) ) THE TORONTO-DOMINION BANK Applicant – v. –, 2013 ONSC 7016

CITATION : TD Bank v. Phillips et al, 2013 ONSC 7016 COURT FILE NO.: 3774/13 DATE: 2013-11-18 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) THE TORONTO-DOMINION BANK Applicant – and – CINDY LOUISE PHILLIPS and RICHARD JOSEPH PHILLIPS Respondents ) ) ) ) ) ) ) ) ) James M. Butson, Counsel for the Applicant G.F. Camelino, Counsel for Cindy Phillips Michael Odumodu, Counsel for Richard Phillips ) ) ) HEARD: October 8, 2013 REASONS FOR JUDGMENT Gray J. [ 1 ] In this application, the Toronto-Dominion Bank applies to pay into court the sum of $52,295.14, less $750 as its costs of the application.

These funds represent the surplus of proceeds from the sale of property owned by the Respondents under a mortgage. In fact, the litigation now involves a contest between the Respondents, Cindy Phillips (“Cindy”) and Richard Phillips (“Richard”), as to the entitlement of each to the surplus, after satisfaction of an execution in favour of the Bank of Montreal in the amount of $19,327.50. [ 2 ] Cindy filed a consumer proposal under the Bankruptcy and Insolvency Act , which was accepted by her creditors, one of which is the Bank of Montreal.

As a result, Cindy argues that she should be entitled to approximately three quarters of the surplus remaining after satisfaction of the Bank of Montreal’s execution, while Richard argues that each party is entitled to one half. [ 3 ] For the reasons that follow, I hold that Richard’s position must prevail. Background [ 4 ] While they were living together, Cindy and Richard were the owners, as joint tenants, of property in Guelph. That property was subject to a mortgage in the amount of $268,000 in favour of the Toronto-Dominion Bank.

The mortgage went into default, and on November 5, 2012, the Bank commenced power of sale proceedings. The property was sold by the Bank under its power of sale, and the transaction closed on April 4, 2013. After payment of expenses, a surplus remained in the amount of $52,295.14. [ 5 ] Cindy moved out of the property on December 7, 2012. No divorce proceedings have been commenced. [ 6 ] On February 1, 2013, Cindy filed a consumer proposal pursuant to

section 66.13 of the Bankruptcy and Insolvency Act . Hoyes, Michalos & Associates Inc. (“HMA”) was appointed as the administrator for the proposal. Unsecured claims were filed with HMA by the Bank of Montreal in the amount of $19,516.40. On April 6, 2011, the Bank of Montreal had obtained a judgment against Cindy and Richard in the amount of $32,734.37, and on April 12, 2011, the Bank of Montreal filed a writ of seizure and sale with the Sheriff.

As of the date of argument before me, it was agreed that the Bank of Montreal’s claim under its writ of execution amounted to $19,327.50. [ 7 ] The aggregate total of all proved claims filed with HMA amounted to $66,233. Of the creditors that filed proofs of claim, four creditors whose claims totalled in aggregate $41,348.95 voted unanimously in favour of the proposal.

Thus, the proposal was deemed approved by the Court on March 18, 2013. [ 8 ] Under the proposal, the Bank of Montreal will be entitled to a dividend of $3,682.79. [ 9 ] Cindy swears that at the time she filed her consumer proposal she was not aware that there would be any equity left in her home, and as a result she did not refer to it in her statement of affairs filed with her proposal. In the result, HMA subsequently advised

the creditors of the surplus funds and gave them an opportunity to request a meeting of creditors in order to amend the proposal.

Nocreditor responded. [10] HMA has agreed to fund this litigation on behalf of Cindy, and Cindy has agreed that her interest in the surplus funds willbe paid to HMA to pay HMA’s fees, including legal fees; to fund payments due under the proposal, including any amendments that maybe agreed upon between Cindy and the creditors as a result of the disclosure of the existence of the surplus funds; and in the event thereis a balance left over, it shall be paid to Cindy. [11] At the argument of the application, it was agreed that the costs of the Toronto-Dominion Bank for this application wouldbe deducted from the surplus funds, leaving a balance of $51,545.14.

From that amount, the sum of $19,327.50 would be deducted andpaid to the Bank of Montreal, since the Bank of Montreal will be paid in any event, whether out of Richard’s share alone, or out of theshares of both Cindy and Richard. The balance, $32,217.64, would be paid to the solicitors for one of the parties in trust to await thedisposition of this application.

