Manufacturers Life Insurance Company v. Granada Investments Limited, 2001 ONCA 2708

DATE: 20011010 DOCKET: C31739

COURT OF APPEAL FOR ONTARIO

OSBORNE A.C.J.O., LABROSSE and DOHERTY JJ.A.

B E T W E E N :

MANUFACTURERS LIFE INSURANCE

COMPANY and KPMG INC.

Plaintiffs

J.B. Casey and J. Wigley

(Appellants)

for the appellants

• and -

Michael Rice

Chief Financial Officer

GRANADA INVESTMENTS LIMITED,

of Granada Investments

JOSEPH SHAW and BARBARA ALLAN

Limited

SHAW

Joseph Shaw

Defendants

in person

(Respondents)

Heard: October 20, 2000

On appeal from the judgment of Justice John D. Ground dated February 16, 1999 [1999] O.J. No. 491.

OSBORNE A.C.J.O.:

OVERVIEW

[1] The appellant mortgagee, Manufacturers Life Insurance Company (“Manulife”), held two mortgages over lands owned by the respondent mortgagor, Granada Investments Limited (“Granada”). After a 12-day trial, Ground J. held that Manulife, whose mortgages had matured, could only recover from Granada and the guarantor, Joseph Shaw, the amount of the mortgage debt as of October 31, 1996, not as of October 1, 1997 when the lands secured by Manulife’s mortgages were sold by way of auction under the power of sale rights contained in Manulife’s mortgages. The basis of the trial judge’s finding in effect freezing the mortgage account at October 31, 1996 was his conclusion that from March, 1996 Manulife was subject to a duty to mitigate its losses. The trial judge held that Manulife did not discharge that duty because it could and should have sold the property secured by the mortgages between March and October, 1996.

[2] Manulife appeals. Its appeal requires the court to consider when Manulife went into possession and the duty of a mortgagee in or out of possession to mitigate its losses.

[3] These issues arise against the background of two mortgages on golf course properties from the mortgagor, Granada, to the mortgagee, Manulife. Joseph Shaw, the president of Granada, guaranteed the mortgages. Granada leased the two golf courses to Aurora Highlands Golf Club (“Aurora Highlands”). Payments under the Aurora Highlands lease constituted Granada’s only revenue. For the purposes of this action, it was accepted that the mortgages matured on January 1, 1995 and that Granada did not pay the loans secured by the mortgages.

[4] Manulife, through its receiver KPMG, operated the two golf courses from August 31, 1996 until October, 1997 when the golf courses were sold at auction. The trial judge found that although Manulife’s receiver, KPMG (not a party to this appeal), properly managed the two golf course properties, Manulife was nonetheless required to sell the golf courses when the mortgage account, including the receiver’s costs, was equal to or lower than the assumed value of the properties secured by the mortgages. In reaching that conclusion, the trial judge held that Manulife “did not act reasonably in taking no steps to attempt to sell the properties during the period from March, 1996 to October, 1996”. He viewed Manulife’s decision to sell later to be unreasonable, with the result that he found that Manulife failed to mitigate its losses.

[5] Manulife contends that the trial judge erred in the following respects:

• By finding that Manulife should have offered the golf courses for sale when it was not in possession.

• By imposing a duty on Manulife as a mortgagee-in-possession, based on its duty to mitigate its losses, to sell the properties secured by its two matured mortgages by the date when the mortgage debt was less the value of the properties secured by the mortgages.

• By imposing a duty on Manulife to expose the golf courses for sale and sell them by October 31, 1996, within two months of the date when Manulife contends it was first in possession of the golf courses.

[6] Granada and Shaw submit that the trial judge was correct in concluding that Manulife was required to mitigate its losses from the time it took possession in March, 1996. They rely on findings of fact made by the trial judge on the general issue of the reasonableness of Manulife’s conduct as mortgagee. Granada accepts that it sought further opportunities to redeem the mortgage properties. However, Granada contends that litigation and other steps it took to prevent the sale of the properties are of no significance because those steps were for the most part undertaken after the time frame during which the trial judge held that the mortgagee, acting reasonably, should have sold the two golf course properties.

THE EVIDENCE

[7] Although there is some dispute in the evidence, the central features of the evidence are not in dispute.

[8] Granada owned two golf courses in Aurora, Ontario, one on the east side and the other on the west side of Bathurst Street. The golf courses were referred to in the evidence as the East Course and the West Course. Both of the golf courses were leased to Aurora Highlands. To obtain financing, Granada mortgaged both courses to Manulife in two separate mortgages, a first mortgage for $2 million on the West Course and a second mortgage also for $2 million on the East Course. When the West Course mortgage was granted, a house owned by Granada but occupied by the respondents, Joseph Shaw and Barbara Allan Shaw, formed part of the West Course. After a severance, Granada transferred the Shaw residence lands to Joseph Shaw, who gave Granada a mortgage back for $600,000.

[9] When the two golf course mortgages matured in January, 1995, Manulife demanded payment of both loans. When payment was not forthcoming, Manulife gave notice of the exercise of its power of sale rights over the East and West Courses, including the Shaw residence. This notice was dated August 9, 1995.

