DATE: 20061031
DOCKET: C44990
COURT OF APPEAL FOR ONTARIO
GOUDGE, SIMMONS AND BLAIR J.J.A.
B E T W E E N :
DUCA FINANCIAL SERVICES CREDIT UNION LTD.
Duncan C. Boswell and Benjamin La Borie for the appellants
Plaintiff
(Respondent)
- and -
MARIA LOUISA BOZZO AND ALBERT BOZZO
Kenneth G. Hood for the respondent
Defendants
(Appellants)
Heard: October 17, 2006
On appeal from the order of Justice James M. Farley of the Superior Court of Justice dated February 2, 2006.
R.A. BLAIR J.A.:
OVERVIEW
[1] Mr. and Mrs. Bozzo seek to set aside the order of Justice Farley, dated February 2, 2006, dismissing their motion to amend their statement of defence in certain respects.
[2] As the motion judge noted, there has been a long history of litigation between the plaintiff and the Bozzos. An important feature of this story is a second mortgage on certain development property in the Brampton area provided to Duca Financial Services Credit Union Ltd. by Joco Investments Ltd., and guaranteed by Mr. Bozzo. Mrs. Bozzo is not a guarantor. The mortgage was in the principal amount of $1,200,000 and was registered on January 17, 1990.
[3] The mortgage fell into default in November 1991. In May 1992, Duca obtained judgment against Mr. Bozzo on the guarantee, and after an unsuccessful appeal, Mr. Bozzo was petitioned into bankruptcy. Neither he nor his trustee in bankruptcy took any official steps to assert whatever rights Mr. Bozzo might have had against Duca, in his capacity as guarantor of the mortgage, in relation to the real property which provided security for the debt of the principal debtor, Joco.
[4] Duca has not recovered on its debt through the bankruptcy proceedings. Mr. Bozzo has been discharged from bankruptcy, but in December 1996, Duca obtained an order pursuant to section 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"), entitling it to commence this action.[^1] The pertinent causes of action asserted in the statement of claim consist of (a) a claim to set aside an $80,000 payment made by Tavender Lane Inc. to Mrs. Bozzo on account of some consulting work done by Mr. Bozzo for Tavender in relation to a golf course and, (b) a claim to set aside a trust declaration providing that fifty-one shares of The Abbas Group Inc. (a Bozzo company) in Mr. Bozzo's name are held in trust for Mrs. Bozzo.
[5] This appeal arises because the appellants seek to amend their statement of defence to raise issues respecting the sale of the mortgaged premises referred to above. Duca sold the property in 2001, pursuant to an order permitting a power of sale, for $2.4 million, an amount insufficient to discharge the first mortgage and the Duca second mortgage. The appellants say this constituted an improvident sale. They wish to amend to allege improvident sale by way of defence, as well as de facto foreclosure, which they assert arises from certain acts Duca undertook in relation to the property in early 1996 ("The Improvident Sale/Foreclosure Claims"). They seek to argue that Duca's recovery in the action, which could never exceed what Mr. Bozzo owed on the guarantee, should be reduced by the shortfall created by the improvident sale or de facto foreclosure.
[6] Justice Farley dismissed the motion on the basis that the appellants were precluded from raising these issues at this time, in this action, on res judicata and abuse of process grounds.
[7] We agree with the decision of the motion judge in the result, but not for the reasons on which he relied.
DISCUSSION
[8] Undoubtedly the motion judge was of the view that Mr. Bozzo could have, and should have, exercised whatever rights he may have in respect of his claim to be protected by the mortgage security, either in conjunction with the action on the guarantee or in opposition to the granting of the receiving order in the bankruptcy proceedings. He therefore concluded that the appellants were precluded from raising such issues at this late stage in the global dispute between the parties, and in these proceedings, on res judicata, estoppel and abuse of process grounds.
[9] However, the essential facts upon which the Improvident Sale/Foreclosure Claims are based did not arise until after both of the earlier proceedings had taken place, and, accordingly, could hardly have formed the basis of an issue determined between the parties at those times. Respectfully, we do not think that the doctrines of res judicata or abuse of process provide a basis for dismissing the appellants' motion to amend at this time.
