DATE: 20020919 DOCKET: C36423

COURT OF APPEAL FOR ONTARIO

RE: VIOLET DICECCO AND CARL CARDELLA (Applicants/Appellants) and CANADA MORTGAGE AND HOUSING CORPORATION and INVESTORS GROUP TRUST CO. LTD. (Respondents/Respondents on Appeal)

BEFORE: GOUDGE, SIMMONS, AND GILLESE JJ.A.

COUNSEL: L. Ricchetti, for the appellants

W. J. Burden, for the respondent Canada Mortgage and Housing Corporation

V. A. E. Dyer, for the respondent Investors Group Trust Co. Ltd.

HEARD: June 18, 2002

On appeal from a judgment of Justice Joan Lax of the Superior Court of Justice dated May 14, 2001 and October 22, 2001

E N D O R S E M E N T

[1] [1] The main issue on this appeal is whether the application judge erred in refusing to declare that money judgments obtained by Investors Group Trust Co. Ltd. against each of the appellants are null and void.

[2] [2] In 1988, each of the appellants invested in a limited partnership MURB tax shelter known as Gerrard Street Associates. Gerrard Street Associates was the beneficial owner of a 57-unit condominium complex located at 86 Gerrard Street East, Toronto. The appellants received an option to purchase a specific unit in the condominium complex on purchasing a unit in the limited partnership.

[1] [3] The intended tax advantage of the limited partnership was that investors could deduct the cost of borrowing monies to purchase their units in the limited partnership. Each of the appellants borrowed money from Investors Group to fund part of the purchase price of their limited partnership unit(s) and gave a promissory note(s) to Investors Group to evidence their respective loan(s).

[2] [4] Gerrard Street Associates guaranteed the appellants’ promissory notes. It also caused its nominee, 86 Gerrard Street Inc., which held the title to the condominium complex, to grant non-recourse mortgages to Investors Group on the individual condominium units that the appellants were entitled to purchase as collateral security for Gerrard Street Associates’ guarantee. The appellants guaranteed the collateral mortgage(s) for the unit(s) they were entitled to purchase on a full-recourse basis. CMHC insured the collateral mortgages.

[3] [5] In 1997, the appellants defaulted in paying their promissory notes to Investors Group. Investors Group accordingly took steps to realize on its security. It served notices of sale under mortgage in relation to the collateral mortgages, and also served statements of claim on the appellants, claiming the amounts owing on their respective promissory notes and guarantees.

[4] [6] The appellants did not exercise their options to purchase the condominium units, redeem the mortgages, or defend the actions that Investors Group brought against them. On April 9, 1998 and May 25, 1998, Investors Group obtained default judgment against Cardella and DiCecco, respectively.

[5] [7] Following the appellants’ default, CMHC paid Investors Group the principal balance owing on the collateral mortgages together with approved borrower’s charges and interest. On May 25, 1998, Investors Group transferred the condominium units that the appellants were entitled to purchase to CMHC pursuant to the power of sale contained in the collateral mortgages. Investors Group immediately served notice on the tenants of the condominium units requiring them to pay their rent to it.

[6] [8] On June 2, 1998, Investors Group filed writs of seizure and sale against the appellants for the full amount of the outstanding default judgments. On June 9, 1998, Investors Group assigned its default judgments against the appellants to CMHC, and on June 16, 1998, the writs of seizure and sale were amended to reflect the assignment.

[7] [9] CMHC managed the condominium units for a period of time but eventually sold them to third party purchasers. There were deficiencies in the amounts realized by CMHC on account of the outstanding balances on the appellants’ loans.

[8] [10] The appellants brought this application for a declaration that the judgments are null and void. In rejecting the appellants’ claims that the sales by Investors Group to CMHC were improvident, that there was a merger of the mortgages and title, that there was a de facto foreclosure, and that the guarantees were released, the application judge made the following findings:

Improvident Sale

The power of sale to CMHC was the mechanism to transfer title. It did not result in an improvident or improper sale. As the condominiums were sold at fair market value to bona fide arms’ length purchasers, [the appellants] have suffered no prejudice and are in no worse position than if Investors Group had sold the units under power of sale.

It is at least arguable that [the appellants] benefited because CMHC sold in a more favourable market. [The appellants] should not be permitted to attack on this basis the form of transaction that would have been unassailable had Investors Group rather than CMHC completed it.

Merger

There can be no merger for two reasons. The first reason is that merger can only arise if there are obligations owed by the same entity under different security instruments: Don Walker Co. Ltd. v. Andrews (1963), 1963 612 (ON CA), 37 D.L.R. (2d) 177 (Ont. C.A.). Here the collateral mortgages and guarantees were given by different entities. The second reason is that the collateral mortgages and the guarantees in respect of those mortgages were expressly made collateral security for the promissory notes. The merger principle does not apply where security of a higher nature … is taken as collateral to the existing debt…

De Facto Foreclosure

The obligations of [the appellants] under their notes and their guarantees are independent from the obligations of 86 Gerrard Street Inc. under the collateral mortgages. The guarantees are very broad. They clearly provide that no matter what steps Investors Group takes in connection with the collateral mortgages, [the appellants] are liable for any monies that are owed and which Investors Group does not recover on the sale of the condominiums. This transaction was structured so that only [the appellants], as investors in the limited partnership, were exposed to the risk of being fully liable for any deficiency remaining after the sale of the condominiums. I expect that there were sound tax planning reasons for this.