[10] Various discussions and negotiations then took place, primarily concerning Granada’s efforts to refinance the golf courses. These negotiations resulted in a formal standstill agreement dated October 11, 1995. This agreement was in force until January 1, 1996.

[11] Since Granada was unsuccessful in its attempts to secure financing, on March 13, 1996, shortly after the standstill agreement expired, Manulife appointed KPMG as receiver of Granada under the East and West Course mortgages. On April 8, 1996, KPMG gave notice to the tenant, Aurora Highlands, of the termination of the lease of the golf course properties for non-payment of rent. On the same day KPMG employees attended at the golf course properties, intending to take possession and control of them. However, as a KPMG representative put it, they were “kicked out”. That is to say, KPMG and Manulife were not able to secure possession of the two golf courses at that time.

[12] To further complicate matters, in addition to resisting KPMG’s attempt to take possession, on April 18, 1996, Aurora Highlands commenced an action against Manulife and KPMG in which it sought declarations that its lease with Granada was valid, enforceable, binding and in good standing and that KPMG’s notice of termination of the East and West Course leases was invalid and of no force and effect. Aurora Highlands also sought damages of $5,000,000. On the same date, April 18, 1996, Granada sued Manulife and KPMG for damages in the amount of $15,000,000. Granada also sought declarations that:

• Since the notice of intention to enforce the security had lapsed and was of no force and effect, Manulife and KPMG were estopped from commencing or continuing any enforcement proceedings;

• KPMG’s receivership of Granada was of no force and effect; and

• Manulife’s notice of sale under the mortgages dated August 9, 1995 was invalid, void and of no force and effect.

[13] In the two actions, both commenced on April 18, 1996, Aurora Highlands and Granada were represented by the same solicitors. Manifestly, the Granada/Shaw strategy was to prevent, or at the very least delay, the sale of the two golf course properties so that Granada could obtain refinancing and redeem them. Indeed, Joseph Shaw admitted that he never wanted Manulife to sell the two golf courses.

[14] On May 28, 1996, Manulife commenced proceedings to confirm KPMG’s appointment as Granada’s receiver. It also sought an order permitting it to go into possession of the golf courses, including the Shaw residence. On June 20, 1996, Manulife applied for a court appointed interim receiver of Aurora Highlands.

[15] While all of this was going on, to assist it in obtaining refinancing, Granada asked Gene Dwelsdorf to prepare an appraisal of the golf course properties. Dwelsdorf’s appraisal, dated June 24, 1996, showed a value for both golf courses of $10,400,000. The trial judge did not accept Mr. Dwelsdorf’s opinion of value. However, Manulife, which was advised of this appraisal during the summer of 1996, knew at that time that the value of the two golf courses from Granada’s standpoint was more than $10,000,000.

[16] The various proceedings by Granada, Aurora Highlands and Manulife were in the Commercial List in Toronto where matters are subjected to vigorous case management, which includes establishing reasonable timelines. Consistent with the agreement of the parties, a timetable for the filing of any further affidavits and cross-examinations on these affidavits was established. There was also agreement on the terms under which KPMG would monitor the operations of Granada until the proceedings could be heard. Consistent with the timetable established, cross-examinations on affidavits were heard in early July, 1996 and August 1, 1996 was fixed as the return date for Manulife’s application.

[17] KPMG reported to Manulife on July 26, 1996 respecting its monitoring of Granada’s operations. KPMG’s report outlined a number of cases of petty fraud and accounting irregularities.

[18] On August 1, 1996, Farley J. issued two orders. Farley J.’s orders provided that:

• KPMG’s appointment as Granada’s receiver was confirmed.

• KPMG was appointed as court appointed interim receiver of Aurora Highlands for 30 days to allow Granada additional time to arrange refinancing and redeem. The order provided that KPMG was to monitor Aurora Highlands’ operations and that Manulife and KPMG were not in possession of the properties.

[19] Also on August 1, 1996, the parties, through their solicitors, signed a consent to a draft order which was attached to the consent. The consent has to be read with the August 1, 1996 orders of Farley J. In summary form, the parties’ deal gave Granada 30 more days to redeem and KPMG, as Aurora Highlands’ court appointed interim receiver, the right to monitor Aurora Highlands’ operations. If Granada did not redeem, the consent provided that an order would issue declaring that Aurora Highlands’ lease was terminated and granting Manulife and KPMG possession of the two golf courses, except for the Shaw residence West Course lands.

[20] As it turned out, Granada did not redeem the properties because it could not obtain financing. Thus, on August 30, 1996, consistent with the consent to which I have referred, Spence J. ordered that the Aurora Highlands lease be terminated and that possession of the East and West Courses be surrendered to KPMG. He further ordered that the court appointed receivership of Aurora Highlands be terminated and that there be the trial of the issue of Manulife’s right to a writ of possession regarding the Shaw residence lands. Consistent with Spence J.’s August 30, 1996 order, Aurora Highlands gave up possession of the golf course properties. The August 1, 1996 orders of Farley J., the parties August 1, 1996 consent and the August 30, 1996 order of Spence J., in my view, provide considerable support for Manulife’s submission that it was not in actual or constructive possession of the two golf courses until August 30, 1996.

