2009 , myself and the other two plaintiffs herein, each as to an undivided one-third (1/3) interest caused H.

Jansen to be paid in full in the amount of $125,607.58 in consideration of the assignment by him of the mortgage and personal covenant, aforesaid. [emphasis added] 27 In his second affidavit, he addressed why the assignment had not been introduced into evidence: In negotiating the payout of the [Jansen] mortgage ... a settlement was reached which obliged Mr. Jansen to sign an “Assignment of Mortgage/Personal Covenant” which up to and including today’s date he has refused or neglected to do. I am advised by my lawyers of record herein and verily believe that the terms of the settlement and the obligation of Mr.

Jansen to assign the mortgage are best evidenced with the following Exhibits ... [copies of the correspondence between Johnston and Webb]. . . . . . I can confirm that the ... Land Titles Office form of “Discharge” signed by Hans Jansen was accurate on May 15, 2009 when it was signed by Mr. Jansen in that he had been paid in full all money due or to grow due on the Mortgage had been paid and (at that time) the mortgage had not been (formally) assigned although he was contractually and legally obliged to sign an agreement.

I believe given the exchange of correspondence between our lawyers of record and [Webb] ... that Hans Jansen was obliged to provide us with an Assignment of the Mortgage and that the form of “Discharge” that he signed and we had registered was for Land Titles purposes only. Statutory Provisions 28 The parties rely on a number of statutory provisions, including ss. 6(1) and (2) of The Mortgage Act , C.C.S.M., c. M200 and ss. 103(1) and (2) of The Real Property Act , C.C.S.M., c.

R30: When mortgagor may require mortgagee to assign mortgage to third party 6(1) Where a mortgagor is entitled to redeem he may require the mortgagee, instead of giving a certificate of payment or re- conveying, and on the terms on which he would be bound to re-convey, to assign the mortgage debt and convey the mortgaged property to any third person, as the mortgagor directs; and the mortgagee is bound to assign and convey accordingly. Encumbrancer to have same right 6(2) The right of the mortgagor under this

section to require an assignment as aforesaid belongs to, and is capable of being enforced by, each encumbrancer, or by the mortgagor, notwithstanding any intermediate encumbrance; but a requisition of an encumbrancer prevails over a requisition of the mortgagor, and, as between encumbrancers, a requisition of a prior encumbrancer prevails over a requisition of a subsequent encumbrancer.

Discharge of mortgage 103(1) Upon the production of a discharge of a mortgage or encumbrance, duly executed, discharging the whole or part of the mortgage or encumbrance or the whole or part of the land comprised in the mortgage or encumbrance from the moneys thereby secured, the district registrar shall make an entry in the register, to the effect that the mortgage or encumbrance is discharged wholly or partially or that part of the land is discharged and, upon the entry being made, the mortgage or encumbrance is released to the extent stated in the discharge.

Effect of partial discharge 103(2) Where a mortgagee or encumbrancer has, by registration of one or more partial discharges, discharged all the land subject to his mortgage or encumbrance, the partial discharge which released all or the balance of the land mortgaged or encumbered shall, in so far as the records of the Land Titles Office are concerned, be deemed to be a final discharge of the mortgage or encumbrance; but nothing in this subsection affects any right of the mortgagee or encumbrancer to take action upon, or enforce, any covenant to pay moneys owing to him and secured by the mortgage or encumbrance.

The Master’s Decision 29 The master focussed on the meaning of the standard charge terms of the Jansen mortgage and the defendant’s “legal responsibility thereunder in light of both statute and common law” (at para. 2). He reviewed the standard charge terms at some length, noting that the defendant covenanted to be “primarily liable” (at para. 25) under the mortgage. 30 He stated that the plaintiffs had paid the money due under the mortgage (at para. 4): …. Although they were all shareholders of the registered corporate owner of the subject property, they paid the monies due to Mr.

Jansen in their personal capacities. …. 31 Relying on Finley’s affidavit evidence, the master explained that “the title was acquired by Iran by way of voluntary transfer rather than a completed foreclosure” (at para. 9). At the appeal hearing, counsel advised this court that this was incorrect and that Iran acquired title pursuant to the registration of a transmission as the final step in the foreclosure proceedings, not by “voluntary transfer.” 32 As for Iran’s sale to a third party, the master stated that Iran “was undoubtedly under an obligation to provide clear title” (at para. 16).

He then stated that “[t]his fact is perhaps irrelevant to the matters to be determined by this court” ( ibid. ) and that “[t]he outstanding issue is what consideration the plaintiffs received for paying money to Mr. Jansen” (at para. 30). 33 After referring to the plaintiffs’ reliance on the standard charge terms and s. 6 of The Mortgage Act , he concluded that (at para. 38): .... The onus placed upon the defendant in this instance, given the almost complete agreement on the facts, has not been met.

