DATE: 20060919
DOCKET: C44161
COURT OF APPEAL FOR ONTARIO
O’CONNOR A.C.J.O., DOHERTY AND MACFARLAND JJ.A.
B E T W E E N :
IN THE MATTER OF ELIAS MARKETS LTD., ELIAS GROUP LTD. AND ELIAS PROPERTIES LTD. CARRYING ON BUSINESS IN THE CITY OF WINDSOR, COUNTY OF ESSEX AND PROVINCE OF ONTARIO
A. Duncan Grace for Bank of Montreal
Milton A. Davis and Brett D. Moldaver for Royal Bank of Canada and Royal Trust Corporation of Canada
- and -
Fred Myers for RSM Richter Inc.
IN THE MATTER OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, SECTION 47(1), AS AMENDED
Heard: May 10, 2006
On appeal from the order of Justice Helen A. Rady of the Superior Court of Justice dated August 19, 2005, reported at (2005), 2005 ONSC 30311, 77 O.R. (3d) 461.
MACFARLAND J.A.:
[1] The appellant, Bank of Montreal (“BMO”) appeals from the order of Rady J. dated August 19, 2005. It asks this court to set aside that part of her order which entitles Royal Bank of Canada and Royal Trust Corporation of Canada (collectively “RBC”) to the remedy of subrogation and to recover from the proceeds realized by the interim receiver, RSM Richter Inc. (“Interim Receiver”) from the sale of the property municipally known as 655 and 755 Crawford Avenue, Windsor, Ontario. BMO seeks an order that RBC is not entitled to the remedy of subrogation or to recover any amount from the proceeds realized from the sale of the property and that BMO is entitled to recover under its security the proceeds.
[2] BMO also seeks to set aside that part of the order declaring that an assignment of rents to RBC is in priority to the security held by BMO. In its place, BMO seeks an order declaring the BMO security to be in priority to the RBC assignment of rents and directing the Interim Receiver to pay to BMO the rents collected in respect of the property.
[3] RBC cross-appeals and asks that this court set aside that portion of the order denying RBC an equitable mortgage on the subject lands. In its place, RBC seeks an order directing that RBC is entitled to the sale proceeds of the subject property in priority to any claim by BMO or any other creditor.
[4] By the terms of her order, the motion judge ordered that the Interim Receiver was authorized and directed to distribute on a final basis the proceeds of sale and rental of the property at 655/755 Crawford Avenue, Windsor, Ontario as follows:
(a) to Royal Bank of Canada, the net rental proceeds;
(b) to Royal Bank of Canada, the sum of $854,158.11 from the net sale proceeds;
(c) to Bank of Montreal, the balance of the net proceeds.
[5] BMO takes the position that because the mortgage held by RBC violated the provisions of the Planning Act, R.S.O. 1990, c. P.13 it is invalid as is the Assignment of Rents, which was taken at the same time and is, by its terms, “additional security” and therefore collateral to the mortgage. If BMO is correct, it would move into a first priority position ahead of RBC and be entitled to the entire net proceeds, both from the sale of the property and the rents collected.
THE FACTS
[6] The facts which give rise to this appeal are complex but must be set out in detail for a proper understanding of the issues.
[7] This proceeding arises out of the insolvency of Elias Markets Ltd. (“Markets”), Elias Properties Ltd. (“Properties”) and Elias Group Ltd. (“Group”) (collectively “the companies”). The companies carried on a retail grocery business in Windsor and surrounding area. Markets operated the grocery stores and Properties owned the real estate, including 655/755 Crawford Avenue. Group was a holding company and did not carry on any active business.
[8] The proceeding before Rady J. was an application by the Interim Receiver for directions as to the manner of distribution of the proceeds of the sale of the Crawford Avenue properties ($1,670,000) and rents collected therefrom.
[9] On January 6, 1996, one of the Elias companies, 1156712 Ontario Ltd. (hereinafter “1156712”) and a predecessor to Properties, bought property at 655 Crawford Avenue, Windsor (“Parcel One”).
[10] In so doing, 1156712 assumed: an existing mortgage in favour of Royal Trust with a principal balance of $657,700.18 outstanding on closing; and an existing mortgage in favour of Larcon Holdings Inc. (“Larcon”) with a principal balance of $340,279.40 outstanding on closing.
[11] On June 10, 1997, another Elias Company, 882876 Ontario Ltd. (“882876”), also a predecessor to Properties, purchased four additional parcels of land adjacent to the north boundary of Parcel One. (“Parcels Two, Three, Four and Five”).
[12] Markets operated a grocery store on Parcel One. In 1998, as part of a plan to develop the entire property, 1156712 and 882876 signed a site Plan Agreement with the City of Windsor. Parcels Four and Five were conveyed to the City. Parcels One, Two and Three remained in the hands of the numbered companies (Parcel One in 1156712 and Parcels Two and Three in 882876). The development proposed a new grocery store building at the south end of Parcel One. The existing building (where Markets was then operating a grocery store) at the north end of Parcel One was to be leased to a bingo hall operator. Parking was to be on Parcel One between the two buildings and on Parcels 2 and 3.