Submissions [12] Counsel for Cindy submits that the Bank of Montreal’s judgment was obtained against Cindy and Richard jointly andseverally, and accordingly, apart from the effect of the consumer proposal, would be enforceable against either or both of Cindy andRichard. [13] However, in this case because of Cindy’s consumer proposal under the Bankruptcy and Insolvency Act, the Bank ofMontreal’s claim against Cindy is stayed as a result of

section 69.2(1) of that Act. Furthermore, pursuant to

section 66.28(2) of the Act,the consumer proposal is binding on all creditors, including the Bank of Montreal, and all monies payable under the consumer proposalare to be paid to the administrator and distributed by the administrator, as required by

section 66.26 of the Act. Accordingly, the Bank ofMontreal’s writ of execution can have no effect on Cindy’s share of the surplus proceeds, and the Bank of Montreal’s writ of executionmust be paid out of Richard’s share. That being the case, Richard is entitled to $6,445.07 out of the surplus and Cindy is entitled to$25,772.57. [14] Cindy submits that this is the clear effect of the provisions of the Bankruptcy and Insolvency Act, and this result is dictatednotwithstanding what is ordinarily the effect of

section 27 of the Mortgages Act, which provides as follows: 27. The money arising from the sale shall be applied by the person receiving the same as follows: Firstly, in payment of all the expenses incident to the sale or incurred in any attempted sale; Secondly, in discharge of all interest and costs then due in respect of the mortgage under which the sale was made; Thirdly, in discharge of all the principal money then due in respect of the mortgage; Fourthly, in payment of the amounts due to the subsequent encumbrancers according to their priorities; Fifthly, in payment to the tenants of the mortgagor of the rent deposits paid under

section 106 of the Residential Tenancies Act, 2006where the rent deposit was not applied in payment for the last rent period, and the residue shall be paid to the mortgagor. [15] Cindy submits that the Bank of Montreal, as an execution creditor, is not a “subsequent encumbrancer” as contemplated insection 27 of the Mortgages Act. In any event, as a creditor under the consumer proposal, the Bank of Montreal’s writ of execution isstayed. Its claim is compromised under the proposal, and the proposal is binding on it. [16] Cindy submits that to the extent that there is any conflict between

section 27 of the Mortgages Act and the provisions ofthe Bankruptcy and Insolvency Act as they govern consumer proposals filed under that Act, the provisions of the Bankruptcy andInsolvency Act must prevail on constitutional grounds. [17] Cindy relies on First City Trust Co. v. McDonough (1993), (ON SC), 15 O.R. (3d) 586 (Gen. Div.); and Rothmans, Benson & Hedges Inc. v. Saskatchewan (2005), 2005 SCC 13 , 250 D.L.R. (4th) 411 (S.C.C.). [18] Richard submits that this matter is governed by

section 27 of the Mortgages Act. [19] He submits that on sale of the property, the interest of both Cindy and Richard in the equity of redemption wasextinguished, and their only interest was in the surplus, if any, that remained after the sale. That interest is defined entirely by

section 27of the Mortgages Act. That

section requires the money arising from the sale to be applied in six ways: first, in payment of the expensesincident to the sale; second, in discharge of all interest and costs due in respect of the mortgage; third, in discharge of the principal moneydue under the mortgage; fourth, in payment of amounts due to subsequent encumbrancers; fifth, in payment to tenants of the mortgagorfor rent deposits; and finally, the payment of any residue to the mortgagor or mortgagors. [20] Richard submits that the first three obligations have been satisfied, leaving the sum of $52,295.14.

It was agreed that thecosts of the Toronto-Dominion Bank on this application would be deducted, leaving a net amount of $51,545.14. The fifth obligation,payment to tenants, does not arise, since there were no tenants. Richard submits that before any residue is owing to the mortgagor (or, asin this case, the mortgagors), there must be paid, pursuant to the fourth obligation, amounts due to subsequent encumbrancers. In thiscase, there was only one subsequent encumbrancer, namely, the Bank of Montreal, pursuant to its writ of execution.

That amount,$19,327.50, must be discharged before there is any residue to be paid to Cindy and Richard. After payment of the subsequent

encumbrancer, the Bank of Montreal, the amount of $32,217.64, remains as residue to be divided equally between Cindy and Richard. Thus, Richard submits, Cindy and Richard should each receive the sum of $16,108.82. [21] Richard submits that the Bank of Montreal, as a result of its writ of execution, is clearly a subsequent encumbrancer. Richard submits that this is the clear effect of the Execution Act, and particularly sections 9(1); 10(4), (5), (6) and (7); 13; and 28 of thatAct. [22] Richard relies on Central Guaranty Trust Co. v.

