CIBC Mortgage Corporation v. Rowatt et al. [Indexed as: CIBC Mortgage Corp. v. Rowatt]

61 O.R. (3d) 737

[2002] O.J. No. 4109

Docket No. C35658

Court of Appeal for Ontario,

Weiler, Rosenberg and Feldman JJ.A.

October 31, 2002

• Application for leave to appeal to the Supreme Court of Canada was dismissed with costs May 15, 2003 (Gonthier, Major and Arbour). S.C.C. File No. 29524.

Contracts -- Undue influence -- Presumption of undue influence arising in some situations where repayment of loan guaranteed by borrower's spouse -- Spouse borrowing money from bank for mortgage investment business -- Borrower's spouse signing mortgage as security for repayment of loan -- Bank suing to enforce mortgage -- Evidence rebutting any presumption of undue influence -- Bank entitled to enforce mortgage.

Debtor and creditor -- Undue influence -- Presumption of undue influence arising in some situations where repayment of loan guaranteed by borrower's spouse -- Spouse borrowing money from bank for mortgage investment business -- Borrower's spouse signing mortgage as security for repayment of loan -- Bank suing to enforce mortgage -- Evidence rebutting any presumption of undue influence -- Bank entitled to enforce mortgage.

In May 1988, after receiving independent legal advice, Mrs. Rowatt agreed to guarantee repayment of her husband's loan from CIBC Mortgage Corporation ("CIBC"). The loan was to be used to finance his then lucrative mortgage investment business. She signed a guarantee and a collateral mortgage on the matrimonial home, which was registered in her name. These securities secured $135,000 of Mr. Rowatt's debt. In September 1988, Mrs. Rowatt agreed to replace the guarantee and mortgage with a new guarantee and a mortgage for $203,000. In 1990, Mr. Rowatt went bankrupt, and CIBC sued Mrs. Rowatt on the $135,000 guaranty, which she alleged was supposed to have been replaced. This action was settled, but the settlement did not deal with the mortgage. Mrs. Rowatt later renewed the mortgage for approximately $130,000 but, in November 1992, after receiving legal advice, she stopped making payments. The bank sued to enforce the mortgage. Coo J. granted CIBC judgment but found that it had enforced a guaranty which it agreed would be replaced by the new mortgage. Mrs. Rowatt appealed and raised the defences of negligence by the bank manager, unconscionability, misrepresentation and undue influence.

Held, save for giving Mrs. Rowatt credit for the settlement of the action on the guarantee, the appeal should be dismissed.

There was no merit in the grounds of appeal based on the bank manager's negligence or based on unconscionability; the trial judge made no error in his findings with respect to these defences. As for misrepresentation, there was no misrepresentation in the classic sense; rather, the bank breached its agreement by seeking to enforce the original guarantee, which was to be replaced. It was therefore appropriate to set off her claim for this breach against the bank's claim on the mortgage. This was a situation where the doctrine of equitable set-off applied.

The appeal based on undue influence failed. The trial judge made clear and unequivocal findings that Mrs. Rowatt was not subjected to undue influence by her husband, that she entered into the mortgage freely, and that there was no misrepresentation. Although under the doctrine of undue influence, as it has been developed in recent cases in the Supreme Court of Canada, the House of Lords and the Court of Appeal, in transactions involving spouses or those in like relationships, there may be a presumption of undue influence, any presumption of undue influence in this case was rebutted on the evidence. [page738]

APPEAL from a judgment enforcing a mortgage.

Cases referred to Bank of Montreal v. Duguid (2000), 2000 5710 (ON CA), 47 O.R. (3d) 737, 185 D.L.R. (4th) 458, 5 B.L.R. (3d) 1 (C.A.), revg (1997), 32 B.L.R. (2d) 35 (Ont. Gen. Div.); Barclays Bank plc v. O'Brien, [1993] 4 All E.R. 417, [1993] 3 W.L.R. 786 (H.L.); Gold v. Rosenberg, 1997 333 (SCC), [1997] 3 S.C.R. 767, 35 O.R. (3d) 736n, 152 D.L.R. (4th) 385, 219 N.R. 93, 35 B.L.R. (2d) 212, 19 E.T.R. (2d) 1; Goodman Estate v. Geffen, 1991 69 (SCC), [1991] 2 S.C.R. 353, 80 Alta. L.R. (2d) 293, 81 D.L.R. (4th) 211, 127 N.R. 241, [1991] 5 W.W.R. 389, 42 E.T.R. 97; Royal Bank of Scotland v. Etridge (No. 2), [2001] 4 All E.R. 449; Telford v. Holt, 1987 18 (SCC), [1987] 2 S.C.R. 193, 54 Alta. L.R. (2d) 193, 41 D.L.R. (4th) 385, 78 N.R. 321, [1987] 6 W.W.R. 385, 37 B.L.R. 241, 21 C.P.C. (2d) 1, 46 R.P.R. 234