[13] On March 15, 1999, RBC issued a commitment letter agreeing to lend $2,300,000 to 1156712, secured by a first mortgage on Parcel One (“the mortgage commitment agreement” or “MCA”). The MCA required that the existing first mortgage against Parcel One in favour of RBC be discharged from the loan proceeds. As the terms of the MCA required that the security for the loan be a first mortgage on the subject property, any other encumbrances which would otherwise rank in priority to this new mortgage would necessarily have to be discharged.
[14] At this point in time, 1156712 did not own any abutting parcels of land; it owned only Parcel One.
[15] On March 26, 1999, Joseph Elias, on behalf of 1156712, signed the MCA and accepted its terms.
[16] Six days later, by Articles of Amalgamation dated April 1, 1999, 1156712 and 882876 and a third Elias company amalgamated to form Properties (“Properties”). The articles of amalgamation were registered only against title to Parcel One.
[17] At this time, Joseph Elias asked RBC to draw on the $2,300,000 of available financing in order to start the construction on Parcel One. As security for the construction financing, Properties granted to RBC a $1,400,000 construction mortgage, registered against Parcel One on May 26,1999.
[18] On November 26, 1999, the $2,300,000 mortgage was registered in favour of RBC against Parcel One. $1,400,000 of this money went to discharge the construction mortgage. Another $854,184.11 was paid to satisfy prior encumbrances, which included:
Royal Bank of Canada mortgage payout – $574,172.55
National Bank of Canada Mortgage payment – $161,000.00
City of Windsor taxes – $36,685.20
Larcon Holdings Inc. mortgage payout – $82,326.36
[19] At the time of the registrations, as a result of the amalgamation, Properties was now the owner of Parcels One, Two and Three. The RBC mortgages – registered May 26, 1999 and November 26, 1999 – were registered only against Parcel One, and thus were void under s. 50(3) of the Planning Act. RBC and Properties were unaware at the time that the mortgages were void. All parties to the mortgages had been represented throughout these transactions by the same solicitor, Jeffrey Slopen.
[20] On June 26, 2001, BMO granted Markets a revolving line of credit. As security, Properties gave a guarantee and executed a General Security Agreement (GSA) in favour of BMO. By spring of 2002, the companies were in financial difficulty.
[21] On May 6, 2002, almost one year later, BMO registered a Notice of Agreement Charging Lands against Parcel’s One and Six. On August 18, 2002, it registered a caution against Parcels One and Three. The registrations coincided with BMO’s realization that RBC’s mortgage was defective, a fact still unknown to RBC. On August 23, 2002, the Interim Receiver was appointed. It was only after the appointment of the Interim Receiver that questions were raised about the validity of the RBC mortgage.
[22] BMO admits it was aware of the mortgage financing in place before it granted the line of credit and obtained the GSA. It was also aware there were prior registrations in favour of RBC. BMO admits it granted the demand loan facility to Markets on the assumption the $2,300,000 RBC mortgage was validly registered and would have priority over its security interest.
THE RECTIFICATION APPLICATION
[23] On learning of the breach of the Planning Act, Jeffrey Slopen’s law firm brought an application to rectify the mortgages, so that they would charge Parcels Two and Three in addition to Parcel One. RBC, BMO, Properties and the Interim Receiver were named as respondents to that application, which proceeded before Abbey J.
[24] In that application, both Slopen and the principal of the mortgagor filed evidence to the effect that it was their common intention to mortgage all three parcels of land.
[25] Abbey J. dismissed the application and, as a result, RBC’s mortgage against Parcel One remained void under the Planning Act. In his reasons, Abbey J. noted that in March 1999, at the time RBC agreed to advance the $2,300,000, there was no Planning Act violation. The pre-amalgamation corporation, 1156712, owned only Parcel One and did not own abutting land at the time. The amalgamation that ultimately affected the validity of the mortgage was effected after the MCA was entered into but before the $2,300,000 RBC mortgage was registered. But for the amalgamation and the effect that triggered under the Planning Act, the registered mortgage would be valid.
ISSUES
[26] The appeal and the cross-appeal raise the following issues:
Did the motion judge err in failing to find that the principles of res judicata and abuse of process precluded RBC from asserting a priority claim to the net sale proceeds of the subject property?
If res judicata and abuse of process do not apply, should RBC be granted the equitable remedy of either equitable mortgage or subrogation?
Does the RBC Assignment of Rents have priority over BMO’s security in respect of the net rents collected by the Interim Receiver from the subject property?
[27] For the reasons that follow, I am of the opinion that the motion judge did not err when she concluded that neither the principles of res judicata nor abuse of process precluded RBC from asserting its priority claim on the basis of equitable mortgage or subrogation; that RBC does not have a valid $2,300,000 equitable mortgage on Parcel One, but is entitled to priority over BMO to the extent of $854,184.11 on the basis of subrogation; and that the RBC Assignment of Rents has priority over BMO’s security.