[21] KPMG and Manulife discussed the pros and cons of an immediate sale, among many other things, in considerable detail. After Manulife went into possession on August 30, 1996, its general understanding was that there was no longer a golf club actually operating on the mortgaged properties, that there were many maintenance issues outstanding and that there was a need to evaluate the condition of the two golf courses to ensure that the highest value would be obtained on a sale. To that end, KPMG had to assemble more accurate financial information.

[22] As is apparent from the evidence of Simon Kinnaird, Manulife specifically inquired if selling the properties immediately (that is, some time in the fall or winter of 1996) was a sensible option. The answer to that inquiry from KPMG and its golf experts was that an immediate sale was not a viable option since a sale in that time frame would not be commercially reasonable having regard to the interests of Manulife, Granada and subsequent mortgagees. Mr. Kinnaird testified that, after receiving advice from KPMG, it was Manulife’s intention to sell the golf courses in the spring of 1997. Manulife rejected the strategy of a long term hold unless it did not receive adequate offers to purchase the golf courses. In the fall of 1996, Manulife decided to ready the golf courses for sale and to sell them in March, 1997. In early January, 1997, Manulife obtained an appraisal and retained C.B. Commercial Realtors to list the golf course properties for sale in the spring of 1997.

[23] After August 30, 1996, Manulife had to make arrangements to obtain inventory since much of the existing inventory had been seized by Revenue Canada. Since there was no liquor licence, an application for a licence had to be made. New employees had to be installed in key positions, including a golf professional, a general manager, a food and beverage manager and employees who could provide accounting and administrative support. Furthermore, Manulife had to make arrangements for golf course maintenance and golf carts since Aurora Highlands’ golf carts had been repossessed. In the fall of 1996, Manulife and KPMG were labouring under the difficulty of having no current or reliable financial information. No financial statements were completed for 1996.

[24] Steven Johnston, KPMG’s lead partner responsible for its golf industry national practice group, provided specific advice to Manulife about the operation of the two golf courses and an opinion as to their market value. He concluded that the market value of the two courses was $6.5 to $7 million. Johnston worked in tandem with another KPMG partner, John Walker, who was part of KPMG’s financial advisory services group. Walker oversaw the receivership, while Johnston was responsible for the implementation of KPMG’s (and Manulife’s) strategic approach to the sale of the golf courses.

[25] All concerned, including Granada, accepted that the properties should be sold as golf courses. Johnston stated that golf course properties are generally valued, and thus bought and sold, on the basis of the cash flow before debt service and capital maintenance. According to Johnston’s evidence, the cash flow multiple used is typically 6 to 10. Assuming a cash flow of $700,000 and using a multiple of 8 would yield a value of $5,600,000 for the two golf courses.

[26] In a letter dated October 22, 1996, Johnston provided Manulife with his suggestion for a strategic plan for the operation of the golf courses under the new name “Aurora Golf and Country Club”. The plan was to market the two golf courses in the spring of 1997 as operating entities.

[27] Johnston recommended a short term strategy for the 1996-97 golf season. He opined that an “as is” sale would result in a value of about $5,600,000. He concluded that the better approach was to ready the two golf courses for the 1997 golf season and to operate them until March 1, 1997, at which time a decision could be made as to whether the properties should be held on a longer term basis or whether they could be made available for an immediate sale shortly before the commencement of the 1997 Ontario golf season.

[28] Johnston testified that in the fall of 1996, in light of the uncertainties respecting revenue, serious problems with respect to irrigation, the design of the West Course and the absence of real business records, the value of the golf courses could be below $5,600,000, and possibly as low as $4,000,000 if the golf courses were sold on an “as is” or fire sale basis. Johnston recognized that in the fall, when the golf season is coming to an end or has ended, there are considerable expenses and little revenue being generated. He thus concluded that it would be unwise to attempt to package the golf courses for sale during the winter of 1996-97.

[29] KPMG advised Manulife that the golf courses could not be sold in the fall of 1996 except on a distress sale basis. Thus, Manulife and KPMG opted not to sell in the fall of 1996. Johnston testified that existing problems with the golf courses had to be resolved to arrive at a point where a purchaser would consider a cash flow multiple of 10, which would yield a value of $6.5 to $7 million on a non-distress, full disclosure basis.

[30] The trial of the issue whether the Shaw residence was part of the property secured by the Manulife West Course mortgage was adjourned. Following that adjournment, on February 14, 1997, Manulife moved ex parte for an order that it could sell the golf course properties other than the Shaw residence lands without further notice of sale. Cameron J. granted that order on February 14, 1997.

[31] When Granada and Joseph Shaw learned about Cameron J.’s February 14, 1997 ex parte order, they immediately applied to set the order aside. They also applied for an order requiring Manulife to serve proper notices of sale under the Mortgages Act and a declaration that Granada was entitled to an opportunity to redeem without any interference from Manulife or KPMG for 30 days after an accounting to determine the proper mortgage account. Finally, Granada and Shaw applied for an order to remove KPMG as receiver and manager. These applications were dismissed by Cameron J. on April 28 and May 5, 1997, without prejudice to Granada’s and Shaw’s right to recover damages from Manulife. In the May 5, 1997 order, Cameron J. granted Manulife leave pursuant to s. 39 of the Mortgages Act to exercise its power of sale rights without further notice of power of sale, but subject to the right of Granada and Joseph Shaw to redeem the golf course properties by no later than 4:00 p.m. on May 30, 1997. Granada did not redeem by May 30, 1997.