Jan D. Weir, for appellant. Alan J. Butcher, for respondent.

The judgment of the court was delivered by

[1] FELDMAN J.A.: -- The appellant gave the respondent a mortgage on her home as security for her husband's business loans from the Canadian Imperial Bank of Commerce (the "bank"). She eventually discontinued payments on the mortgage and defended this action for enforcement of the mortgage on the basis that the mortgage was obtained by misrepresentation, that she did not understand the documents or the transaction and that she was not provided with full information regarding her husband's indebtedness and the bank's intended use of the funds. The trial judge gave judgment to the respondent enforcing the mortgage, but found that the bank had enforced a guaranty which it had agreed would be replaced by the mortgage. I would uphold the decision of the trial judge to enforce the mortgage, but would give the appellant credit for the amount she paid the bank in the settlement of the earlier action on the guaranty.

Facts Found by the Trial Judge

[2] In 1988, the appellant's husband, a lawyer, was taking advantage of the inflationary local real estate market by investing in second, third and fourth mortgages. He did this using funds borrowed from the bank. He first obtained a $35,000 line of credit, and then a $100,000 demand loan. In May 1988, the appellant signed a guaranty and collateral mortgage over the matrimonial home, which had been transferred into her name some years before in order to protect it from her husband's creditors. The guaranty and mortgage secured $135,000 of the husband's bank indebtedness. The appellant had independent legal advice when she signed these documents. The trial judge found that the appellant [page739] knew that the purpose of the guaranty and collateral mortgage was to help secure money borrowed from the bank by her husband for the purpose of his then lucrative mortgage investment business. The trial judge also found that the appellant was prepared to support her husband's business endeavours.

[3] In September 1988, Mr. Rowatt explained to the appellant that the bank wanted to replace the original guaranty and collateral mortgage with a new conventional mortgage with regular payments, which new mortgage would be for the highest amount that the value of the property could support. He also told her that the new mortgage would support continuing availability of more investment funds from the bank. She agreed to this and was not concerned about the handling of the funds as between her husband and the bank. The mortgage was entered into with the respondent in the amount of $203,000, which amount represented the husband's indebtedness to the bank at that time. The bank used the funds to pay down its debt but made an additional $200,000 and more available to the husband for his mortgage investment business. The real estate market eventually collapsed, and Mr. Rowatt went bankrupt in 1990, owing the bank significant funds.

[4] Contrary to Mr. Rowatt's representation to his wife regarding the mortgage transaction, the bank sued Mrs. Rowatt on the $135,000 guaranty which was supposed to have been replaced by the $203,000 conventional mortgage. Mrs. Rowatt was represented in the action by experienced and knowledgeable counsel. A substantial part of Mrs. Rowatt's defence was that the new mortgage had replaced the guaranty and that she was making payments on the new mortgage. The parties settled the guaranty action. Mrs. Rowatt assigned to the bank some rights she had in a claim belonging to her husband in Quebec. The value of the settlement is unclear in the record, but was between $12,000 and $50,000.

[5] The mortgage was not dealt with in the settlement. The appellant later renewed the mortgage in the amount of approximately $130,000, part having been paid down by Mr. Rowatt. Soon after renewing the mortgage, after speaking to another lawyer in mid-November 1992, the appellant stopped making payments on the mortgage.