I. RES JUDICATA AND ABUSE OF PROCESS
[28] BMO argues that, on the motion before Rady J., RBC was in substance seeking the same remedy as was sought in the rectification application – priority over the net sale proceeds of the Crawford Avenue property – on the basis of different legal theories. On the basis of the doctrines of res judicata and abuse of process, BMO submits that those legal theories ought to have been advanced as part of the rectification application.
[29] The motion judge, in her careful reasons, concluded:
[28] The unsuccessful application for rectification of the mortgage brought by Mr. Slopen’s law firm was in the nature of a “salvage” action to rectify the mortgage to reflect what was argued to be the parties’ intention. If rectification had been granted, RBC would have enjoyed a priority position and presumably the solicitor’s malpractice suit would be avoided. There was no need to raise any argument with respect to equitable principles or the doctrine of subrogation.
[29] The present proceeding is brought by the Interim Receiver, seeking the Court’s direction on the issue of priorities, the RBC mortgage having been found to be illegal. Essentially the court is being asked to deal with the consequences of the illegal mortgage. No legal or factual issues are being relitigated and this is not an attempt to impeach, in any way, the findings made by Abbey J.
[30] I agree. In Minott v. O’Shanter Development Co. (1999), 1999 ONCA 3686, 42 O.R. (3d) 321 at 329, Laskin J.A. writing on behalf of this court noted:
Res judicata itself is a form of estoppel and embraces both cause of action estoppel and issue estoppel. Cause of action estoppel prevents a party from relitigating a claim that was decided or could have been raised in an earlier proceeding.
[31] In this appeal, BMO relies on cause of action estoppel.
[32] BMO submits that the evidence in support of the equitable mortgage and subrogation remedies sought before Rady J. was before the court on the rectification application. Having sought to advance RBC’s claim to priority in the rectification application solely on the basis of rectification, BMO submits that RBC cannot now in this proceeding advance a claim to priority on the basis of different legal theories. Those legal theories were properly part of and ought to have been advanced in the rectification application.
[33] The rectification application was concerned with the mortgage itself, where it was argued that it was always the intention of the parties – both RBC and Properties – that the mortgage was intended to apply to Parcels One, Two and Three. That application was brought by the solicitors who acted for both parties to the mortgage. Had the application been successful, the mortgage would no longer be in breach of the Planning Act and an action against the solicitors would have been avoided. When the application failed, the adversity of interest between the solicitors and RBC crystallized. An action against the solicitors in negligence and breach of contract has been instituted and remains outstanding.
[34] Had RBC sought to have the issue of priorities as between it and BMO adjudicated in the proceedings before Abbey J., it would have been obliged to bring a separate application – an application to which the solicitors would not be a party and to obtain an order to have its application heard immediately following the rectification application. The issue of priorities was, in my view, irrelevant to the issue raised in the rectification proceeding. Only when the application for rectification was dismissed did it become necessary to determine the competing priority claims.
[35] The proceeding before Rady J. was brought by the Interim Receiver and sought the direction of the court as to whom the monies it had collected from the sale of the property and the collection of rents should be paid. This was a very different issue than the one determined by Abbey J.
[36] While some of the evidence before Abbey J. was necessarily led before Rady J. to provide context and background, the evidence that specifically related to the priorities issue was new. Clearly relevant to the priorities claim was evidence about what BMO knew about prior encumbrances, specifically the RBC mortgage, when it made its decision to loan money and take a GSA as security. Such was not evidence before Abbey J., nor could it be.
[37] In McQuillan v. Native Inter-Tribal Housing Co-Operative Inc. (1998), 1998 ONCA 6408, 42 O.R. (3d) 46, Charron J.A. writing for this court, wrote at p. 50:
The respondent does not contend that the cause of action is the same in both applications. Indeed, it is not. The respondent relies rather on a wider principle, often treated as covered by the plea of res judicata. The doctrine of res judicata, in its wider application, prevents a person from relying on a claim or defence which he or she had the opportunity of putting before the court in the earlier proceedings but failed to do so. This principle was adopted by the Supreme Court of Canada in Maynard v. Maynard, 1950 SCC 3, [1951] S.C.R. 346 at pp. 358-9 … (citing the often-quoted words of Wigram V.C. in Henderson v. Henderson (1843), 67 E.R. 313, 3 Hare 100 (Eng. V.C.)):
… where a given matter becomes the subject of litigation in and of adjudication by a court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of a matter which might have been brought forward as part of the subject in contest, but which was not brought forward only because they have from negligence, inadvertence or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation and which the parties, exercising reasonable diligence, might have brought forward at the time.