Sudbury (1992), (ON SC), 8 O.R. (3d) 565 (Gen.Div.); Polsak (Re) (1978), (ON SC), 19 O.R. (2d) 570 (S.C.O in Bankruptcy); Arnold Bros. Transport Ltd. v. Murphy, 2013 MBQB 137 , [2013] M.J. 243 (Q.B.); National Bank of Canada v. Young (2002), 4 R.P.R. (4th) 79 (Ont. S.C.J.); andMaroukis v. Maroukis, (SCC), [1984] S.C.J. 35. Analysis [23] Upon sale of the property, any right the mortgagors had to the equity of redemption was extinguished. The only right themortgagors had was to the residue of any surplus that remained after the sale. That right is entirely defined by

section 27 of theMortgages Act. That

section sets out a scheme of distribution, in five steps, before the right of the mortgagors to any residue arises. [24] In this case, the first three steps have been satisfied. The expenses of sale, interest, costs, and principal have been paid,leaving $52,295.14. It is agreed that the fifth step has no application, because there were no tenants. [25] That leaves for consideration the fourth step. [26] The Bank of Montreal’s writ of execution is with respect to a judgment debt against Cindy and Richard, jointly andseverally.

Cindy and Richard, before the sale of the property, were the owners of the property, as joint tenants. As such, they each hadan undivided joint interest in the equity of redemption. Upon the sale of the property, their interest in the equity of redemption wasextinguished but the judgment debt of the Bank of Montreal remained as a joint and several obligation. Cindy’s position rests on thesubmission that the Bank of Montreal’s writ of execution is not an encumbrance. I do not accept that submission. [27] In Outaouais Synergest Inc. v.

Keenan (2013), 2013 ONCA 526 , 116 O.R. (3d) 742 (C.A), the Court of Appealat paragraphs 57-72 discussed the concept of an encumbrance. At para. 58, Blair J.A., for the Court, quoted the often-cited passage fromthe reasons of Estey J. in Wotherspoon v. Canadian Pacific Ltd., (SCC), [1987] 1 S.C.R. 952, at p. 1021: The term “incumbrance” is a general term of law without any classical meaning. The word should be accorded its plain meaning that isconsistent with the context of the statute. As is discussed by the Nova Scotia Supreme Court in Clark v.

Raynor (1992), 65 D.L.R. 425(C.A.), at p.439: “The word ‘encumbrance’ has no technical meaning. It is not one of the ‘terms of the law’ and no definition of it willbe found in the older books.” By generally accepted definition “it comprehends ‘every right to or interest in the land which may subsistin a third person to the diminution of the value of land, but consistent with the passing of the fee by the conveyance’...It is apparent, ofcourse, that the word is to be interpreted according to the context in which it is found” (p.439). (See also Evans v.

Evans (1853), 22 L.J.Ch. 785 (C.A.), at p.90.) [Emphasis added] [28] In paragraph 58 itself, Blair J.A. stated: “An encumbrance is an obligation that creates a right to or interest in the landsubsisting in a third person.” [29] As an example of something that is not an encumbrance, at para. 61 Blair J.A. referred to a Mareva injunction. While aMareva injunction freezes assets (including land) and prevents their sale or disposition pending the outcome of litigation, it is notsomething that creates a right to or an interest in land.

Rather, it is an instrument that provides a mechanism for protecting the personalrights of those who benefit from it. [30] By contrast, in my view, a writ of execution that has been filed with the Sheriff does create a right to or an interest in land. In my view, this is the clear effect of the provisions of the Execution Act, and indeed is recognized by the provisions of the MortgagesAct itself. [31] Section 9(1) of the Execution Act provides that land, including any interest of the execution debtor in lands held in jointtenancy, may be sold.

Sections 28(2) and (3) provide that the interest of a mortgagor, including the equity of redemption, may be sold. [32] The following provisions of the Execution Act have significance: 10.