[6] The trial judge dealt with the fact that two bank employees were investing with Mr. Rowatt at the time of the second mortgage and had their investments paid out to them once the new funding arrangements were in place. The trial judge rejected the suggestion of conflict of interest or that the involvement of these two employees influenced anyone's conduct in the matter. He noted that "no one really says otherwise" and that not much time was spent on this point in argument. [page740]

[7] The trial judge made specific findings regarding the credibility of both the appellant and her husband, and rejected their evidence of lack of information and understanding of the loan arrangements with the bank. He also found that Mr. Rowatt exercised no undue influence over the appellant and that Mrs. Rowatt did not need to be pressured or persuaded to join the expanding business venture, nor did Mr. Rowatt make any misrepresentation to her. He concluded his reasons at p. 6:

I am satisfied that Mrs. Rowatt equably and clearly understood the situation when she independently and with a free mind decided to provide the new mortgage, which at the time I am sure seemed like a sensible idea.

Issues

[8] The appellant raises four issues on the appeal:

(1) The bank manager's negligence

[9] The appellant submits that it was the bank manager who caused the bank's losses in this case by the way he lent money to Mr. Rowatt for the purpose of investing in mortgages with insufficient equity. In that regard, the trial judge refused to admit into evidence certain internal bank documents which the appellant says would have supported this submission.

[10] I would not give effect to this ground of appeal. The trial judge heard the evidence of Mr. and Mrs. Rowatt. He rejected much of it. The respondent called no evidence. The trial judge also reviewed the documents which he had ruled were admissible and relevant. He considered the legal and factual submissions of counsel for both parties including, presumably, this argument. Although it was not specifically addressed in the reasons, the trial judge obviously concluded that the appellant was responsible to the bank for its losses and not absolved as a result of any negligence in the handling of its own affairs by the bank.

(2) Undue influence

[11] The appellant submits that the circumstances in this case gave rise to a presumption of undue influence of which the bank had notice. Because the bank took no steps to ensure that the appellant fully understood and freely entered into the mortgage transaction, the mortgage was not enforceable by the bank. [See Note 1 at end of document] The [page741] appellant relies on the cases of Barclays Bank plc v. O'Brien, [1993] 4 All E.R. 417, [1993] 3 W.L.R. 786 (H.L.); Bank of Montreal v. Duguid (2000), 2000 5710 (ON CA), 47 O.R. (3d) 737, 185 D.L.R. (4th) 458 (C.A.) and the important new decision on the issue by the House of Lords in Royal Bank of Scotland v. Etridge (No. 2), [2001] 4 All E.R. 449.

[12] The doctrine of undue influence and the presumption of undue influence were most recently discussed by the Supreme Court of Canada in Goodman Estate v. Geffen, 1991 69 (SCC), [1991] 2 S.C.R. 353, 81 D.L.R. (4th) 211, in the context of both gifts and commercial transactions, and again in Gold v. Rosenberg, 1997 333 (SCC), [1997] 3 S.C.R. 767, 152 D.L.R. (4th) 385, where the court referred with approval to the decision of the House of Lords in Barclays Bank, recognizing the presumption of undue influence by a spouse or co-habitee when a guarantee is being given to a bank.

[13] In the Etridge case, the House of Lords revisited its landmark decision in Barclays Bank where the court first articulated the obligation of a bank, which takes a pledge of assets or guarantee from one spouse or personal partner to secure the debts of the other, to take reasonable steps to ensure that there is no misrepresentation or undue influence, whether actual or presumed, motivating the spouse or partner giving the pledge or guarantee. After five years of experience with the process set out by the court, several cases arose for clarification of the requirements, and were heard together in the Etridge case.

[14] One of the issues that required clarification in the Etridge case was the use and meaning of the term "presumed undue influence" or the "presumption of undue influence", referred to as "class 2B" as explained in the Barclays Bank case in the context of a spousal or like relationship.

[15] In the Etridge case, the court clarified that the presumption of undue influence in a spousal or like relationship, arising from the emotional interdependency of the parties, has two effects in this context.

[16] The first is to put a bank on notice and inquiry when a spouse or personal partner is guaranteeing the debts of the other partner. In order to protect itself from a claim that the guaranty was procured by undue influence by the benefiting spouse, the bank must take reasonable steps to try to ensure that the proposed guarantor understands the transaction and is entering into it freely by suggesting that the guarantor seek and obtain independent legal advice and a full explanation of the transaction.