[38] In McQuillan, the appellant was seeking a prescriptive easement over a two-foot strip of land on the respondent’s property. In earlier proceedings, the appellant had sought a declaration of possessory title to the same two-foot strip of land based on much the same evidence. In the circumstances, the court had no difficulty concluding that the second application was precluded by the doctrine of res judicata. The court noted, at p. 51:
Upon careful review of the material filed in support of each application in this case, I am persuaded that the respondent’s position should be adopted. Although, in a strict legal sense, a different cause of action is advanced on this application, the appellant is in effect seeking an analogous remedy based on virtually identical facts. In each application, the appellant asserted a right to continue to use the two-foot strip of land on the respondent’s property as part of her driveway. It does not appear that it would make any practical difference to the appellant whether this right was asserted by way of possessory title or by way of prescriptive easement. On the facts as presented on the earlier application, it would have been open to advance not only the claim for possessory title but also, in the alternative, the claim to a prescriptive easement. In my view, the appellant’s second application falls clearly within the scope of the doctrine of res judicata in its wider application.
[39] In my view, that is not this case. Very different relief was sought and different evidence heard in each of the two proceedings.
[40] Clearly, the Interim Receiver had to have the priorities issue resolved before it could disburse funds, and the rectification application did not and could not deal with that issue. The doctrine of res judicata simply does not arise nor is there any abuse of process by bringing the second application.
II. a) SUBROGATION
[41] BMO argues that when it acquired its security interest (some two years after the RBC mortgage had been granted) in the Crawford property, there were no other valid encumbrances affecting the Crawford property. It says that the RBC mortgage, although registered, was void and of no effect and as a result, BMO acquired a first priority position in the Crawford property. As a purchaser for value, the only equities enforceable against BMO are those of which it had notice at the time it acquired its interest in the Crawford Property. And BMO submits that it had no notice of RBC’s equity of subrogation.
[42] The fallacy in BMO’s argument is that at the time it advanced funds and obtained the GSA which secured those funds, it was aware of the RBC $2,300,000 mortgage, believed that that mortgage had priority over its GSA and was not aware that there was any problem with the RBC mortgage. It advanced funds believing that its GSA ranked behind the RBC $2,300,000 mortgage. It was only after the companies fell into financial difficulty and the receiver appointed that a question was raised (by the Interim Receiver and not BMO) about the validity of RBC’s security in view of the apparent breach of the provisions of the Planning Act. Only after it became aware of the Elias financial difficulties. Thus, BMO was not in the position of a bona fide purchaser for value without notice as it did not give value for taking first place. It got what it paid for, and that did not include ranking as first mortgagee on the property.
[43] In Mutual Trust Company v. Creditview Estate Homes Limited (1997), 1997 ONCA 1107, 34 O.R. (3d) 583, this court considered the equitable remedy of subrogation. The facts in that case are as follows. The subject property was a family home purchased by IS and BS as joint tenants in December, 1988. As part of the purchase, IS and BS granted a first mortgage to Scotia Mortgage for $220,000. On April 23, 1990, IS and BS gave a further mortgage to the Bank of Nova Scotia in the sum of $15,000.
[44] In June 1991, RS, the son of IS and BS, was a commercial tenant of Creditview. On June 7, 1991, Creditview commenced an action against RS claiming damages for breach of lease. IS was also named a defendant in that action as the indemnifier of RS with respect to his obligations under the lease. IS transferred his interest in the home property to BS on March 12, 1991.
[45] On February 28, 1992, Creditview commenced an action against IS and BS for a declaration that the transfer from IS to BS was a fraudulent conveyance and void as against Creditview.
[46] On March 2, 1992, Creditview obtained a certificate of pending litigation (CPL) and registered it against the title to the home property.
[47] On September 3, 1992, Mutual Trust agreed to provide $230,000 to refinance the home property to be secured by a first charge. A solicitor retained by Mutual Trust to act on its behalf did not report the existence of the CPL to Mutual Trust.
[48] The Mutual Trust refinancing charge was registered September 16th, 1992, which secured the principal sum of $229,500. Discharges of the Scotia Mortgage and Bank charges were also registered. No request was made to Creditview to subordinate its CPL to the Mutual Trust charge.
[49] A total of $228,863.37 was advanced under the Mutual Trust charge. Of that sum, $227,967.14 was paid to Scotia Mortgage and the Bank for discharges of their charges.
[50] Following its discovery of the CPL on title, Mutual Trust brought an application for an order declaring that the CPL was subordinate to the Mutual Trust charge. The application succeeded on the ground that the Mutual Trust charge was subrogated to the Scotia Mortgage and the Bank charges that it replaced and, accordingly, it ranked ahead of the CPL. This court noted, at pp. 586-587:
In granting Mutual Trust’s application, Adams J. held that the doctrine of subrogation applied, that it was not proscribed by the Registry Act, R.S.O. 1990, c. R.20, that the fundamental principle underlying the doctrine was one of fairness in light of all the circumstances, that it applied to certificates of pending litigation, that the negligence of the party claiming subrogation was not determinative of the issue, that subrogation is not precluded by the fact that the lands in question are in the land titles system, and the fact that IS was only a guarantor of Mutual Trust’s charge presented no obstacle to granting the declaration sought. I agree entirely with his reasoning and his conclusions of these points [citation omitted].
