SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: CV-11-9452 CL
DATE: 20120815

RE: ROMSPEN INVESTMENT CORPORATION , Applicant

AND:

EDGEWORTH PROPERTIES - DERRICK VIEW ESTATES INC., 1253122 ALBERTA LTD., EDGEWORTH PROPERTIES - HEARTLAND RIDGE INC., EDGEWORTH PROPERTIES - SOUTHPOINT LANDING INC., EDGEWORTH PLACE AT SPRUCE RIDGE DRIVE INC., EDGEWORTH PROPERTIES – CREEKSIDE ESTATES INC., EDGEWORTH PLACE AT HEARTLAND INC., EDGEWORTH PROPERTIES – WOLF CREEK ESTATES INC., EDGEWORTH ESTATES AT MANNING DRIVE PHASE I INC., EDGEWORTH PROPERTIES – ELLERSLIE RIDGE INC. , 1519560 ALBERTA LTD., DERRICK VIEW ESTATES PHASE II INC., 1330433 ALBERTA LTD. , Respondents

BEFORE: C. Campbell J.

COUNSEL:
David P. Preger and Lisa S. Corne , counsel for the Plaintiff, Romspen Investment Corporation

R. Shayne Kukulowicz and Kate Stigler , counsel for the Defendants, Edgeworth Properties Inc. et al.

Katherine McEachern, counsel for the Monitor

Craig A. Mills, Terrence Warner and Lesley Akst, Counsel for the Receiver

Ken Lenz, representative counsel to the Edgeworth Mortgage Investment Corporation, Edgeworth Mortgage Investment II Corporation and Biggs Avenue Mortgage Investment Corporation and the preferred shareholders of same

John Salmas , Canada Mortgage and Housing Corporation

MONITOR: Daniel Sobel

HEARD: July 31 and August 3, 2012

ENDORSEMENT

[ 1 ] Romspen Investment Corporation (“Romspen”) claims as the first secured mortgage creditor of the Respondents and seeks on this motion a declaration of the validity of its security over the real property and related personal property of the Respondents and an order as against Edgeworth (in CCAA) and other claimant creditors for the listing and sale of various remaining receivership properties.

[ 2 ] The relief sought is opposed on behalf of the many holders of undivided interest investors (the “UDI Investors”) and various lot purchasers (the “Lot Purchasers”) in many of the properties over which Romspen claims for security. The UDI Investors also oppose the distribution proposed by the Receiver to Romspen of funds from the sale of properties previously authorized by orders of this Court.

[ 3 ] As the UDI Investors and the Lot Purchasers were not represented by counsel at this time, the Court requested the Receiver of Edgeworth to undertake an investigation of the claims of the UDI Investors and Lot Purchasers and obtain a report from Alberta counsel to the Receiver with respect to the priority claim of Romspen.

[ 4 ] The Romspen relief is also opposed on behalf of mortgage corporation investors (MIC) in respect of receivership properties over which they claim priority of security interest.

[ 5 ] The Court having heard the Romspen position delayed rendering a decision to enable representatives on behalf of UDIs and Lot Purchasers to make further submissions. Written submissions were received from Mr. Clinton Thierman who also made oral submissions as did Mr. Wei Cheng Tan and Mr. Edwin Neo. Mr. Murray Wotherspoon made oral comments.

[ 6 ] Having heard submissions on behalf of all parties and for the reasons below, I am satisfied that Romspen is entitled to the relief sought and the Order with the amendments agreed on by counsel discussed in the telephone conference call of August 3 should issue.

[ 7 ] Romspen seeks an order:

a) declaring that it holds valid, enforceable, first, and in certain cases second, ranking security against the real properties and related personal property owned by the Edgeworth Respondents, subject only to certain charges created by the Receivership Order, the Bankruptcy and Insolvency Act , and liens for unpaid municipal realty taxes collectively;

b) directing MNP Ltd. in its capacity as Court-appointed receiver to distribute to Romspen from the net sale proceeds realized from the Properties sold by the Receiver, all amounts required to repay the indebtedness of the Respondents to Romspen; and

c) permitting Romspen to proceed with judicial sale/foreclosure proceedings in Alberta in respect of the remaining Receivership Properties (other than the property owned by Edgeworth Place at Spruce Ridge Drive Inc.).