(4) A sheriff to whom a writ of execution, a renewal of a writ of execution or a certificate of lien under the Bail Act is directed shall,upon receiving from or on behalf of the judgment creditor the required fee in accordance with the Administration of Justice Act andinstructions to do so, shall promptly take the following actions; 1. Enter the writ, renewal or certificate of lien, as the case may be in the electronic database maintained by the sheriff as the index ofwrits of execution. 2. Indicate in the electronic database that the writ, renewal or certificate of lien, as the case may be, affects real property governed bythe Land Titles Act.

(5) As part of maintaining the electronic database that is the index of writs of execution, the sheriff shall do the following: 1. Assign consecutive numbers in the electronic database to each writ and certificate of lien in the order in which the writs and

certificates of lien are entered into the database. 2. Note in the electronic database the effective date of each writ, renewal of a writ and certificates of lien. 3. Give access to the electronic database to the land registrar of each land titles division wholly or partially within the sheriff’s jurisdiction.

(6) Subject to

section 11 and the Land Titles Act , a writ of execution , a renewal of it or a certificate of lien under the Bail Act binds the land against which it is issued from the effective date of the writ, renewal or certificate noted in the electronic database maintained by the sheriff as the index of writs of execution.

(7) The date of receiving a writ, a renewal of it or a certificate of lien referred to in clause 136(1)(

d) of the Land Titles Act is deemed to be the effective date referred to in subsection (6). ***** 13.

Subject to the Courts of Justice Act and the rules of court, land and other hereditaments and real estate belonging to any person indebted are liable to and chargeable with all just debts, duties and demands of whatsoever nature or kind owing by any such person to Her Majesty or to any of her subjects and are assets for the satisfaction thereof and are subject to the like remedies, proceedings and process for seizing, selling or disposing of them towards the satisfaction of such debts, duties and demands, and in like manner as personal estate is seized, sold or disposed of. [Emphasis added] [ 33 ] In my view the effect of these provisions is clear: a writ of execution “binds the land” and land is “liable to and chargeable with” just debts, duties and demands and “are assets for the satisfaction thereof.” An execution creditor not only has a right to sell land, but the writ of execution itself “binds” the land, and the land is “chargeable” with the debt.

In my view, these provisions recognize the creation of an interest in the land itself as part of the enforcement mechanisms set out in the Act . [ 34 ] This concept is recognized in the Mortgages Act . Section 31(1) provides: 31.

(1) A mortgagee shall not exercise a power of sale unless a notice of exercising the power of sale in the Form to this Act has been given by the mortgagee to the following persons, other than the persons having an interest in the mortgaged property prior to that of the mortgagee and any other persons subject to whose rights the mortgagee proposes to sell the mortgaged property: 1. Where the mortgaged property is registered under the Land Titles Act , to every person appearing by the parcel register and by the index of executions to have an interest in the mortgaged property . 2.

Where the Registry Act applies to the mortgaged property, to every person appearing by the abstract index and by the index of writs received for execution by the sheriff for the area in which the mortgaged property is situated to have an interest in the mortgaged property. [Emphasis added] [ 35 ] By these provisions, the legislature has clearly recognized and understood that the holder of a writ of execution has “an interest in the mortgaged property.” In the final analysis, to apply the concept referred to by Blair J.A. at para. 58 of Outaouais , supra , a writ of execution filed with the Sheriff creates “a right to or interest in the land subsisting in a third person.” Thus, in my view, the Bank of Montreal, as the holder of a writ of execution against the joint owners of the property, is the holder of an encumbrance within the meaning of

section 27 of the Mortgages Act . Accordingly, that encumbrance must be discharged before there is any residue owing to the mortgagors. [ 36 ] The First City Trust case, relied on by Cindy, does not assist her. The issue in that case was whether a loan taken out by one spouse, without the consent of the other spouse, constituted an encumbrance on the matrimonial home. Borins J., as he then was, held that it was not.

At page 590, he stated: “It would seem that the simple act of borrowing money by way of unsecured transaction does not result in an encumbrance upon the borrower’s property, nor does it constitute the lender as an encumbrancer.” [ 37 ] It is clear that Borins J. was dealing only with a simple loan, and not with a writ of execution.

Indeed, in the words immediately following those I just quoted, at page 591, he stated: “ The transaction may , if the loan is not paid and the lender sues the borrower, obtains judgment against the borrower, is unable to collect the judgment, obtains a writ of seizure and sale in respect to the borrower’s property and registers the writ with the Sheriff, result in there being an encumbrance in the form of an execution against the borrower’s interest in a jointly owned matrimonial home .