[32] Granada and Joseph Shaw appealed the orders of Cameron J. to this court. The appeals were dismissed on October 27, 1997.

[33] In attempting to establish a reasonable value for the two golf course properties, KPMG considered purchases and sales of 15 golf courses, most of which were in southern Ontario. On May 13, 1997, when Joseph Shaw learned that the Arnold Palmer Golf Management Company (“Palmer”) had expressed an interest in buying the golf courses, he wrote to Palmer advising that Granada was the owner of the lands and personal property being offered for sale. He went on to say:

… Manulife is exercising its power of sale over the lands without having delivered a valid notice of sale pursuant to the Mortgages Act … . Manulife is doing this pursuant to a judgment of the Ontario Court of Justice (General Division), and specifically of the honourable Mr. Justice Cameron, dated May 5, 1997.

You are hereby put on notice that the above-mentioned judgment is under appeal to the Ontario Court of Appeal. In that appeal, the Ontario Court of Appeal is being asked to set aside the judgment and make an order requiring Manulife to serve a proper, complete and accurate notice of sale under the Mortgage with respect to the lands being offered for sale … . The result of that appeal may affect your rights with regard to Granada’s assets… .

[34] Notwithstanding Joseph Shaw’s letter, on June 6, 1997, Palmer wrote to KPMG expressing interest, but advising KPMG that “a number of hurdles” had to be removed before the golf courses were “truly salable”. Palmer’s letter went on to advise that it would offer $5.75 million subject to a due diligence review concerning a required severance, the resolution of the East Course clubhouse problems, the construction of a bridge under Bathurst Street to service both the East and West Courses, the availability of the continued pumping of water from the East Course to the West Course by way of a conduit under Bathurst Street or the construction of additional wells or ponds on the West Course and adequate title to the land and assets to be conveyed in the proposed transaction. Palmer’s letter stipulated that the contract would be terminated if the identified issues, and other issues thought to be of significance, were not resolved. In the alternative to the due diligence review referred to in general terms above, Palmer advised that it was prepared to offer $4 million “… for an “As Is” deal…”.

[35] At no time did Granada or Joseph Shaw ask that the golf courses be sold. Joseph Shaw acknowledged in his cross-examination that he remained hopeful that he could arrange refinancing. He was concerned about KPMG’s management of the property and he asked Manulife if he could take over the management of the golf courses from KPMG. Manulife refused. Clearly, Joseph Shaw and Granada were trying to delay the sale of the golf courses in the hope that refinancing could be obtained.

[36] In June, 1997, Granada’s appeal from Cameron J.’s April 28 and May 5, 1997 orders meant that Manulife’s right to sell the mortgaged properties under the power of sale rights contained in the two Manulife mortgages was still in issue. Thus, as a precautionary measure, Manulife served new notices of power of sale dated June 27, 1997. Granada and Joseph Shaw responded by moving for an injunction to postpone the sale of the golf course properties until this Court dealt with Granada’s appeals from Cameron J.’s orders.

[37] On September 29, 1997, Blair J. dismissed Granada’s motion for an injunction to postpone the sale of the golf course properties.

[38] In October, 1997, Granada and Shaw lobbed a final grenade in the path of the sale of the East and West Courses. Before the auction at which the two golf course properties were to be offered for sale, Shaw, as president of Granada and personally, caused a notice to be distributed to potential purchasers. The notice was similar to Granada’s May, 1997 letter to Palmer. The notice concluded by stating that “[t]he outcome of these events [the appeals from Cameron J.’s two orders and a motion to stay the September 29, 1997 order of Blair J.] may effect [sic] the validity of the auction or any sale, and any claims you may have as a purchaser.” The obvious purpose of this notice was to delay the sale of the golf course properties.

[39] The East and West Courses, excluding the Shaw residence lands, were sold at auction in October, 1997 for $6,950,000. The transaction closed on November 18, 1997. There was a considerable shortfall on the mortgages following the sale of the golf club properties, which Manulife sought to recover from Granada and Joseph Shaw in this action.

[40] When Shaw was asked what he would have done had the golf courses been sold in 1996, he said that “[i]t’s quite possible” that he would have done what he did in 1997 with respect to warning potential purchasers of the lawsuits that they might be buying if they were to complete a purchase of the golf course properties.

[41] Before concluding my review of the relevant background evidence, I should make brief reference to the positions asserted by Granada and Joseph Shaw in their statement of defence in this action. In so far as possession is concerned, in paragraphs 68 and 69 of their statement of defence, Granada and Shaw alleged that Manulife and KPMG were given possession of the golf course properties on August 30, 1996, not in March, 1996 as Granada and Shaw alleged at trial and on this appeal. The statement of defence also alleges that March, 1997 was “not an opportune or commercially reasonable time to sell the Golf Course Property…”. It does not allege that Manulife sold the golf course properties too late. Quite the contrary, to the extent that the timing of the sale is dealt with, the October, 1997 sale was referred to as “quick”, meaning that it was undertaken too soon. The statement of defence alleged that a “quick sale” was effected to hide the mismanagement of KPMG and to take advantage of the fact that Granada at the time did not have counsel.