[ 8 ] Romspen advanced funds to the Respondents pursuant to a Commitment Letter dated September 27, 2010, as amended by Supplement No. 1 dated October 7, 2010. Of the funds advanced by Romspen, $9.7 million was used by the Respondents to refinance and replace pre-existing mortgages registered against Spruce Ridge, $1.34 million was used to refinance and replace a pre-existing mortgage on a property known as Half Moon Lake and $5.5 million was used to purchase the Blackfalds property.

[ 9 ] Romspen’s advances to the Respondents are secured by a mortgage and supplemental mortgage registered against title to all of the Properties, and a security interest in all of the Respondents’ personal property.

[ 10 ] In addition, Romspen acquired an assignment of certain loans and security held by Liberty Mortgage Services Ltd., Sterling Bridge Mortgage Corp. and Hurlburt Farms Ltd., each of which rank in priority to Romspen’s blanket mortgage.

[ 11 ] Based on the material before the court, I accept the analysis by Romspen that all of the existing interests and encumbrances registered against the Receivership Properties and in particular as set out in the table in the material where the interests of Rompsen, the MIC investors, the UDI investors and the Lot Purchasers rank in terms of priority i set out.

[ 12 ] There are seven properties in which postponements were given by Edgeworth Mortgage Investment Corporation to Romspen’s $23.5 million blanket mortgage. In respect of each of those seven Properties, Romspen’s $23.5 million blanket mortgage is either in first or second position (behind one of the assigned mortgages noted above). In respect of three of the seven properties, the first-ranking mortgage which has now been assigned to Romspen was registered before the MIC mortgage was registered. Therefore, Romspen as assignee of the first ranking mortgages, ranks in priority to the MICs with respect to those three properties regardless of whether the postponements granted by the MICs are valid. Moreover, there are four Properties which are subject to a mortgage held by Edgeworth Mortgage Investment II Corporation or Biggs Avenue Corporation. However, in each case where there is a mortgage held by Edgeworth Mortgage Investment II Corporation, or Biggs Avenue Corporation, Romspen’s $23.5 million blanket mortgage was registered before Edgeworth Mortgage Investment II Corporation’s charge, and before Biggs Avenue Corporation’s charge.

[ 13 ] In response to the Edgeworth Group’s application for relief pursuant to the CCAA , Romspen sought leave to commence foreclosure proceedings in respect of the Properties. In light of objections raised by the Respondents and certain other stakeholders, and a proposal for a compromise which would avoid seeing Romspen ensnared in a costly, full-blown CCAA proceeding, Romspen sought the appointment of the Receiver, as an alternative to foreclosure, provided that it was on terms which treated all mortgagees equally.

[ 14 ] Although all mortgagees were initially treated equally under the Appointment Order, that changed with the Order dated December 12, 2011 lifting the stay of proceedings to permit Firm Capital Mortgage Funds Inc. to proceed with judicial sale/foreclosure proceedings to be supervised by this Court.

[ 15 ] When Romspen proffered the receivership option, the Edgeworth group and its chief restructuring officer were optimistic that they would be in a position to seek approval of a sale of the Properties within 60 to 90 days which would generate sufficient proceeds to repay the third party mortgagees, including Romspen, in full. Unfortunately, that has not happened.

[ 16 ] Romspen now wishes to realize upon the Judicial Sale Properties, without the associated costs of the Receiver. The expenses associated with the within the receivership are significant. For example, where a Receiver’s sale of a property has been approved by the Court in Ontario, an associated recognition motion in Alberta has been necessary. The costs associated with the receivership could may well represent the difference between a partial recovery for MIC and UDI investors and lot purchasers (or some of them) and a shortfall for Romspen. In the circumstances, I conclude, there is no benefit to be gained by incurring further professional costs associated with the receivership which will only reduce potential recoveries for all of the stakeholders, including the MICs, UDIs and lot purchasers.

[ 17 ] The position of the UDI investors is well set out in the written submissions by Mr. Thierman which in essence comes down to a statement of the UDI contractual position against Edgeworth which is urged was one of trust given the promise of registration of their interest which is urged should be binding on the Romspen given imputed or actual knowledge of the UDI interests.

