COURT OF APPEAL FOR ONTARIO

DATE: 20001214

DOCKET: C34020

CATZMAN, ABELLA and SHARPE JJ.A.

BETWEEN:

NATIONAL TRUST COMPANY

Allan D. Weiss

for the appellant

Plaintiff

(Appellant)

• and -

WILLIAM HENRY HODGSON, RUTH WINNIFRED HODGSON and

BRIAN DOUGLAS BATCHELAR

Charles K. Waite for the

respondents William Henry Hodgson

and Ruth Winnifred Hodgson

Defendants

(Respondents)

HEARD: November 3, 2000

On appeal from the judgment of the Honourable Mr. Justice Kruzick dated March 9, 2000.

ABELLA J.A. (Dissenting):

[1] The appellant National Trust Company seeks to set aside the order of Kruzick J. granting the motion by the respondents William Henry Hodgson and Ruth Winnifred Hodgson for an order that the proceeding be dismissed as against them.

[2] The central issue is whether there was novation in the contractual relationship between the parties, releasing the Hodgsons from the terms and obligations of their mortgage with National Trust. Kruzick J. found novation based on the unusual facts in this case.

[3] The argument was based on the following Agreed Facts:

1. The facts and documents set out in the Plaintiff's Request to Admit of March 18, 1998 are admitted to be true and the Defendants' (William Henry Hodgson and Ruth Winnifred Hodgson) Response to Request to Admit is withdrawn and the following supplementary facts are further agreed between the parties for the purposes of this proceeding only.

2. The Defendants had no knowledge that they applied for and executed the mortgage and supporting documents. They relied upon the fraudulent misrepresentation of Brian Batchelar that they were signing documents to sell to him their prior residence and to purchase and mortgage their new residence.

3. The Plaintiff processed the Defendant's mortgage as a "broker deal"; that is, without any knowledge of the representations made by Brian Batchelar or any other person. The Plaintiff and the Defendants had no direct contact at any material time.

4. The Plaintiff advanced the full amount of $150,000.00 to Brian Batchelar at the written direction of the Defendants. The Plaintiff believed at all material times that Brian Batchelar was the guarantor of the Defendants' mortgage debt.

5. The amount due and owing under the mortgage as of April 26, 1999 is $50,091.28 with interest at 7% per year.

Further Agreed Facts

1. On March 4, 1991, Brian Batchelar wrote to National advising it of the transfer of title of the subject property into his own name alone and that he would be paying the mortgage in future.

2. In or about May of 1991, Brian Batchelar renewed the mortgage for a period of one year with annual interest at 10.75% on a principal balance of $148,741.37 without any further participation from William Henry Hodgson or Ruth Winnifred Hodgson.

3. In or about September of 1992, Brian Batchelar again renewed the mortgage for a period of one year with annual interest at 7% on a principal balance of $146,680.96 without any further participation from William Henry Hodgson or Ruth Winnifred Hodgson.

4. National never received any written authorisation or other written notice that William Henry Hodgson and Ruth Winnifred Hodgson consented to the assumption renewal of the mortgage by Brian Batchelar.

5. National processed the Defendants' mortgage as a "broker deal"; that is, without any knowledge of the representations made by Brian Batchelar or any other person. National and William Henry Hodgson and Ruth Winnifred Hodgson had no direct contact at any material time. National's legal position is unaffected by any fraud which may be found to have occurred as between William Henry Hodgson or Ruth Winnifred Hodgson and Brian Batchelar.

[4] In the Agreed Facts before the trial judge, the parties acknowledged that the Hodgsons had been the victims of fraud. They were misled by Brian Douglas Batchelar, their former lawyer, and had no knowledge that they applied for and executed the mortgage and supporting documents. They relied upon the fraudulent misrepresentation of Batchelar that they were signing documents to sell to him their prior residence and to purchase and mortgage their new residence. Batchelar is now bankrupt and National Trust is seeking payment of the mortgage from the Hodgsons.

[5] Both parties concede that the trial judge correctly identified the test for novation. The issue in this appeal is whether the law was properly applied to the facts of this case. In my view, based on the unique facts of this case, it was.