[10] Nonetheless, the decision to dismiss the motion to amend was the correct one, in our view. The Improvident Sale/Foreclosure Claims cannot provide a defence to the claims being made by Duca in this action, nor can they operate as a defence by way of set-off. To the extent that they may give rise to a separate counter-claim, they are not Mr. Bozzo's, but rather the trustee's, to assert.
[11] A section 38 proceeding under the BIA is brought where a creditor believes that an action would be for the benefit of the bankrupt estate but the trustee declines to take it. An order granted under section 38 permits the creditor to pursue the action at the creditor's own expense and to recover for itself any benefit derived from the proceeding to the extent of its claim plus costs; any surplus obtained belongs to the bankrupt estate: BIA, supra, s. 38.
[12] Thus, Duca, as plaintiff in this action, is not asserting its claim for the guarantee debt owed by Mr. Bozzo. Rather, it is asserting what would otherwise be the trustee's claim to set aside two transactions – unrelated to the mortgage property or the guaranteed debt – and theoretically to recover money or money's worth for the benefit of the estate and the creditors as a whole. The fact that the statutory scheme entitles the section 38 creditor to be paid out of the proceeds in priority to other creditors, or that, on the facts of this case, there are no other creditors, does not change this scenario. In these circumstances, we do not see how Mr. Bozzo's claim to be protected in relation to the security provided for the loan he guaranteed can give rise to any defence to the claims asserted against the defendants in this action.
[13] Nor do we see how the Improvident Sale/Foreclosure Claims could operate by way of set-off to the plaintiff's claim, as argued by Mr. Boswell. Legal set-off cannot apply given the absence of mutual debts. Moreover, equitable set-off cannot apply because the alleged fraudulent preferences arise from transactions that are completely different from the mortgage guarantee that gives rise to the security-related allegations; clearly they are not so inextricably intertwined as to support such a set-off claim: see Holt v. Telford, 1987 18 (SCC), [1987] 2 S.C.R. 193 at 204, 211-212.
[14] Finally, to the extent that the Improvident Sale/Foreclosure Claims could amount to a separate counter-claim by Mr. Bozzo against Duca, such a claim is no longer Mr. Bozzo's to assert. The Improvident Sale/Foreclosure Claims against Duca, as creditor, arise out of the general propositions that a guarantor is entitled, from the moment of his or her guarantee, to call for the benefit of all securities held in respect of the guaranteed debt, if needed, and that a creditor has a general obligation to protect and preserve the security and to be in a position to return or reassign the security to the debtor or surety on repayment of the debt: see Bauer v. Bank of Montreal, 1980 12 (SCC), [1980] 2 S.C.R. 102 at 106; First City Capital Ltd. v. Hall, (1993) 1993 8595 (ON CA), 11 O.R. (3d) 792 at 795 (C.A.). Should the mortgaged property be disposed of by power of sale, the mortgagee's obligation is to account for the proceeds of sale: see Walter M. Traub, Falconbridge on Mortgages, 5th ed. looseleaf (Aurora: Canada Law Book, 2004) c. 31 at 31-12 – 31-14; Mortgages Act, R.S.O 1990, c. M.40, s. 27.
[15] In this context, the right that Mr. Bozzo had to require Duca to obtain fair market value if it sold the security constituted a chose in action that passed to the trustee on Mr. Bozzo's bankruptcy. The later allegedly improvident sale may fix the recovery available based on that chose in action, but does not create a new chose in action inuring to Mr. Bozzo's benefit post-bankruptcy. Any claim based upon this chose in action must therefore be asserted by the trustee, and not by Mr. Bozzo, unless, of course, Mr. Bozzo can persuade the trustee to pursue the Improvident Sale Claims or assign them to him.
DISPOSITION
[16] For the foregoing reasons, then, we dismiss the appeal and affirm the decision of the motion judge to dismiss the appellants' motion to amend, albeit on a different basis than that relied upon by him.
[17] The respondent is entitled to its costs of the appeal, fixed at $6,418.11 inclusive of disbursements and GST.
"R.A. Blair J.A."
"I agree S.T. Goudge J.A."
"I agree J.M. Simmons J.A."
RELEASED: October 31, 2006
[^1]: In accordance with the s. 38 Order, the trustee in bankruptcy assigned all of its rights to the claims asserted in the action to Duca.