[42] In summary, the strategy of Granada and Joseph Shaw throughout was to frustrate and thus delay the sale of the golf courses. That strategy continued to be employed even after the golf courses were listed for sale in early 1997. Joseph Shaw admitted that when he learned that the golf courses were actually for sale, he started an action to prevent the sale. He said “I never wanted Manulife to sell”.

THE TRIAL JUDGE’S FINDINGS

[43] The trial judge’s central finding is that Manulife could and should have exposed the golf courses for sale and sold them between March, 1996 and October, 1996. As a result of this finding, the trial judge in effect froze the mortgage account at $5,726,911, the account balance as at October 31, 1996. It is not clear to me why the trial judge picked October 31, 1996 as the date by which Manulife ought to have sold the two golf course properties for the purposes of establishing the shortfall owed to Manulife by Granada and the guarantor, Joseph Shaw. It appears likely that the trial judge decided that October 31, 1996 was the date when the mortgage account, including all costs of possession, was below the value of the property secured by the two mortgages.

[44] What drove the trial judge to his finding as to when the golf course properties should have been exposed to the market and sold was his acceptance of Granada’s submission that from March, 1996 onward, when Manulife appointed KPMG as Granada’s receiver, Manulife was under a duty to mitigate its losses.

[45] The trial judge concluded that KPMG’s operation of the two golf courses as receiver was not imprudent or negligent. He also accepted that steps taken by KPMG and Manulife during the management of the two golf courses did not have “a negative impact” on the value of the two golf courses. Finally, the trial judge quoted Granada and Shaw that the October 1997 sale of the two golf courses to Club Link was not improvident.

[46] The trial judge recognized that Manulife was faced with problems which would have made a sale of the two golf courses more difficult in the March to October, 1996 period. However, he concluded that:

• The lease of the golf course properties to Aurora Highlands was in default from March, 1996 and could have been terminated by Manulife, as mortgagee in possession, any time after March, 1996.

• The litigation commenced by Granada and Joseph Shaw did not constitute “an absolute bar” to the sale of the golf course properties during the spring, summer and fall of 1996.

• The golf course properties could have been sold without resolving the dispute with respect to the Shaw residence lands.

[47] The trial judge concluded that the insufficiency of reliable financial information, the absence of any 1996 financial statements and the various problems regarding the condition of the golf courses could have been addressed at the due diligence stage of a transaction and, if necessary, accounted for “in negotiating terms of sale”. According to the trial judge, the fact that neither Granada nor Joseph Shaw requested that the properties be sold, and indeed resisted the sale of the properties, could not “… have prohibited the plaintiffs from proceeding with a sale of the properties.”

[48] It is against that background that the trial judge concluded that a sale of the golf courses was possible in the March to October, 1996 period and that if a sale were concluded, it probably would have been for a purchase price equal to or minimally less than the total mortgage debt. He put it this way:

… a sale of the golf club properties was possible in the period from March , 1996 onwards and … a sale of the properties, at least during the period between March 1996 and October 1996, would probably have resulted in payment in full of the mortgage debt, the realty taxes and the cost of sale or would have resulted in only a minimum shortfall.

[49] The trial judge dealt with Manulife’s duty to mitigate in these terms:

… I must conclude that the plaintiffs did not act reasonably in taking no steps to attempt to sell the properties during the period from March, 1996 to October, 1996 and were in breach of their duty to mitigate their losses and their duty to the mortgagor and guarantor to mitigate their exposure and liability for the mortgage debt. [Emphasis added.]

[50] In reaching his conclusion on the general issue of mitigation, the trial judge, after referring to Saunders J.’s judgment in Oak Orchard Developments Ltd. v. Iseman, [1987] O.J. No. 361 (Ont. H.C.J.), aff’d, [1989] O.J. No. 2394 (C.A.), recognized that a mortgagee can exercise its power of sale “whenever he chooses to do so.” However, the trial judge did not view Oak Orchard as authority permitting a mortgagee in possession to choose a date for sale “… without regard to the interests of the mortgagor or of a guarantor of the mortgage and the risk of increasing the exposure of the mortgagor or guarantor on the mortgage.” The trial judge’s reasoning assumes that Manulife was in possession from March, 1996 onward.

[51] The trial judge found support for his conclusions on the duty of a mortgagee in possession to mitigate its loss in the judgment of Cusinato J. in Canada Trustco Mortgage Co. v. Windsor Painting Contractors Ltd. (1991), 22 R.P.R. (2d) 222 (Ont. Gen. Div.). He specifically adopted Cusinato J.’s statement in Canada Trustco regarding a mortgagee’s duty to mitigate. At p. 239, Cusinato J. stated:

On the issue of mitigation, this principle is well settled in the law, where you have a right to claim whether in tort or contract, you owe a duty to your neighbour to minimize your loss. Where, through its failure to act quickly and providently, the mortgagee depletes the mortgagor’s security and the guarantor is exposed to a claim, then it cannot be said that the mortgagee mitigated against its total loss.