[ 18 ] Mr. Thierman in an impassioned written submission urges rejection of the Romspen position in summary as follows:

a) that UDI investors are innocent victims of the breaches of trust and contract by Edgeworth and its officers;

b) since the UDI investors were entitled to property by their investment, Edgeworth could not issue the postponements to Romspen as it did not have the legal capacity to do so.

c) Romspen must have known that Edgeworth did not have the power to grant a mortgage in favour of Romspen and should not be entitled to priority.

[ 19 ] Alberta Counsel to the Receiver provided 2 opinions. The first dated July 20, 2012 and the second dated July 27, 2012 to address additional queries from various stakeholders.

[ 20 ] In the opinion of Alberta Counsel to the Receiver, based on the clear wording of s. 203 of the Land Titles Act Alberta which is amply supported by case law, absent fraud considerations, a mortgagee even with actual knowledge of a prior unregistered interest will acquire title without any impact of the unregistered interest.

[ 21 ] Section 203 of the Act provides as follows:

203(1) In this section,

(a) “interest” includes any estate or interest in land;

(b) “owner” means

(i) the owner of an interest in whose name a certificate of title has been granted,

(ii) the owner of any other registered interest in whose name the interest is registered, or

(iii) the caveator or transferee of a caveat in whose name the caveat is registered.

(2) A person contracting or dealing with or taking or proposing to take a transfer, mortgage, encumbrance, lease or other interest from an owner is not, except in the case of fraud by that person,

(a) bound or concerned, for the purpose of obtaining priority over a trust or other interest that is not registered by instrument or caveat, to inquire into or ascertain the circumstances in or the consideration for which the owner or any previous owner of the interest acquired the interest or to see to the application of the purchase money or any part of the money, or

(b) affected by any notice, direct, implied or constructive, of any trust or other interest in the land that is not registered by instrument or caveat, any rule of law or equity to the contrary notwithstanding.

(3) The knowledge of the person that any trust or interest that is not registered by instrument or caveat is in existence shall not of itself be imputed as fraud.

(4) This section is deemed to have been in force since the commencement of The Land Titles Act , SA 1906 c24, in place of section 135 of that Act and similar sections in successor Acts.

[ 22 ] The Receiver’s Alberta Counsel, Mr. Warner, adds the following:

The question is whether there is present an additional element of dishonesty that the cases refer to such that the mortgage of Romspen should be subordinated to the UDI and Lot Purchaser interests. Simply having knowledge of the terms and conditions of the UDI and Lot Purchase agreements, and knowledge that taking the mortgage would defeat those interests, does not, by itself elevate the transaction to the level of fraud. Edgeworth may have acted in breach of the UDI and Lot Purchaser agreements, but we are not prepared to assume that Edgeworth fraudulently and do not do so in the context of this supplemental opinion; that is simply not for us to determine. However, even if Edgeworth did act fraudulently based upon its agreements with the UDI and Lot Purchaser holders, which we are not either suggesting or assuming, that would not lead to the conclusion that Romspen either acted fraudulently, or that its mortgage should be tainted by that alleged fraud. Absent evidence of collusion with intent to defeat the interests of the UDI and Lot Purchaser interests, we stand by our opinion that Romspen has priority.

[ 23 ] Section 203 of the Act represents an unequivocal abrogation of the doctrine of actual notice in Alberta such that, absent fraud, an unregistered interest cannot under any circumstances trump a registered interest. This absolute rule, codified in section 203 of the Act , was recognized by the Supreme Court of Canada in United Trust Co. vs. Dominion Stores Ltd ., 1976 CarswellOnt 383, in paragraph 75 , where Spence J. , on behalf of the majority, remarked as follows:

There is no doubt that when such a term appear s in the governing statute, the result is that unregistered encumbrances fail in any way to affect the title of the purchaser for value . [emphasis added]

[ 24 ] Further, in Holt Renfrew & Co. v. Henry Singer Ltd. , 1982 ABCA 135 , 1982 CarswellAlta 92, the Alberta Court of Appeal noted that the Act expressly provides that “knowledge of the existence of an unregistered interest shall not of itself be imputed as fraud”. The Court in Holt Renfrew explained that there must be some additional element or dishonesty of some sort on the part of a mortgagee, in addition to knowledge of an unregistered interest, in order to defeat or subordinate a registered charge. Knowledge that a proposed charge or transfer will defeat an unregistered interest is not sufficient to subordinate a registered transfer or mortgage.

