David Gerlach and 1298046 Ontario Inc. v. AGF Trust Company, 2012 ONSC 636

ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO: 07-CV-333597PD1

DATE: 20120214

B E T W E E N:

David Gerlach and 1298046 Ontario Inc. Plaintiffs - and - AGF Trust Company Defendant

Devinder Bath, for the Plaintiffs Howard W. Reininger, for the Defendant

HEARD: January 12, 2012

LEDERMAN J.:

Nature of Motion

1This is a motion by the defendant for summary judgment dismissing the action.

2The main issue in the action is whether the defendant, as a mortgagee in possession, owed a duty to insure the interest in the property of the plaintiff, 1298046 Ontario. Inc., the mortgagor, against loss or damage and whether the defendant breached that duty, thereby causing a loss to the plaintiffs.

3The statement of claim also alleges that the defendant, as a mortgagee in possession of properties owned by the plaintiff corporation, sold them under power of sale and failed to obtain fair market value. No evidence was put forth by the plaintiff corporation in this regard and, accordingly, there is no evidentiary basis to support this cause of action.

Background Facts

4The defendant held several mortgages from the plaintiff corporation on several properties, which charges were guaranteed by the personal plaintiff ("Gerlach"). When default in payment occurred, the defendant exercised its remedies, took possession of the properties and sold some of the properties under power of sale.

5The sale proceeds were insufficient to pay out the entire indebtedness owed to the defendant. However, the plaintiff corporation exercised its right to redeem the remaining properties and after payment to the defendant, the defendant discharged the remaining mortgages on the remaining properties

6One of the properties of which the defendant had taken possession was located at 493-495 Dundas Street in Woodstock, Ontario (the “Property”). The mortgage or charge from the plaintiff corporation to the defendant secured the sum of $455,000. The mortgage incorporated the provisions of Standard Charge Terms 9320 which provided as follows:

“The chargor will immediately insure, unless already insured, and during the continuance of the Charge keep insured against loss or damage by fire, in such proportions upon each building as may be required by the Chargee, the buildings on the land to the amount of not less than their full insurable value on a replacement cost basis in dollars of lawful money of Canada. … Evidence of continuation of all such insurance having been effected shall be produced to the Chargee at least fifteen (15) days before the expiration thereof; otherwise the Chargee may provide therefore and charge the premium paid and interest thereon at the rate provided for in the Charge to the Chargor and the same shall be payable forthwith and shall also be a charge upon the land. …”

7The plaintiff corporation defaulted in payment under the charge and the defendant took possession of the Property some time towards the end of 2005.

8After taking possession, the defendant caused an investigation to be made of the building on the Property. A report was prepared on December 28, 2005 which indicated that extensive renovations were being carried out, and that there were several building code and fire code contraventions.

9The roof on this building collapsed on February 6, 2006. A consulting engineering report indicates that the roof did not collapse because of snow accumulations, and in a subsequent report it was found that the conditions of the structure may have contributed to the failure of the roof.

10The plaintiff corporation had purchased the property in May 2005 for $350,000. However, the plaintiff corporation alleges that the replacement cost of the building on the Property at the time of purchase was $2.6 million.

11On June 4, 2007 the plaintiff corporation exercised its right to redeem and paid the balance owing to the defendant. A discharge of all remaining charges was provided to the plaintiffs, including the charge on the Property, the subject matter of this action.

Failure to Insure

12The plaintiffs allege that when the defendant was in possession of the Property, the plaintiffs and the defendant received notice of cancellation of the ING insurance policy on the Property.

13The plaintiffs allege that the defendant did not act prudently or diligently and did not at any point in time ask the plaintiffs or their agent to put an insurance policy in place either before or after taking over possession of the Property.

14The plaintiffs allege that the defendant, in fact, informed their agent that it was not necessary for him to look after the insurance as its own blanket insurance policy would cover the Property.