[51] The court went on to quote with approval the following reasoning of Adams J:
The fundamental principle underlying the equitable doctrine of subrogation is one of fairness in light of all the circumstances. Within this principle is an understanding that no injustice is done by the appropriate subrogation of a party to the rights of original mortgages. Thus Street J. in Brown v. McLean (1889), 18 O.R. 533 (H.C.) at p. 536, stated:
I think, however, that the plaintiff here is entitled upon the ground of mistake to be subrogated to the rights of the original mortgagees to the extent of allowing him a priority over the defendant for the amount he paid to discharge their mortgages. It is clear beyond question that he would not have discharged these mortgages had he been aware of the existence of the Defendant’s fi fa. He would either have refused to make the advance altogether, or he would have had the mortgages assigned to him instead of discharging them.
It is equally clear that the defendant has not been in any way prejudiced by what has happened, and that no injustice will be done by replacing him in his former position.
This is because the equity of subrogation affixes to the land in relation to which the third party advanced the mortgage funds. Further, it is not determinative that the entire situation arises because of the negligence of the party claiming subrogation. … In fact, the doctrine is usually called into play because of a mistake or inadvertence. Accordingly, it is not enough to point to negligent conduct to defeat the doctrine’s application. The issue remains one of fairness between the affected parties having regard to all the circumstances.
[52] The motion judge in this case concluded that RBC was entitled to rely on the doctrine of subrogation to recover monies advanced to pay municipal taxes and to discharge prior mortgages on Parcel One, all of which totalled $854,184.11. She concluded there was ample authority for the proposition that a mortgagee who pays off earlier encumbrances is entitled to the priority position of those earlier charges. She quoted from Crosbie-Hill v. Sayer, [1908] 1 Ch. 866, as follows:
[W]here a third party at the request of a mortgagor pays off a first mortgage with a view to becoming himself a first mortgagee of the property, he becomes, in a default of intention to the contrary, entitled in equity to stand, as against the property, in the shoes of the first mortgagee.
[53] The motion judge reasoned:
[47] … In my view, it would be simply unfair in the circumstances of this case to deny RBC its subrogation rights. BMO did not rely on the abstract of title to its detriment. Indeed, BMO was aware of the prior advances made by RBC and it assumed that RBC’s security was validly registered. This is made evident by the candid testimony of James Graham, a representative of BMO, during the course of his cross-examination. The transcript reveals the following questions and answers.
58Q. And you were aware of the mortgage financing that had been put in place before Bank of Montreal got involved?
A. That’s right, yes.
125Q. And so Bank of Montreal knew that there were prior registrations including registrations in favour of Royal Bank, right?
A. That’s right.
127Q. Now can we agree, Mr. Graham, that when the Bank of Montreal first lent its money to or granted demand loan facility to Elias it assumed that Royal Trust mortgage of 2.3 million dollars was validly registered?
A. Yes, that’s right.
[48] As a result, BMO made its lending decision knowing of RBCs prior registered interest. Presumably, it was content to rank behind the RBC mortgage of $2.3 million. That was a business decision that it was entitled to make after weighing the relative risks and benefits.
[49] BMO may suffer a loss but it seems to me that this was a risk undertaken by BMO in making the loan in question. Its loss is not, strictly speaking, caused by RBC’s right of subrogation, but rather by reason of the deficiency in the value of the security and the underlying covenant. Moreover, to deny subrogation would give BMO an unanticipated windfall. BMO would be unjustly enriched ... In other words, BMO would receive the value of RBC’s advances totalling $854,184 which increased the equity in the property and it would be unjustly enriched as a result. This windfall is made more unfair because BMO only discovered that there might be a defect in RBC’s security in the spring of 2002, more than a year after its registrations under the PPSA. It was at that time that BMO took steps to register its GSA against Parcels 1 and 3. BMO also registered its Notices of Agreement Charging Land and Caution in May, August and October 2002, all after it became aware of the potential defect in the RBC mortgage.
[50] I pause here to note that RBC is entitled to subrogation not only for the mortgages that it retired but also for the City taxes it paid on behalf of the mortgagor. Authority for this is found in Traders Realty Ltd. v. Huron Heights Shopping Plaza Ltd., 1967 ONSC 261, [1967] 64 D.L.R. (2d) 278 (H.C.J.) and the rationale is consistent with the reasoning expressed in the Creditview trilogy reviewed above.
[51] Before leaving the subject, I should deal with BMO’s submissions on the issue. It asserts that the doctrine does not appear to have been applied to give a claimant priority over a creditor whose claim did not exist at the time of the payment or advance in question. I can see no reason, in principle, why subrogation should not apply in such a case, particularly where the subsequent creditor has not been misled or has not relied on an abstract of title to its detriment.