There is a genuine issue for trial on these facts and contained therein in this instance is this court’s finding that the plaintiffs do have a reasonable cause of action. The law does not prohibit the plaintiffs from legally pursuing the covenantor. ... [T]he plaintiffs have for good consideration obtained, both contractually and under s. 6 of the Mortgage Act the legal right to an assignment from the mortgagee. The present refusal of Mr. Jansen to provide that document is not a bar to the plaintiffs’ right to proceed.

The Motion Judge’s Decision 34 In his oral decision, the judge did not comment on the master’s decision. The judge focussed on the issue of whether the plaintiffs had the intention to discharge the Jansen mortgage, or have it assigned to them. He concluded that this was a genuine issue for trial. 35 At one point, he observed that it was “difficult to say” whether the plaintiffs: … [T]hrough their company or personally ... approach[ed] Janzen [ sic ] and paid him an amount equivalent to what was owing under the

mortgage. .... 36 Later he stated that “[i]n this case, what we do have, on the facts is a third party paying off a mortgage.” 37 He commented on the nature of a mortgage and the effect of a discharge of mortgage: A mortgage is not a debt, in my opinion, a mortgage evidences a debt. .... A discharge of a mortgage is not necessarily a discharge of thedebt. …. It is security for debt. A discharge of the mortgage does not necessarily discharge a covenant to pay.

In this case, although theamount paid to Janzen [sic] was what was owing under the mortgage, in return for which the plaintiffs received a discharge of amortgage as well as an assignment of the mortgage, the amount paid [is] irrelevant. …. [emphasis added] 38 Relying on Kerschener v. Convention of Baptist Churches, (BC CA), [1930] 4 D.L.R. 135 (B.C.C.A.),which concerned the rights arising in the context of a purchase of a mortgage, the judge stated that: .... Where a third party pays off a mortgage the presumption is that he does not intend to discharge it but to keep it alive for his ownbenefit. ....

A heavy onus therefore rests upon the [defendant]. Heavier I think than the burden that would rest on the mortgagor if itwas seeking a similar declaration. …. 39 He concluded that: In this case, what we do have, on the facts is a third party paying off a mortgage. Accordingly, the presumption ... comes into play andthat presumption is that the third party, namely the plaintiffs, do not intend to discharge the mortgage but rather to keep it alive for theirown benefit. .... That does not mean that the discharge of the mortgage filed at land titles office becomes [ir]relevant.

It is evidence,evidence that will have to be weighed by a trial judge after hearing from witnesses specifically the plaintiffs. This is not a matter thatshould be determined on a

summary basis, rather there is a genuine issue for trial. That is, what was the intent of the plaintiffs, was ittheir intent to pay off the mortgage and discharge it or was it their intent to keep the mortgage for their own benefit. …. [emphasis added] Position of the Defendant 40 The defendant’s position is that he discharged the onus on him that, prima facie, the plaintiffs’ claim must fail and that theplaintiffs did not establish that there is a genuine issue for trial as to whether they obtained a valid assignment of the Jansen mortgagewhich would entitle them to maintain a claim against the defendant.

He says that in concluding that there was a genuine issue for trial,the judge erred in principle and made palpable and overriding errors. 41 He asserts that the record discloses that the property was sold by Iran and that in conjunction with that sale, the Jansenmortgage was paid in full and not assigned.

He says that because the debt under the Jansen mortgage no longer exists, his covenant hasbeen extinguished. 42 The defendant argues that the plaintiffs cannot rely on s. 6(1) of The Mortgage Act because it provides an election to amortgagor to require a mortgagee to either discharge or assign a mortgage and Iran elected to obtain a discharge of the Jansen mortgage. 43 He makes three additional arguments with respect to s. 6(1). First, he argues that an assignment of the Jansen mortgage wasimpossible in the circumstances because Iran had agreed to sell the property and provide clear title.

As a result, Iran was not amortgagor who was “entitled to redeem” as required by s. 6(1). Second, he argues that the discharge of the Jansen mortgage made itimpossible for the plaintiffs to convey the Jansen mortgage to the defendant or his designate pursuant to s. 6(1). He says that this wouldhave been his right upon payment under the covenant. Third, relying on Crown Trust Co. v. E.J.W.