[6] In National Trust Co. v. Mead, 1990 73 (SCC), [1990] 2 S.C.R. 410 Wilson J. held that "novation is a question of fact". While the threshold is a high one, it will depend on the facts of each case. She set out the test as follows at p. 427 and pp. 431 and 432:

… in the absence of express agreement, the court should be loath to find novation unless the circumstances are really compelling. Thus, while the court may look at the surrounding circumstances, including the conduct of the parties, in order to determine whether a novation has occurred, the burden of establishing novation is not easily met. The courts have established a three-part test for determining if novation has occurred. It is set out in Polson v. Wulffsohn (1890), 2 B.C.R. 39, as follows:

1. The new debtor must assume the complete liability;

2. The creditor must accept the new debtor as principal debtor and not merely as an agent or guarantor; and

3. The creditor must accept the new contract in full satisfaction and substitution for the old contract.

…The significance attached by some courts to changes in the mortgage terms has given rise to the suggestion that a fourth requirement should be added, namely the consent of the original debtor….

In my view, if Lambert J.A. meant to suggest … that the consent of the original debtor is required for a novation in cases where there have been significant changes in the original mortgage terms, I think he must be in error. It seems to me that if the original mortgagor consents to the mortgage being assumed by his assignee on different terms, this would indicate rather that he considers himself to continue to be bound despite the assignment. Consent to changed terms, in other words, does not indicate novation but rather continuing liability. On the other hand, when changes in the terms have been effected without the knowledge or consent of the original mortgagor, that will be a strong indication in favour of novation.

[7] The trial judge found that the first part of the test was satisfied and that the new debtor, Brian Douglas Batchelar had assumed complete liability. This assumption was reflected in his letter of March 4, 1991, advising National Trust that he had assumed the mortgage and would be responsible for all future payments.

[8] The trial judge also found that National Trust accepted Batchelar as the principal debtor and not merely as an agent or guarantor. In his view, National Trust accepted the new contract in full satisfaction and substitution for the old contract, satisfying the second and third requirements of the test based on the following facts:

• After receiving Batchelar's letter of March 4, 1991, National Trust could have sought the consent of the Hodgsons to the new arrangement, but did not. National Trust was not forced to accept the new arrangement and therefore was not an unwilling creditor. Although there is no express agreement to relieve the Hodgsons of liability, National Trust conducted itself as if the Hodgsons were no longer debtors.

• The March 4, 1991 letter from Batchelar enclosed a cheque in the amount of $50.00 as payment of "your assumption fee with respect to this transaction". The trial judge found that the $50.00 amount was National Trust's fee to effect an assumption of a mortgage. National Trust therefore appeared to accept Batchelar as the new mortgagor.

• The mortgage was renewed twice after Batchelar's letter of March 4, 1991 without any notice to, consent, or input from the Hodgsons. National Trust dealt only with Batchelar, appearing to accept him as the principal debtor. This inference is supported by the fact that in the mortgage renewal prior to Batchelar's letter of March 4, 1991, the Hodgsons are identified as the Mortgagors/Registered Owners, and Batchelar as Guarantor. In the two renewals of the mortgage after Batchelar's letter to National Trust, only Batchelar is identified as the Mortgagor/Registered Owner in the documents and no one is referred to as Guarantor.

• Kruzick J. held that the two renewals effected by National Trust and Batchelar involved substantial changes to the terms of the mortgage without the Hodgsons' consent. The two "Mortgage Renewal Agreements" lowered the interest rates and monthly payments. In Mead, Wilson J. said "…significant changes in the terms of a mortgage effected without the consent of the original mortgagor constitute very strong evidence of novation…this is a strong indication that the creditor is no longer looking to the mortgagor for payment." This applies regardless of whether the terms changed are beneficial to the mortgagor. In Canada Permanent Trust Co. v. Neumann (1986), 1986 821 (BC CA), 8 B.C.L.R. (2d) 318 (B.C.C.A.), cited by Wilson J. with approval, novation was found because the mortgage had been altered in several respects, including a lowering of the interest rate and monthly instalments, as in the case before us.

[9] The appellant submitted that the "no prejudice" clauses in the mortgage should be given effect so that the Hodgsons would still be liable to National Trust. Relying on Wilson J.'s language in Mead, the trial judge found that the "no prejudice" clauses should not be enforced because of National Trust's later actions. National Trust and Batchelar conducted themselves in a manner consistent with novation, causing Kruzick J. to hold that the "no prejudice" clauses should not be enforced.

[10] I agree with Kruzick J. that National Trust was a willing creditor to Batchelar. It acted as if Batchelar were the principal debtor and as if there were a new mortgage. The Hodgsons' debt was discharged in return for Batchelar's promise to perform the mortgage obligations.

[11] I would dismiss the appeal with costs.

Signed: “R.S. Abella J.A.”