[52] It is not entirely clear to me what the trial judge found with respect to the timing of Manulife’s possession of the two golf course properties secured by its mortgages. In his review of the history of the mortgages on the East and West Courses, the trial judge stated that Manulife, through KPMG, took possession of the two golf courses on August 31, 1996. He said:

On August 31, 1996, KPMG took over possession of the East Course and the West Course and commenced to operate the golf club operations on both properties under the name of Aurora Golf and Country Club. KPMG operated the golf clubs until the sale of the properties. [Emphasis added.]

[53] However, later in his reasons, the trial judge seems to have concluded that Manulife was in possession in March, 1996, once it appointed KPMG as Granada’s receiver under the mortgages, or that Manulife could have gone into possession at any time in the March to August, 1996 period.

[54] For the reasons that follow, although I accept Cusinato J.’s statements in Canada Trustco as to the general duties of a mortgagee in possession, I do not accept that a mortgagee is under a duty to mitigate its loss, as that term is understood in the context of contract and tort damage claims. Furthermore, in my view, the trial judge erred in concluding that Manulife was in possession before August 31, 1996, or in concluding that, although Manulife was not in possession until August 31, 1996, for purposes of imposing a duty to mitigate, it could have gone into possession any time after March, 1996 when it appointed KPMG as Granada’s receiver.

ANALYSIS

1. The Date of Manulife’s Possession

[55] I will deal first with the issue of the date of Manulife’s possession and then with the issue of Manulife’s duty as a mortgagee in possession.

[56] A mortgagee enters into possession when it deprives the mortgagor of control and management of the mortgaged property. See Rayner and McLaren, Falconbridge on Mortgages, 4th ed. (1997), at p. 643. The right of a mortgagee to possession arises when the mortgagor defaults. However, there is no obligation on the mortgagee to take possession at the time of default, or at all. See Bennett on Power of Sale, 1997 ed. (1996), at p. 51.

[57] From March through August 1, 1996, Granada and Aurora Highlands resisted possession directly when Aurora Highlands refused to permit KPMG employees to enter into possession and when Granada and Aurora Highlands commenced the litigation to which I referred earlier. In that litigation, Granada and Aurora Highlands took the position that Manulife was not entitled to possession of Aurora Highlands. They contended that the lease from Granada to Aurora Highlands was not in default and that Manulife’s notice of termination of the lease was invalid.

[58] Things changed somewhat on August 1, 1996. Farley J. issued two orders and the parties consented to an order that became Spence J.’s August 30, 1996 order terminating the lease and giving Manulife and KPMG possession of the two golf courses.

[59] It is apparent that in the August, 1996 redemption period and before, the parties accepted that Aurora Highlands, not Manulife or KPMG, was in possession of the two golf courses secured by Manulife’s mortgages. On August 1, 1996, Granada, Manulife, Aurora Highlands and Joseph Shaw agreed that Granada would be given 30 more days to redeem. The parties further agreed that if Granada did not redeem by August 30, 1996 an order would issue on consent declaring that the Aurora Highlands lease is terminated effective August 1, 1996 and that Aurora Highlands forthwith surrender immediate possession of the two golf courses to Manulife and KPMG.

[60] In my opinion, Manulife was not in possession of the properties secured by its mortgages until August 30, 1996, when Granada, not having been able to redeem, agreed to give Manulife possession.

[61] Manulife’s attempt to take possession of the golf courses failed in April, 1996 when its receiver’s representatives were “kicked out”. From April, 1996 until August 30, 1996, Aurora Highlands, not Manulife, was in control of the golf club operations. In the spring of 1996, Granada and Aurora Highlands challenged Manulife’s right to possess and sell the golf courses. Granada did not abandon the golf courses at any time in the March to August 30, 1996 period. Nor did Aurora Highlands pay rent to Granada in that period. Thus, the Aurora Highlands lease was in default. Furthermore, on August 1, 1996, Granada and Joseph Shaw plainly accepted that Manulife was not in possession of the golf courses. At that time, by agreement, Granada and Aurora Highlands were given a 30-day reprieve, subject to the right of KPMG to monitor Aurora Highlands’ operations as court appointed interim receiver. Granada’s consent and Spence J.’s August 30, 1996 order giving effect to the consent were premised on Manulife not being in possession on August 1, 1996 and on Manulife’s right to possession on August 30, 1996 being dependent on Granada’s failure to redeem between August 1, 1996 and August 30, 1996.

[62] I acknowledge that Manulife could have gone into possession once it determined that Aurora Highlands had not remitted the required lease payments to Granada. However, as I have noted, KPMG was “kicked out” when it attempted to enter into possession on Manulife’s behalf. Throughout the March to August, 1996 period, Granada and Aurora Highlands were actively challenging Manulife’s right to sell the golf courses. It was not until August, 1996 that Granada, Joseph Shaw and Aurora Highlands agreed to give Manulife possession as of August 30, 1996 if Granada was not able to redeem by August 30, 1996. In my view, Manulife was not in possession until August 30, 1996.