[52] BMO asserts that subrogation cannot arise because the RBC mortgage was void. I disagree. Subrogation does not depend on the validity of the underlying registration but arises by virtue of the advance of funds to pay out prior encumbrances.
[54] I agree with her reasoning. On the facts, there is no question that BMO assumed that RBC’s security had priority to the extent of $2,300,000 over its GSA. It made its loan to the companies on that basis and, at the time, had no basis to question the validity of the RBC mortgage. It advanced its funds on the assumption that the RBC mortgage was valid and had priority over the GSA.
[55] In such circumstances, there can be no unfairness to BMO if the doctrine of subrogation is invoked to give priority to RBC over BMO to the extent of the earlier mortgages and municipal taxes paid out from the funds advanced by RBC.
b) EQUITABLE MORTGAGE
[56] On cross-appeal, RBC argues that it has a valid equitable mortgage for $2,300,000 on Parcel One, which was created on March 26, 1999 when 1156712 accepted the terms of the RBC MCA dated March 15, 1999. When that equitable mortgage was created, title to Parcel One was in the name of 1156712, which owned no abutting land. Thus, RBC submits, there was no violation of the Planning Act.
[57] The motion judge rejected this argument. In reaching this conclusion, the motion judge relied on the decision of this court in Tessis v. Scherer (1982), 32 O.R. (2d) 149, leave to appeal to S.C.C. refused, [1982] 2 S.C.R. xi. In that case, a mortgagee sought to enforce a mortgage that had been made in violation of the Planning Act; the mortgagor owned abutting parcels of land at the time of the mortgage. This court concluded that the mortgage conveyed no interest as a result of this breach. It does not appear that an argument was made about whether the loan agreement between the parties created an equitable mortgage.
[58] That issue was raised specifically in the related matter before Sutherland J. in Scherer v. Price Waterhouse, [1985] O.J. No. 881 (H.C.J.). In his decision, Sutherland J. carefully reviewed the law on equitable mortgages and concluded that an equitable mortgage had not arisen on the facts of that case. At para. 22, he wrote:
The highest interest in the land that can have been conferred on Tessis by the loan agreement is the right to an equitable mortgage after the required planning consent had been obtained. In no true sense of the term can Tessis be said to have had an equitable mortgage before that consent was obtained. This is not a case of a want of formalities in the mortgage document or a case of the refusal by the borrower to execute a mortgage. Although there undoubtedly was a mistake the usual equitable remedies are not available if to purport to make them available would be to contravene the statute. No equitable mortgage arises upon the entry into the loan agreement. To put the matter another way, in the absence of the required consent the loan agreement does not create an equitable mortgage any more than a legal mortgage document, correct in all its documentary formalities, creates a legal mortgage. At the material times, Tessis was not an equitable mortgagee.
[59] Because the loan agreement was entered into at a time when the mortgagor owned abutting parcels of land and consent had not been obtained under the Planning Act, there was no equitable mortgage because to recognize one would have been in contravention of the statute.
[60] In the instant case, after reviewing the law on equitable mortgages, the motion judge concluded:
This is not a case involving a want of formalities, an inadvertent omission or misdescription or a refusal on the part of the mortgagor to provide a mortgage. In fact, a mortgage was duly prepared, executed and registered as the parties had agreed. The wrinkle was that no planning consent was obtained and the mortgage was void as a result. I agree … that an equitable mortgage cannot arise upon acceptance of the commitment letter unless a consent is obtained because to hold otherwise would permit a contravention of the statute.
[40] Moreover, if an equitable mortgage confers the same rights as a legal mortgage, it follows that the mortgagee could foreclose or sell the property. This would result in a change in ownership, the very thing the Planning Act seeks to prevent or at least, regulate. As a result, I am not persuaded that the commitment letter gave rise to an equitable mortgage in the circumstances of this case.
[61] I agree with the motion judge that there was no enforceable equitable mortgage on Parcel One. However, I reach this conclusion for different reasons.
[62] As noted by the motion judge, “[t]he legal concept of an equitable mortgage has existed for hundreds of years.” Despite this long history, there is a dearth of recent jurisprudence in Ontario on this concept. As such, some comment is in order on the nature of an equitable mortgage, the manner by which an equitable mortgage is created, and the priorities of enforcement.
- The nature of an equitable mortgage
[63] An equitable mortgage is distinct from a legal mortgage. “An equitable mortgage is one that does not transfer the legal estate in the property to the mortgagee, but creates in equity a charge upon the property”: A.H. Oosterhoff & W.B. Rayner, Anger and Honsberger: Law of Real Property, 2d ed. (Aurora, Ont.: Canada Law Book) at 1643.
[64] The concept of an equitable mortgage would seem to find its foundation in the equitable maxim that “equity looks on that as done which ought to be done”. Historically, the courts of equity mitigated the rigour of the common law, tempering its rules to the needs of particular cases on principles of justice and equity. The common law courts were primarily concerned with enforcing the strict legal rights of the parties, whereas equity was a court of conscience; it would step in to prevent an injustice that would otherwise arise from the strict application of the law.