Even if the obligations are not independent, judgment on a mortgage covenant does not preclude a mortgagee from later enforcing its security upon the property…

CMHC did not foreclose on the mortgages. Neither Investors Group nor CMHC brought an action for foreclosure… Their conduct was not tantamount to foreclosure. Investors Group sued on the notes and the guarantees before realizing on the collateral security. When it obtained the Judgments, it was in possession of the condominium units as mortgagee. For a lengthy period after the Judgments were obtained and title was transferred, CMHC was in a position to convey the units to the applicants … [The appellants] never intended to satisfy the Judgments nor did they wish to redeem the collateral mortgages…

Release of the Guarantees

It is submitted that [the appellants] as guarantors were prejudiced when CMHC took title to the condominiums, but preserved its debt. For reasons already given, I reject this argument.

[9] [11] In dealing with the submission that there was an improvident sale, the application judge focused on the substance of the transaction and treated CMHC as standing in the shoes of Investors Group. Given CMHC’s position as insurer of the collateral mortgages, and the application judge’s findings that the appellants did not intend to redeem the collateral mortgages and that the conduct of the respondents was not tantamount to foreclosure, we see no error in this approach on the facts of this case.

[10] [12] In effect, the application judge found that CMHC assumed the mortgagee’s obligations in carrying out the power of sale. Although there may have been imperfections in the form of transaction by which this was achieved, because the appellants did not intend to redeem and because the sales to third parties were at a fair price, we agree with the application judge’s finding that the appellants were not prejudiced as a result. To the extent that the application judge’s finding may impose an obligation on CMHC to formally account to the appellants for the proceeds of the condominium unit sales, it was not necessary that CMHC do so in this proceeding, because the appellants did not request an accounting in their Notice of Application.

[11] [13] Further, we would not give effect to the appellants’ argument, raised for the first time on appeal, that if the transfer to CMHC operated as the equivalent of an assignment of mortgage, CMHC was obliged to serve a new notice of sale. Given CMHC’s position as Investors Group’s insurer, it may not be clear that the authorities requiring a new notice of sale in the event of an assignment of mortgage are applicable. As this argument was not raised on the application, in the notice of appeal, or in the appellant’s factum, it is not appropriate that we deal with it now.

[12] [14] As for the appellants’ submissions that the mortgage merged in the title to the property and therefore released the debt that formed the subject matter of the guarantee, and that the separate claims arising from the promissory notes and the guarantees merged in the default judgment, the application judge’s findings concerning the nature of the appellants’ guarantees are a complete answer to these arguments. The terms of the guarantees are very broad. They provide that the appellants’ respective obligations for the indebtedness secured by the collateral mortgages are “as principal debtor and not a surety”, that Investors Group could “release or deal with or take any proceedings …against the mortgaged lands or the Chargor as … it may see fit”, that “no such act by Chargee shall in any way whatsoever release [the appellants] from payment”, and that “nevertheless this covenant shall remain in full force until all monies payable under this Charge are fully paid and satisfied”.

[13] [15] We share the application judge’s expectation that there were “sound tax planning reasons” for structuring the transaction so that only the appellants were exposed to the risk of being fully liable for any deficiency remaining after the sale of the condominiums and agree with her findings that the appellants’ obligations under their notes and their guarantees are independent from the obligations of 86 Gerrard Street Inc. under the collateral mortgages, and remained in effect despite the respondents’ dealings with the condominium units.

[14] [16] The appellants’ submission that CMHC improperly created a no-risk situation for itself by acquiring title to the property without making its intention to account for surplus proceeds clear in the event of a profitable sale has some force. However, the question of whether there was a de facto foreclosure is an issue of mixed fact and law to be determined on the facts of each case particular case. The appellants have not identified an error in principle or a palpable and overriding error of fact in the application judge’s reasons creating grounds to interfere with her conclusion. Subject to CMHC’s claim that its rights of action on the promissory notes are independent of its rights of action on the collateral mortgages, and that these rights did not merge in the judgments that it obtained against each appellant, in our view, the application judge imposed an obligation on CMHC to account for the proceeds of sale when she found that CMHC stands in the shoes of Investors Group. Accordingly, there was no de facto foreclosure.

[15] [17] Finally, we agree with the respondents’ submission that any present inability on the part of CMHC to reconvey the mortgaged condominium units was caused by the default of the mortgagor and, ultimately, the appellants. Such inability is not therefore a bar to enforcement of the default judgments: The Huron and Erie Mortgage Corporation v. Longo, 1944 94 (ON CA), [1944] O.R. 627 (C.A.).

[16] [18] CMHC undertook to account to the appellants for the proceeds of sale in this case. However, it claims that it is not obliged to do so, as a matter of law, because its rights of action against the appellants on the promissory notes are independent from its rights of action against them on the collateral mortgage guarantees and because those rights did not merge in the judgments that were obtained. In light of the conclusions that we have reached, CMHC’s undertaking, and the fact that the appellants did not claim an accounting in this proceeding, it is unnecessary that we decide whether CMHC’s submissions are correct.

[17] [19] The appeal is accordingly dismissed with costs to the respondents fixed at $9,000 in favour of CMHC and fixed at $1,500 in favour of Investors Group.

____ “Janet Simmons J.A.”

_____ “S.T. Goudge J.A.”

____ “E.E. Gillese J.A.”