[17] In Barclays Bank, Lord Browne-Wilkinson described the circumstances when a bank will be put on notice in this way at p. 429 All E.R.: [page742]

As I have said above in dealing with undue influence, this tenderness of the law towards married women is due to the fact that, even today, many wives repose confidence and trust in their husbands in relation to their financial affairs. This tenderness of the law is reflected by the fact that voluntary dispositions by the wife in favour of her husband are more likely to be set aside than other dispositions by her: a wife is more likely to establish presumed undue influence of class 2B by her husband than by others because, in practice, many wives do repose in their husbands trust and confidence in relation to their financial affairs. Moreover the informality of business dealings between spouses raises a substantial risk that the husband has not accurately stated to the wife the nature of the liability she is undertaking, i.e. he has misrepresented the position, albeit negligently.

Therefore, in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.

(Emphasis added)

[18] Following Barclays Bank, some courts were requiring proof that the bank had knowledge of the state of the relationship between the particular couple and whether the wife reposed trust and confidence in the husband before requiring the bank to have taken the reasonable steps. In Etridge, the court explained that the emphasized portion of the above quotation was Lord Browne-Wilkinson's way of describing why the relationship itself puts the bank on notice. In Etridge, the court clarified that "whenever a wife offers to stand surety for her husband's debts" the bank is put on inquiry (p. 465-66 All E.R.).

[19] The court then went on to discuss in detail the reasonable steps a bank must take in order to protect itself from a later claim by the guarantor/spouse that the guaranty is vitiated by undue influence or misrepresentation. The purpose of those steps is not for the bank to determine if the wife has been wronged by the husband, but "[t]he steps are concerned to minimize the risk that such a wrong may be committed" (p. 465 All E.R.). The consequence of not taking reasonable steps to ensure understanding and free will by the guarantor, is that the bank "is deemed to have notice of any claim the guarantor may have that the transaction was procured by undue influence or misrepresentation on the part of the debtor" (p. 476 All E.R.). If the bank does take these reasonable steps, it is protected from such a claim.

[20] The second effect of the presumption of undue influence arises where the bank has not taken the reasonable steps and the guarantor later seeks to avoid liability on the pledge or guaranty by claiming that it was obtained by undue influence, and relies on a presumption of undue influence based on the relationship of [page743] the parties together with the disadvantageous nature of the transaction for the guarantor. In that circumstance, the presumption will not be determinative, but will be one of the evidentiary matters the trial judge considers when deciding whether or not the guaranty or pledge was entered into based on undue influence or misrepresentation by the spouse or partner. Lord Scott explained the confusion over this concept, and its correct application in the following passage at pp. 513-14 All E.R.:

The presumption of undue influence, whether in a category 2A case, [See Note 2 at end of document] or in a category 2B case, is a rebuttable evidential presumption. It is a presumption which arises if the nature of the relationship between two parties coupled with the nature of the transaction between them is such as justifies, in the absence of any other evidence, an inference that the transaction was procured by the undue influence of one party over the other. This evidential presumption shifts the onus to the dominant party and requires the dominant party, if he is to avoid a finding of undue influence, to adduce some sufficient additional evidence to rebut the presumption. In a case where there has been a full trial, however, the judge must decide on the totality of the evidence before the court whether or not the allegation of undue influence has been proved. In an appropriate case the presumption may carry the complainant home. But it makes no sense to find, on the one hand, that there was no undue influence but, on the other hand, that the presumption applies. If the presumption does, after all the evidence has been heard, still apply, then a finding of undue influence is justified. If, on the other hand, the judge, having heard the evidence, concludes that there was no undue influence, the presumption stands rebutted. A finding of actual undue influence and a finding that there is a presumption of undue influence are not alternatives to one another. The presumption is, I repeat, an evidential presumption. If it applies, and the evidence is not sufficient to rebut it, an allegation of undue influence succeeds.

As to manifest disadvantage, the expression is no more than shorthand for the proposition that the nature and ingredients of the impugned transaction are essential factors in deciding whether the evidential presumption has arisen and in determining the strength of that presumption. It is not a divining rod by means of which the presence of undue influence in the procuring of a transaction can be identified. It is merely a description of a transaction which cannot be explained by reference to the ordinary motives by which people are accustomed to act.

[21] Applying these principles to this case, based on a consideration of all the evidence, the trial judge made clear and unequivocal findings that the appellant was not subjected to undue influence by her husband, that she entered into the mortgage freely and that there was no misrepresentation. Any presumption [page744] of undue influence in this case was rebutted on the evidence. Consequently, I would not give effect to this ground of appeal.