[63] As a general proposition, although Manulife could have asserted rights to possession under the mortgage before August 30, 1996, it was not under any duty to do so in the March through August, 1996 period. See Modern Realty Co., Ltd. v. Shantz, 1928 CanLII 5 (SCC), [1928] S.C.R. 213 at 221. Manulife was entitled to exercise its right of possession when it chose to do so.

2. The duty of Manulife as mortgagee in possession

[64] As mortgagee in possession, Manulife had to:

• account to the mortgagor;

• manage the property in a reasonable way, that is as a prudent owner would; and

• act with reasonable care to get a true price, or the best price in the circumstances, once it decided to exercise its power of sale. See Falconbridge on Mortgages, supra, at p. 651.

[65] There is no issue in this case with respect to Manulife’s duty to account and, as I have said, the trial judge found that KPMG’s management of the properties was not improvident. A mortgagee in possession must take reasonable care to manage the property in question prudently, since the property must be returned to the mortgagor if the mortgagor pays the mortgage debt. Only reasonable costs attendant on the management of the property are properly added to the mortgage debt.

[66] Apart from the question of the timing of the sale of the golf course properties, a question I will address shortly, it is not suggested that once in possession as of August 31, 1996, Manulife breached the duties imposed upon it as a mortgagee in possession.

[67] In Oak Orchard, supra, a case in which the mortgagor contended that the mortgagee sold the mortgaged property for an insufficient price, Saunders J. extracted six propositions from the decided cases:

1. A mortgagee selling under a power of sale is under a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. This does not mean that the mortgagee must, in fact, obtain the true value.

2. The duty of the mortgagee is only to take reasonable precautions. Perfection is not required. Some latitude is allowed to a mortgagee.

3. In deciding whether a mortgagee has fallen short of his duty, the facts must be looked at broadly and he will not be adjudged to be in default of his duties unless he is plainly on the wrong side of the line.

4. The mortgagee is entitled to exercise an accrued power of sale for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting, a higher price could be obtained.

5. The mortgagee can accept the best price he can obtain in an adverse market provided that none of the adverse factors are due to fault on his part.

6. Even if the duty to take reasonable precautions is breached, the mortgagor must show that a higher price would have been obtained but for the breach in order to be compensated in damages. [Emphasis added.]

[68] The issue when a mortgagee must exercise its power of sale rights was considered by Anderson J. in Hausman v. O’Grady (1986), 1986 CanLII 2668 (ON SC), 61 O.R. (2d) 96 (Ont. H.C.J.), aff’d, (1989), 1989 CanLII 4173 (ON CA), 67 O.R. (2d) 735 (C.A.). In Hausman, the mortgagor contended that the mortgagee sold too quickly and for too low a price. Anderson J. referred to and adopted Salmon L.J.’s statement in Cuckmere Brick Co. Ltd. et al. v. Mutual Finance Ltd., [1971] Ch. 949 at 965:

Once the power [the power of sale] has accrued, the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting a higher price could be obtained. He has the right to realise his security by turning it into money when he likes. Nor, in my view, is there anything to prevent a mortgagee from accepting the best bid he can get at an auction, even though the auction is badly at ended [sic] and the bidding exceptionally low. Providing none of those adverse factors is due to any fault of the mortgagee, he can do as he likes. [Emphasis added.]

[69] As I have noted, appeals by the mortgagors in both Oak Orchard, supra, and Hausman, supra, were dismissed by this court.

[70] In Hodgins v. Laurentian Bank of Canada, [1994] O.J. No. 2460 (Ont. Gen. Div.), MacPherson J. considered several complaints of the mortgagor with respect to the mortgagee’s conduct, including one that the mortgagee took too long to sell the property. MacPherson J. referred to and accepted the same six propositions that were set out by Saunders J. in Oak Orchard, supra. He concluded that the mortgagee had fulfilled the duties imposed upon it as a mortgagee in possession. In so doing, he implicitly rejected the mortgagor’s contention that the mortgagee had sold too soon.

[71] In British Columbia Land and Investment Agency Ltd. v. Ishitaka (1911), 1911 CanLII 204 (SCC), 45 S.C.R. 302, a chattel mortgage case, the mortgagor contended that the property secured by the mortgage was sold for less than market value. Duff J. considered the duty of a mortgagee and said at pp. 316-17:

… It is to be observed that the duty of a mortgagee in exercising a power of sale (as touching the measures to be taken to secure a good price for the property sold), has in recent years been stated by a very high authority, (Kennedy v. DeTrafford … The sum of the matter appears to be this. He is bound to observe the limits of the power and he is bound to act in good faith, that is to say, he is bound to exercise the power fairly for the purpose for which it was given. If the mortgagee proceeds in a manner which is calculated to injure the interests of the mortgagor and if his course of action is incapable of justification as one which in the circumstances an honest mortgagee might reasonably consider to be required for the protection of his own interests; if he sacrifice the mortgagor’s interests “fraudulently, wilfully or recklessly,” then, as Lord Herschell says, it would be difficult to understand how he could be held to be acting in good faith. But that is a vastly different thing from saying that he is under a duty to the mortgagor to take, (regardless of his own interests as mortgagee,) all the measures a prudent man might be expected to take in selling his own property.