[65] In essence, the concept of an equitable mortgage seeks to enforce a common intention of the mortgagor and mortgagee to secure property for either a past debt or future advances, where that common intention is unenforceable under the strict demands of the common law.
- How is an equitable mortgage created?
[66] In Scherer v. Price Waterhouse, Sutherland J. discussed the manner in which an equitable mortgage is created, at para. 20:
In one part of his submissions the applicant claimed to be an equitable mortgagee, citing, among other things, the following passage from Fisher and Lightwood’s Law of Mortgage, 7th ed., at p. 16:
Equitable mortgages of the property of legal owners … are created by some instrument or act which is insufficient to confer a legal estate, but which, being founded on valuable consideration, shows the intention of the parties to create a security; or in other words, evidences a contract to do so.
In Falconbridge, Law of Mortgages, 4th ed., at p. 80, the following statement is made about equitable mortgages:
An equitable mortgage therefore is a contract which creates in equity a charge on property but does not pass the legal estate to the mortgagee. Its operation is that of an executory assurance, which, as between the parties, and so far as equitable rights and remedies are concerned, is equivalent to an actual assurance, and is enforceable under the equitable jurisdiction of the court.
5.2 How an Equitable Mortgage is Created
The equitable nature of a mortgage may be due either (1) to the fact that the interest mortgaged is equitable or future, or (2) to the fact that the mortgagor has not executed an instrument sufficient to transfer the legal estate. In the first case the mortgage, be it [ever] so formal, cannot be a legal mortgage; in the second case it is the informality of the mortgage which prevents it from being a legal mortgage. These alternatives will be discussed separately. (3) An equitable mortgage may also be created by deposit of title deeds.
It is clear that neither (1) nor (3) above have any application to the facts of this matter and that we need be concerned only with (2) above. In the same publication there appears, at p. 83, under the heading “Mortgage by Instrument not Sufficient to Convey the Legal Estate”, the following passage:
(1) Conveyance defective in form
If a document in the form of a legal mortgage is signed but not sealed, or for any other reason is not sufficient to transfer the legal estate, it is an equitable mortgage.
An instrument intended to operate as a legal mortgage, which fails so to operate for want of some formality, is valid as an equitable charge and gives the mortgagee a right to a perfected assurance.
(2) Agreement to give a Mortgage
An agreement in writing duly signed to execute a legal mortgage is an equitable mortgage, operating as a present charge on the lands described in the agreement.
[67] In this case, we are concerned with a mortgage by an instrument that is insufficient to convey the legal estate – the MCA.
- Priorities
[68] Given that this cross-appeal essentially involves a contest of priority between RBC and BMO to the funds realized upon the sale of the Crawford Avenue property, it is necessary to briefly consider the priorities of enforcement as they relate to equitable mortgages.
[69] In this regard, I adopt the following equitable “rules” as summarized in Falconbridge on Mortgages, 5th ed., looseleaf (Agincourt, Ont.: Canada Law Book, 2003) at paras. 7:20 – 7:40:
Rule 1. As between two equitable mortgages the first in time has priority, unless the second mortgagee, taking in good faith for value and without notice, has been misled by the fraud or negligence of the first mortgagee, or by a representation of the first mortgagee which estops him or her from claiming priority over the second mortgage.
Rule 2. As between a first legal mortgage and a second equitable mortgage, the first mortgage has priority, unless the second mortgagee, being a mortgagee in good faith for value and without notice, has been misled by the fraud or negligence of the first mortgagee in connection with the taking of the first mortgage or the subsequent fraud (as distinguished from mere negligence) of the first mortgagee, or unless the first mortgagee is estopped from claiming priority.
Rule 3. As between a first equitable mortgage and a second legal mortgage, the second mortgage has priority if the mortgagee has acquired the legal estate in good faith for value and without notice [emphasis added].
- Does the commitment letter give rise to an enforceable equitable mortgage?
[70] In order for the MCA to give rise to an enforceable equitable mortgage in this case, it must have arisen prior to April 1, 1999 – the date of amalgamation.
[71] With respect, I disagree with the motion judge that a Planning Act consent was required before the MCA could give rise to an equitable mortgage. In reaching this conclusion, the motion judge appears to have been wrongly influenced by the conclusion of Sutherland J. in Scherer v. Price Waterhouse.
[72] Importantly, in Scherer, the loan agreement contravened the Planning Act because the mortgagor owned an interest in an abutting parcel of land at the time the loan agreement was signed and accepted. Here, however, 1156712 did not have any interest in any abutting land at the time the MCA was signed and accepted on March 26, 1999. It only acquired an interest in abutting land on April 1, 1999 as a result of amalgamation. Consequently, if an enforceable equitable mortgage is found to have arisen prior to amalgamation, there would be no violation of the Planning Act; no consent was required at that time. Unlike Scherer, this would not be a case in which provisions of the Planning Act were not complied with.