Development Co. et al., Pauls, Matz,Adams and Rivalin (1982), (MB KB), 20 Man.R. (2d) 299 (Q.B.), he argues that s. 6(1) was not applicable becauseIran took title pursuant to a transmission, not a transfer of land, and therefore Iran was not a covenantor under the implied covenantpursuant to s. 77 of The Real Property Act. 44 The defendant asserts that s. 103(1) of The Real Property Act stands for the principle that once a mortgage is discharged, it

ceases to exist. He relies on Roy v. Investors Trust Co. (1967), (MB KB), 60 W.W.R. 630 (Man. Q.B.), in whichBastin J. stated that (at p. 634): …. … [A] discharge of mortgage is not merely the statutory form called for by The Real Property Act … to remove the mortgage fromthe certificate of title, it is also a receipt in full for the money secured by the mortgage. …. 45 Finally, he points out that in Kerschener, which was relied on by the judge, Macdonald C.J.B.C. observed “that if themortgage ha[d] been paid off and discharged [the] position [of the appellant] would be very much improved” (at p. 137).

Position of the Plaintiffs 46 The plaintiffs acknowledge that if the discharge extinguished the debt, as well as the mortgage, then there is no personalcovenant upon which they can sue. They say, however, that the discharge was just the release of the property as security.

They furthersay that the timing of the registration of the discharge and the provision of the assignment is a red herring because the covenant isassignable in its own right. 47 They assert that s. 6(2) of The Mortgage Act and s. 103(2) of The Real Property Act, as well as the terms of the Jansenmortgage, allow them to fully discharge all of the security and still retain full recourse against the defendant, as covenantor. 48 They say that s. 6(2) entitles a second or subsequent mortgagee to have a right in priority to the mortgagor to pay out a priormortgage and take an assignment of it and that s. 103(2) provides that the right of a mortgagee to take action upon any covenant to paymoney owing and secured by a mortgage is unaffected by a mortgagee discharging all of the land. 49 Finally, and in the alternative, the plaintiffs rely on the amendments made to the statement of claim subsequent to the judge’sdecision.

They say that the appeal is rendered moot if its outcome turns in any material way on the wording of the discharge.

Summary Judgment and Standard of Review 50 The law with respect to the well-known two-step process for a

summary judgment motion was recently summarized inBodnarchuk v. RBC Life Insurance Co. et al., 2011 MBCA 18, 262 Man.R. (2d) 225, an appeal also concerning a motion for

summaryjudgment dismissing a claim (at para. 13): Thus, an application for

summary judgment, whether by plaintiff or defendant, is a two-step process. See Homestead Properties [2007MBCA 61, 214 Man.R. (2d) 148]; Perth Services Ltd. v. Deloitte Haskins & Sells et al., [2005] Man.R. (2d) Uned. 4; 2005 MBCA 14,and Beavis et al. v. PricewaterhouseCoopers Inc. (2010), 2010 MBCA 69 , 258 Man.R. (2d) 15; 499 W.A.C. 15; 87 C.P.C.(6th) 392; 2010 MBCA 69. Firstly, the moving party (in this case, Assante) must demonstrate on a prima facie basis that the claim ordefence, as the case may be, should fail. If this first hurdle is not met by the applicant, that is the end of the matter.

In this instance, themotions court judge found, correctly in my view, that Assante had met this burden. Once a prima facie claim or defence has been shown,the onus shifts to the respondent (in this case, Bodnarchuk) to establish that the claim or defence has a real chance of success; in otherwords, that there is a genuine issue for trial. At this stage, the court must take a good hard look at the merits of the claim. See Blanco etal. v.

Canada Trust Co. et al. (2003), 2003 MBCA 64 , 173 Man.R. (2d) 247; 293 W.A.C. 247; 2003 MBCA 64, at para. 24,and Homestead Properties. [emphasis added] 51 The “hard look” mandated by the second step only arises if the moving party has met the initial burden upon it. SeeTelecommunication Employees Association of Manitoba Inc. et al. v. Manitoba Telecom Services Inc. et al., 2007 MBCA 85 at para. 106,214 Man.R. (2d) 284. 52 The granting or denying of a motion for

summary judgment is a discretionary ruling. This exercise of discretion is entitled todeference unless the judge in question has misdirected himself or herself as to the applicable law (that is, erred in principle) or as to thefacts, or unless the decision is unjust. As is well known, a question of law is reviewed on the standard of correctness and a question offact, as well as the application of the law to the facts, is reviewed on the standard of palpable and overriding error. See Towers Ltd. v.Quinton’s Cleaners Ltd. et al., 2009 MBCA 81, 245 Man.R. (2d) 70. Analysis and Decision

53 The law with respect to mortgages, covenants and real property can be complex. Some of the parties’ arguments attempt to engage this complexity. 54 I have concluded that it is not necessary to address most of these arguments because the disposition of this appeal turns on its facts, and more particularly, the choice made by Iran to sell the property and pay off the Jansen mortgage so that it was discharged from the certificate of title. It also turns on several palpable and overriding errors of the judge and his failure to take that required hard look at the second step of the

summary judgment analysis, as explained above. This failure, being a misdirection as to the law, was an error of law. As a result of these errors, the judge’s decision is not entitled to deference. 55 Clearly, the defendant presented a prima facie case for his motion for

summary judgment dismissing the plaintiffs’ claim, given that the Jansen mortgage was paid in full and discharged. 56 The crucial issue was whether the plaintiffs met their onus to establish that their claim had a real chance of success; in other words, was there a genuine issue for trial. To repeat, this is where the good hard look at the merits of their claim was required. 57 I think that it is trite law to state that a personal covenant to a mortgage is only valid when there is a debt owing on the mortgage.