[72] There is no issue in this case concerning the steps taken by Manulife to sell the property, apart from the timing of the sale. In my opinion, Manulife acted in good faith. It was entirely reasonable for Manulife to have accepted the advice of KPMG’s golf expert, Johnston, not to sell the golf course properties on an “as is” basis, but rather to ready them for sale as going concerns in the spring of 1997. This advice required the mortgagee and its receiver to take steps to generate a cash flow from the golf course operations. Once a decision to proceed with a sale was made, the golf courses were exposed to the market in a reasonable way and, in October, 1997, sold for a reasonable price.

[73] In theory, Manulife could have entered into possession and exposed the golf course properties for sale in the spring of 1996. Apart from the strategic decision to develop a revenue stream from the golf courses to secure a higher price in their sale, the uncontradicted evidence indicates that because of Granada’s and Joseph Shaw’s efforts to frustrate any sale of the golf course properties, it is highly unlikely that any purchaser would have been interested in buying the properties except on a fire sale price basis.

[74] The trial judge’s conclusion limiting Manulife’s claim to the mortgage account as at October 31, 1996 assumes that the golf courses could have been sold for at least the October 31, 1996 mortgage account balance in the March to October, 1996 period, or for a purchase price minimally less than the mortgage debt. There is no evidence that in that period a purchaser would have been prepared to resolve, or ignore, the various impediments set in place by Granada, Joseph Shaw and Aurora Highlands. In my view, the trial judge was unrealistically dismissive in failing to take into account how any reasonable purchaser would have reacted to these impediments.

[75] The net result of the actions of Granada, Joseph Shaw and Aurora Highlands was to substantially increase the mortgage debt by fighting KPMG and Manulife at every step. Joseph Shaw’s goal was to redeem so long as the sale of the golf courses could be deferred and the possibility of redemption remained extant. To give credit to Granada and Joseph Shaw, they were at least consistent. They were vehemently opposed to the sale of the golf course properties throughout.

[76] Lastly, in my opinion, as a general proposition, mitigation does not apply to an action for a fixed debt as it does to tort and contract damage claims. The mitigation issue in a mortgage remedy context arose in Pacific & Western Trust Corp. v. Gretchen Enterprises Ltd. (1989), 1989 CanLII 4666 (SK QB), 63 D.L.R. (4th) 764 (Sask. Q.B.). In that case, the mortgagor’s position was that since the value of the mortgaged land was equal to or greater than the amount of the mortgage debt, the mortgagee had a duty to mitigate its losses by accepting an offer from the mortgagor to transfer the mortgaged property to the mortgagee in satisfaction of the debt. At pp. 765-66, Estey J., after referring to Chitty on Contracts, 24th ed., vol. 1 (1977), at pp. 727-28 and Anson, Principles of the English Law of Contract, 21st ed. (1959), at p. 459, concluded that a mortgagee in an action for debt is under no duty to mitigate the mortgage debt by accepting a transfer of the mortgaged land. He concluded that doctrines such as remoteness and mitigation, which place limits on the recovery of damages, do not apply to a debt. I agree. The principle of mitigation has no application to Manulife’s claim for repayment of its loans to Granada.

[77] Although mitigation as it is known to tort and contract law does not apply to an action for a debt, the mortgagee is constrained by duties imposed by the law. A mortgagee in possession is required to account and may only add expenses to the mortgage debt that are reasonably incurred in all of the circumstances. Taken that far, I have no problem with the comments of Cusinato J. in Canada Trustco, supra. In that case, expenses incurred after Canada Trustco went into possession caused the mortgage debt to increase significantly beyond the value of the property. The mortgagee took no steps for five years to sell in a depressed market. I agree with the proposition as set out in Canada Trustco that a mortgagee in possession must take reasonable precautions to obtain the true value of the mortgaged property and should not incur expenses as a mortgagee in possession that are unreasonable. I do not, however, agree with Cusinato J.’s observations about the application of the principle of mitigation. That part of Canada Trustco should not be followed.

[78] The trial judge found that KPMG’s expenses were not unreasonable. I see no basis in the evidence and the trial judge’s findings of fact to attack those expenses through the back door by imposing a broad duty to mitigate on the basis that the mortgage account would have been lower if the golf courses had been sold sooner.

CONCLUSION

[79] For these reasons, I would allow the appeal. Since a reference to determine the exact sale proceeds of the sale to Clublink appears to be necessary, I would vary the judgment by:

• deleting that part of the judgment directing a reference to determine the exact amount of the net proceeds realized by the plaintiffs on the sale of the golf club properties to Clublink before adjusting for costs of sale and the exact amount of realty taxes as of October 31, 1996 and to determine a reasonable amount for the costs of sale of the golf club properties if they had been sold between March and October, 1996.

• substituting judgment for Manulife against Granada and Joseph Shaw for the amount of the shortfall on the mortgages following the sale of the properties secured by Manulife’s mortgages as of the date of the judgment and remitting same to the trial judge to determine the amount owing by reference or as the trial judge may direct;

[80] Manulife is entitled to its costs of the appeal and the trial. It is also entitled to post-judgment interest at the rate set out in the mortgage.

RELEASED: “Oct 10 2001” “CAO”

“C.A. Osborne A.C.J.O.”

“I agree J.M. Labrosse J.A.”

“I agree Doherty J.A.”