CATZMAN and SHARPE JJ.A.:

[12] We agree with paragraphs 1 to 4 and 6 of the endorsement of Abella J.A. where our colleague sets out the essential facts and the applicable legal principles. However, for the following reasons, we respectfully disagree with Abella J.A. and with the trial judge that the test for novation was met in the circumstances of this case.

[13] We note that the parties explicitly stipulated that the Appellant’s legal position “is unaffected by any fraud” which may be found to have occurred as between the Hodgsons and Batchelar.

[14] Although there was no formal assumption agreement, it would seem that the Appellant did agree to Batchelar assuming the mortgage. Batchelar’s letter to the Appellant, dated March 4, 1991, indicated that he was assuming the mortgage and the Appellant acted on that representation. However, it is common ground, that there is a clear distinction between an assumption agreement and a novation, and that without more, the Appellant’s agreement to Batchelar assuming the mortgage does not relieve the Hodgsons of liability.

[15] The Hodgsons argue that as they did not know they had signed the mortgage in the first place, they could not have known that Batchelar had assumed the mortgage or renewed it. They say that in these circumstances, by dealing with Batchelar without notifying them, the Appellant's conduct falls within the principle enunciated by Wilson J in the National Trust case, namely, that changes in the terms were effected without their knowledge or consent, thereby providing “strong indication in favour of novation”.

[16] In our view, this argument cannot be accepted in light of the “no prejudice” clause in the mortgage and in light of the Hodgsons’ agreement that Batechelor’s fraud would not affect the legal position of the Appellant.

[17] The “no prejudice” clause provides:

No extension of time given by the Chargee to the Chargor, or anyone claiming under him, or any other dealing by the Chargee with the owner of the equity of redemption of the Land including the increase of the interest rate payable under the Charge shall in any way affect or prejudice the rights of the Chargor against the Chargee or any other person liable for the payment of the moneys hereby secured, and the Charge may be renewed by an agreement in writing at any time, either before or after maturity for any term with or without an increased rate of interest notwithstanding that there may be subsequent encumbrancers…

[18] It is clear on the authorities that the language of the “no prejudice” clause preserves the rights of the mortgagee against the mortgagor where the mortgagee deals with the owner of the equity of redemption and renews the term of the mortgage at a different interest rate: Cabot Trust Co. v. D’Agostino (1992), 1992 7507 (ON SC), 11 O.R. (3d) 144 (Gen. Div.); Financeamerica Realty Ltd. v. Holloway et al. (1985), 1985 2164 (ON SC), 53 O.R. (2d) 3 (H.C.J.); Malaviya et al. v. Lankin et al. (1985), 1985 2017 (ON CA), 53 O.R. (2d) 1 (C.A.).

[19] In light of the no prejudice clause and the Hodgsons’ concession that the Appellant’s legal rights are not to be affected by reason of Batchelar’s fraud, the Appellant cannot be faulted for failing to notify the Hodgsons of Batchelar’s assumption of the mortgage. Batchelar was retained to act on the transaction by the Hodgsons’ and the Appellant had no reason to question the apparent sale to Batchelar. Once the element of the fraud on the part of Batchelar is removed, as it must be in accordance with the agreed statement of facts, we are left with a situation that, from the Appellant’s point of view, appeared to be a normal mortgage transaction with a subsequent sale and assumption of the mortgage by the purchaser of the property. That situation is covered by the standard terms of the “no prejudice” clause, as is the renewal of the mortgage at a lower interest rate.

[20] While one cannot help but have sympathy for the plight of the Hodgsons, it is difficult to see any basis for relieving them of that plight at the expense of the Appellant. As between the Hodgsons and the Appellant, the Hodgsons were the authors of their own misfortune. It was the Hodgsons who were apparently duped by Batchelar. They signed the documents that allowed Batchelar to put his scheme into operation. In light of the explicit terms of the mortgage they signed and the agreed statement of facts, it is difficult to see why, as between the Hodgsons and the Appellant, the Appellant should bear the brunt of Batchelar’s fraudulent activities.

[21] For these reasons, we would allow the appeal, set aside the order of Kruzick J., and, in its place, substitute judgment in favour of the Appellant for the balance due and owing under the mortgage, with costs both here and below, to be assessed. This disposition is without prejudice to the right of the Hodgsons to pursue their crossclaim against Batchelar, if so advised.

RELEASED: DEC 14 2000 Signed: “M.A. Catzman J.A.”

“Robert J. Sharpe J.A.”