If authority is needed, see Kevin Patrick McGuinness, The Law of Guarantee: A Treatise on Guarantee, Indemnity and the Standby Letter of Credit , 2d ed. (Scarborough: Carswell, 1996) at para. 10.93. In fact, the plaintiffs acknowledge this. 58 In my view, there is simply no bona fide issue worthy of trial with respect to whether or not the debt owing under the Jansen mortgage was paid in full and therefore extinguished.

To repeat, the undisputed facts are that Iran sold the property to a third party; in conjunction with the sale, the Jansen mortgage was paid off and a discharge of the mortgage was provided by Jansen for registration in the land titles office. Importantly, the discharge included Jansen’s statement that the mortgage was paid in full and had not been assigned. 59 The plaintiffs assert that it was they who paid the Jansen mortgage and as a result they are entitled to an assignment of that mortgage for various reasons.

In my view, the judge made a palpable and overriding error when he accepted that the plaintiffs had so paid, or at least raised a bona fide issue about that. The evidence demonstrates that Iran, through its lawyer, paid off the mortgage in conjunction with the sale of the property by Iran. In fact, when the subsequent demand for an assignment was first made, it was for an assignment in favour of Iran. Later, the request was for an assignment in favour of the plaintiffs. To compound this inconsistency, there is Finley’s vague evidence that the plaintiffs “caused” Jansen to be paid in full.

That is not evidence that the plaintiffs paid the monies due under the Jansen mortgage. It is simply consistent with the plaintiffs’ role as the directing minds of Iran. 60 The evidence demonstrates that the demand for an assignment was no more than an afterthought and Jansen provided it to settle the issue as to the amount owing under the Jansen mortgage. This permitted the release of the trust funds to him.

In the absence of evidence from Jansen as to why his statements in the discharge should not be taken at face value, the undated assignment document is of little or no value. 61 I agree with the judge that the security created by a mortgage is distinct from the covenant to pay under the mortgage. However, in this case, as is often the case, the Jansen mortgage contained the covenants to pay of Massey and the defendant, as well as creating the security for those covenants.

In turn, the discharge of the Jansen mortgage was not only a registerable document for land titles purposes, it was also an acknowledgment that the debt had been paid in full, as was the case in Roy . 62 The judge stated that the “plaintiffs received a discharge of a mortgage as well as an assignment of a mortgage.” He also stated that “the amount paid [is] irrelevant.” In my view, both statements reflect palpable and overriding errors.

The former statement does not take into account the crucial factual context concerning the timing, and other circumstances, of the receipt of the discharge and the subsequent assignment. The latter statement is wrong because the payment in full of the Jansen mortgage, in all of the circumstances, is very relevant to whether the covenant of the defendant was extinguished. 63 For all of these reasons, I am of the view that the judge erred when he concluded that there was a genuine issue for trial.

A hard look at the uncontested evidence demonstrates otherwise. 64 While that conclusion is sufficient to dispose of the appeal in favour of the defendant, I do wish to make two brief observations about the plaintiffs’ reliance on s. 6 of The Mortgage Act . 65 First, the plaintiffs could not rely on s. 6(1) because Iran, as the registered owner of the property, agreed to sell the property with clear title. Section 6(1) contemplates a choice between an assignment and a discharge.

Even if s. 6(1) applied here, Iran made its choice to sell the property and obtain the discharge of the Jansen mortgage in conjunction with the sale transaction. While mortgages, like other securities, are often purchased and are then transferred or assigned, no one bought the Jansen mortgage. It was paid and discharged. 66 Second, the plaintiffs’ reliance on s. 6(2) of The Mortgage Act is flawed because s. 6(2) extends the right to an assignment of a mortgage under s. 6(1) to subsequent encumbrancers. Iran was the registered owner of the property and not a subsequent encumbrancer.

Conclusion 67 I would allow the appeal, grant the defendant’s motion and dismiss the plaintiffs’ claim. 68 I would order costs in favour of the defendant on the appeal and also for the motions before the master and the judge.

J.A. I agree: J.A. I agree: J.A.