But at the time the lender makes a loan an execution in respect of the borrower’s property is only a possibility which is five steps removed from the loan.” [Emphasis added] [ 38 ] In two cases drawn to my attention, the holders of writs of execution filed with the Sheriff, before a sale under power of sale took place, were considered to be encumbrancers. [ 39 ] In Central Guaranty Trust, supra , Loukidelis J. held that holders of writs of execution filed before the sale took place were entitled to share in the surplus, while holders of writs filed after the sale were not.

At para. 16, he referred to the right of subsequent encumbrancers to share in the surplus proceeds, and at para. 20, he stated, “it would seem on the relevant case law that the execution creditor, to participate in a rateable distribution of the surplus proceeds, must be the holder of an execution which bound the land at the time of the sale. All those who gain executions following the sale cannot participate. The former class had a claim to the equity of redemption and a right to redeem which was extinguished by the power of sale and, in exchange, received an interest in any sale of

proceeds surplus.” [ 40 ] That case was followed by Nordheimer J. in National Bank of Canada , supra . At para. 10, he stated: Executions filed prior to the sale attach to the land because the debtor/mortgagor still has an interest in the land. However, once the sale occurs the debtor/mortgagor no longer has any interest in the property and any subsequent execution cannot attach to that which the debtor does not own. What the debtor does have is an entitlement to the surplus after the requirements of

section 27 of the Mortgages Act have been met. As noted above,

section 27 requires that payment be made of the amounts due to the “subsequent encumbrancers”. Those subsequent encumbrancers included execution creditors whose executions were on file with the Sheriff up to the time of the sale but not those which arose later. [Emphasis added] [ 41 ] In my view, with respect, Nordheimer J. is clearly right, and his holding is dispositive of this case. The Bank of Montreal is a subsequent encumbrancer. Its execution was on file with the Sheriff before the time of the sale, and

section 27 of the Mortgages Act requires that payment be made of the amount due to it. The interest of the mortgagors in the residue only arises after the payment to the Bank of Montreal has been made. [ 42 ] That leaves for consideration the constitutional argument made by counsel for Cindy. I would not give effect to that argument. [ 43 ] First, I am not aware that any notice of the constitutional question was served pursuant to

section 109 of the Courts of Justice Act . Such a notice must be served where “the constitutional validity or constitutional applicability of

an act of the Parliament of Canada, or the Legislature...is in question”. Cindy argues that

section 27 of the Mortgages Act is inoperative to the extent that it conflicts with the Bankruptcy and Insolvency Act . By that argument, she is questioning the “constitutional applicability” of

section 27 of the Mortgages Act . Since notice under

section 109 of the Courts of Justice Act was not given, I cannot consider that argument. [ 44 ] In any event, I am not convinced that there is any conflict between

section 27 of the Mortgages Act and the provisions of the Bankruptcy and Insolvency Act . [ 45 ] Under the provisions of the Bankruptcy and Insolvency Act as they relate to consumer proposals, the property of the person who makes a consumer proposal does not vest in a trustee. Rather, the property remains in the hands of the debtor. [ 46 ] In a case such as this, where land is sold by a mortgagee pursuant to a power of sale, the mortgagors have no further interest in the property; rather, their only remaining interest is in the residue of the surplus that remains after a number of steps have been followed.

One of those steps is the payment of subsequent encumbrancers which, in this case, is only the Bank of Montreal. [ 47 ] For these reasons, each of Cindy and Richard is entitled to one half of the residue after payment of the amount required to satisfy the Bank of Montreal’s writ of execution. There is no conflict with the provisions of the Bankruptcy and Insolvency Act .

Disposition [ 48 ] For all of the foregoing reasons, I hold that each of Cindy and Richard is entitled to be paid the sum of $16,108.82. [ 49 ] I will entertain brief written submissions with respect to costs, not to exceed three pages together with a costs outline. Counsel for Richard shall have five days to file his submissions, and counsel for Cindy shall have five days to respond. Counsel for Richard shall have three days to reply. Gray J. Released: November 18, 2013 CITATION : TD Bank v. Phillips et al, 2013 ONSC 7016 COURT FILE NO.: 3774/13 DATE: 2013-11-18

ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: THE TORONTO-DOMINION BANK Applicant – and – CINDY LOUISE PHILLIPS and RICHARD JOSEPH PHILLIPS Respondents REASONS FOR JUDGMENT Gray J. Released: November 18, 2013