[73] With that in mind, I turn to the consideration of whether an enforceable equitable mortgage actually arose prior to the date of amalgamation.
[74] RBC signed the MCA on March 15, 1999. It was accepted and signed back to RBC on March 26, 1999. Under the heading “SECURITY”, the mortgagor and mortgagee agreed as follows:
The security for this loan, registered or recorded as required by [RBC], shall be:
A first charge/mortgage on the freehold property owned by [1156712] and known as 655 Crawford Avenue, in the City of Windsor, being Conc 1, Part 1, Ref Plan 12RI0596 (the “Property”).
A first ranking security interest in an assignment of rentals payable by all tenants of the Property, present and future.
A first and specific registered assignment of the current leases to those tenants as outlined on Form J attached.
Further, [1156712] will provide [RBC], on request, with a first and specific assignment of such other present and future leases of the Property which [RBC] may designate in writing from time to time.
[75] The MCA was subject to the following conditions precedent:
Prior to an advance of funds hereunder, at [1156712’s] expense, [1156712 is] to provide [RBC] with:
Completion Certificate indicating the new building is completed and that the renovations are completed on the existing building.
A Remediation Report from Agra Earth & Environmental indicating that the environmental concerns outlined in the Agra Report of December 13, 1995 have been remediated in accordance with MOE guidelines.
[76] Thus, before it can be considered a binding contract, the two conditions must have been either satisfied or waived. And the finding of an enforceable equitable mortgage on Parcel One is dependent on satisfaction or waiver prior to April 1, 1999.
[77] On the record before this court, there is no evidence of compliance with or waiver of the two conditions prior to the date of amalgamation. As a result, RBC does not have a valid and enforceable equitable mortgage on Parcel One.
[78] I conclude with the following observations. Had the conditions precedent been satisfied or waived prior to April 1, 1999, I would have concluded that the MCA gave rise to a valid equitable mortgage for $2,300,000 on Parcel One. But for the conditions, the MCA evidenced a common intention to secure property, which was supported by the valuable consideration of the exchange of promises between RBC and 1156712 regarding the security of that property and the future advance of $2,300,000.
[79] In that context, the equitable mortgage would not have been in violation of the Planning Act, because it would have arisen prior to amalgamation. As already discussed, this is a key factual difference between this case and Scherer v. Price Waterhouse.
[80] In addition, the equitable mortgage would have been enforceable in priority to BMO’s GSA. This is because, as already discussed, BMO acquired its legal charge with notice of RBC’s mortgage financing. In this context, it makes no difference that BMO was not aware of the equitable mortgage, given its knowledge of the registered, albeit invalid, mortgage. As a result, and in accordance with the third rule of priorities already described, the equitable mortgage would rank in priority to BMO’s subsequent legal interest.
[81] If that were the case, RBC would be entitled to that portion of the $1,670,000 realized upon the sale of 655/755 Crawford Avenue that can be attributed to Parcel One. This would not, as the motion judge feared, “result in a change in ownership [to Parcel One], the very thing the Planning Act seeks to prevent or at least, regulate.”
III. NET RENTAL PROCEEDS
[82] In addition to the money it collected from the sale of the property, the Interim Receiver also collected money in rental proceeds from Parcel One.
[83] As noted by the motion judge, RBC was granted an Assignment of Rents by Properties, which was registered under both the PPSA and the Land Titles Act. RBC registered two Financing Change Statements under the PPSA. The first was dated April 7, 1998 and referred to an assignment of rents in respect of Parcel One. The second, dated August 31, 2000, referred to a general and specific assignment of rents.
[84] RBC conceded before the motion judge that the registration of the Assignment of Rents under the Land Titles Act was also void because of the Planning Act breach. It argued, however, that the registration under the PPSA remained valid and binding and took priority over any subsequent PPSA registrations, including those of BMO.
[85] I agree with the motion judge’s conclusion that the PPSA registrations are not inextricably bound to the Assignment of Rents. They are capable of existing independently, such that their valid registrations take priority over BMO’s GSA registered under the PPSA in 2001. The PPSA registrations and the Assignment of Rents evidence an interest in an income stream and, as a result, are not dependent on the validity of the underlying registration against title to the lands. RBC is entitled to the net rental proceeds.
DISPOSITION
[86] In the result, the appeal is dismissed and the cross-appeal is dismissed. Counsel agree that the successful party on the appeal should have costs fixed in the sum of $10,000 and, on the cross-appeal, in the sum of $5000.
[87] Accordingly, RBC is entitled to costs of the appeal fixed in the sum of $10,000 and BMO is entitled to costs of the cross-appeal fixed in the sum of $5000. Both figures are inclusive of disbursements and G.S.T.
RELEASED: September 19, 2006 “DOC”
“J. MacFarland J.A.”
“I agree D. O’Connor A.C.J.O.”
“I agree Doherty J.A.”