[ 25 ] In Ric New Brunswick Inc. v. 1301725 Alberta Ltd. , 2012 ABQB 213 , the court followed the interpretation of section 203 of the Act set out in Holt Renfrew, and upheld a mortgage over lands notwithstanding the mortgagee’s knowledge of an unregistered agreement by the mortgagor to convey a portion of the lands to a third party after that portion of the lands had been subdivided. Although the mortgagee had knowledge of that agreement, there was no instrument registered on title to protect the third party at the time the mortgage was granted and the funds were advanced. The mortgagee was not a party to the agreement between the mortgagor and the third party, had not been party to any misrepresentations or discussions with the third party, or agreed to discharge its mortgage over the portion of the lands to be conveyed after subdivision. Accordingly, as there was no evidence of any bad faith or any element of mala fides or dishonesty on the part of the mortgagee, it was entitled to rely upon the certainty of title and the protection afforded to mortgagees by the Act .

[ 26 ] The assertion on behalf of the UDI investors is that Edgeworth breached a contractual or trust relationship and that Romspen should not be able to take advantage of that failure even though Romspen advanced some $15 million by way of its mortgage and other first mortgages on some properties it assumed.

[ 27 ] There is no evidence before the court to suggest that Romspen itself committed a fraud and in the absence of that finding, Romspen is entitled to have its priority confirmed. I accept the opinion of Alberta counsel for the Receiver that there are no facts before the court that would support an argument for Equitable Subordination of the Romspen debt even assuming the concept were to apply.

[ 28 ] A further submission was made on the behalf of UDI investors by Mr. Wei Cheng Tan to the effect that Romspen should be required to first be repaid from properties that are not subject to UDI interests. A mortgage creditor such as Romspen is entitled to recover against any property over which it has priority of security.

[ 29 ] There is no basis in Alberta land law to limit the Romspen recovery in the way the UDI investors propose.

The MICs

[ 30 ] The MIC Investors Committee opposes the declaration of validity of the postponements granted to Romspen by the corporations referred to as MICs.

[ 31 ] It is the position of the MICs that these corporations raised some $57 million from investors on the basis that those investors would receive first or second priority security on specific properties covered by the mortgages granted in favour of the MICs.

[ 32 ] The issue on this motion is whether the postponements granted by one of the MICs, [EMIC. 1] to Romspen are valid and enforceable

[ 33 ] The position put forward by Mr. Lenz on behalf of the MICs is that Romspen is not entitled to rely on the postponements granted by the MICs since the MICs were not parties to either of the commitment letters or either of the mortgages relied on by Romspen.

[ 34 ] Basically put, it is asserted that the MICs were not parties to the main agreement and there is no evidence of any consideration flowing from the MICs to Romspen since the MICs were not owned by Edgeworth.

[ 35 ] The MICs position is that there may be a lack of corporate seals in respect of some of the postponements is also relied on as is the assertion of independent shareholders in the MIC’s from those of Edgeworth.

[ 36 ] The response of Romspen to the position of the MIC’s is twofold. The first being that the MIC in question had at least one common corporate officer with Edgeworth and their officer signed postponements on behalf of the MIC.

[ 37 ] The second response of Romspen is reliance on section 161 (a) of the Alberta Land Titles Act which reads as follows:

“161 An instrument or caveat executed by a corporation notwithstanding anything to the contrary in the Act, statute, constating documents, charter or memorandum and articles of association incorporating the corporation, is for the purposes of this Act deemed to be sufficiently executed if the instrument or caveat is

(a) sealed with the corporate seal of the corporation and countersigned by at least one officer or director of the corporation , …” [emphasis added]

[ 38 ] On the material before the court I am prepared to conclude that the postponements granted by the MICs in favor of Romspen were executed by an authorized officer and there is no evidence to suggest that the were not sealed with the appropriate corporate seals.

Conclusion

[ 39 ] For the foregoing reasons I conclude that Romspen be entitled to the declaratory relief requested and to the distribution of funds in the hands of the Receiver as set out in the motion record. The form of draft order that was settled on the teleconference call on August 3, 2012 will issue in the form signed.

[ 40 ] There will be an opportunity for the UDI investors and others to claim against future sums if any that may be recovered once Romspen has been repaid its debt.

C. Campbell J.

Date: August 15, 2012