(3) Unconscionability

[22] The appellant submits that the court should refuse to enforce the mortgage because there was an inequality of bargaining power when the bank, as the stronger party, took undue advantage of the appellant who was in a vulnerable position, to impose an unfair bargain. She relied on the following circumstances:

(a) The misrepresentation by the bank that the guarantee would be discharged.

(b) The investment by the bank manager and loan officer in Mr. Rowatt's business, which may have impaired their judgment in approving the loans to him.

(c) The payment of one of the loan officer's investments after the mortgage funds were advanced.

(d) The negligence of the bank manager in putting forth the loan applications without disclosure to his superiors.

(e) The settlement of the guarantee action with the appellant by accepting a valuable chose in action from the appellant and not paying her costs, when the guarantee sued on was to have been discharged at the time of the mortgage.

[23] Although the trial judge did not refer specifically to the concept of unconscionability, his findings with respect to the dealings between the parties, and the full understanding of the appellant as well as of her husband of what was going on, make it clear that he was satisfied that there was no overbearance or unconscionable conduct by the bank in the all the circumstances of this case, which would vitiate the mortgage transaction. There is no basis to interfere with his findings.

(4) Misrepresentation

[24] The appellant submits that the mortgage was obtained by the misrepresentation that the guaranty of the $135,000 line of credit (together with the collateral mortgage) would be discharged in exchange for the appellant entering into the conventional mortgage for $203,000. The trial judge found as a fact that Mr. Rowatt told Mrs. Rowatt that the new conventional mortgage would replace the existing guarantee and collateral mortgage. Further to that finding, the trial judge stated at p. 4: [page745]

I add now that it is my view that the Rowatts had a right to be angry and upset about the guaranty action, since there is no doubt on the evidence I have that the bank agreed to have the new mortgage replace not just the collateral mortgage but the guaranty as well.

[25] Having made that clear finding, however, the trial judge accorded no legal significance to it or to the fact that the bank accepted a settlement of the guaranty action wherein value was given by Mrs. Rowatt and significant legal expenses were incurred by her. It appears from the Agreed Statement of Facts filed as exhibit 1 that in this action the bank continued to dispute that the guaranty was to be discharged in exchange for the new mortgage, thereby requiring the finding of the trial judge.

[26] The issue on the appeal is, what is the legal significance of this finding of the trial judge? In my view, this is not a misrepresentation in the classic sense. The trial judge found not that the bank misrepresented the terms of the new mortgage transaction, but rather, for reasons unexplained, it breached its agreement by seeking to enforce the guaranty. The appellant suffered damages as a result of that breach, being the amount she paid to settle the guaranty action and the legal costs she incurred defending the action.

[27] Based on the finding of the trial judge in this action, the appellant could sue the bank to recover the damages she suffered. However, in this action, the bank [See Note 3 at end of document] now seeks to enforce the mortgage it obtained to replace that guaranty. As one of her grounds of appeal, the appellant has requested a set-off of the amount of damages she suffered. In my view, this is a case where the doctrine of equitable set-off applies. The claims are "so clearly connected" that "it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration" the appellant's claim for damages. See Telford v. Holt, 1987 18 (SCC), [1987] 2 S.C.R. 193 at p. 212, 41 D.L.R. (4th) 385.

Result

[28] The appeal against enforcement of the mortgage is dismissed. However, the appeal is allowed to the extent that the amount of damages suffered by the appellant as a result of the bank's breach of its agreement to discharge the guaranty, being the amount realized by the bank from the chose in action which was transferred to settle the guaranty action, together with the legal costs incurred by the appellant in that action, shall be set off against the amount owing on the mortgage. If the parties cannot agree on those amounts, they may refer the matter to the Master. [page746]

[29] As success on the appeal was divided, there shall be no order as to costs.

Order accordingly.

Notes

Note 1: The respondent and the CIBC are described as related corporations in the respondent's pleadings. Although the CIBC and the respondent are separate legal entities, the trial judge did not differentiate between them and effectively treated them as one entity throughout his judgment.

Note 2: Category 2A is the classical group of relationships which automatically give rise to a presumption of undue influence (not including husband/wife) such as priest/penitent, doctor/patient, lawyer/client.

Note 3: See footnote 1.