Duty to Insure

15Counsel for the defendant submits that the obligation to insure the Property is provided for in Standard Charge Terms 9320. He submits that the obligation is that of the plaintiff corporation and not that of the defendant. The defendant, as mortgagee, may insure and add the premium to the debt, but there is no obligation to do so. Further, the defendant, as mortgagee, has no obligation to insure the interests of the plaintiff and has the right to insure only the lender’s interest (i.e. the amount owing under the mortgage) if it chooses to do so.

16The duty of a mortgagee in possession has been stated by Falconbridge on Mortgages, by W.B. Rayner and R.H. McLaren (1977, 4 th ed., Canada Law Book Ltd.) at page 651, as follows:

The mortgagee, having asserted his common law right to possession and having taken the management of the property out of the mortgagor’s hands, must himself assume the responsibilities of management. He must manage the property as a person of ordinary prudence would manage it if it were his own, and so long as the equitable right to redeem subsists, is liable to be called to account in respect of his management.

(Also see Canada Housing Corp. v. Canplex Corp ., [2008] O.J. No. 86 (S.C.J.), at paragraphs 29-30 .)

17As to whether the duty to act prudently goes so far as to require the mortgagee to place insurance coverage on the property in the event that a mortgagor does not do so, depends on whether the mortgagee has assumed a trust or a duty to place coverage. The principle was enunciated in Maxey v. Canada Permanent Trust Co., 1984 2897 (MB CA), [1984] M.J. No. 85 (Man.CA). The Manitoba Court of Appeal held, however, that in the circumstances of that case there was insufficient evidence to prove that the mortgagor relied on the mortgagee to arrange and maintain insurance coverage for both itself and the mortgagor.

18Counsel for the plaintiffs submits that Maxey, supra, was not a case where the mortgagee was in possession and, therefore, there had been no assumption of a trust or duty. In the instant case, the defendant was in possession and the plaintiffs submit that it was obliged to act prudently by avoiding the cancellation of the plaintiff’s insurance policy or at the least, putting in place a new insurance policy to protect the plaintiff’s interest. There were some tenants on the Property and the defendant was authorized and could have applied rent revenue to cover the insurance premium or could have made the premium payments and sought reimbursement in the same manner that the defendant recovered payment of utility bills and other expenses.

Conflicting Evidence

19The plaintiffs allege that when the defendant was in possession of the Property both the plaintiff and the defendant received notice of cancellation of the ING insurance policy on the Property. However, the evidence of Karen Radic (“Radic”) on behalf of the defendant is that she did not become aware of the lack of insurance on the Property until after the roof collapsed in February 2006, and that she only became aware at that time that a notice of cancellation from ING had been sent to a former address of the defendant. Accordingly, she states that the defendant had not received the cancellation notice before the insurance on the Property had been cancelled in November 2005.

20A statement signed by Larry Gwynne (“Gwynne”) who had been retained by the plaintiff, Gerlach, to deal with the Property, states that he received notice of the insurance being cancelled; that he told Radic that the insurance was being cancelled and that he was told by Radic that the defendant was covered by a general blanket policy.

21Counsel for the defendant argued that the statement signed by Gwynne does not state that the defendant told him not to place insurance to protect the interest of the plaintiffs, and it does not state that he was told by the defendant that its policy would protect the interest of the plaintiffs.

22On cross-examination, Gwynne stated that he told Radic that the policy was being cancelled while at a fiftieth birthday party for another broker named, Bill Eves, and that Radic advised him that it was not a problem because the defendant was covered by a general blanket insurance policy. That was the full extent of the conversation that he could recall. Counsel for the defendant points out that during the cross-examination Gwynne never stated that he was told that he did not need to place insurance coverage for the plaintiffs, but only that the defendant had its own coverage.

23Radic states unequivocally that she never told Gwynne that it was not necessary for him or the plaintiffs to place insurance on the Property.

24Further, Radic states that she spoke with Bill Eves and confirmed that his birthday party took place in September 2005, and suggests that Gwynne could not have told her that the insurance had been cancelled at this party because her information was that the insurance cancellation did not take place until November 2005.

25There is a serious conflict in the evidence as to when the defendant learned of the cancellation of insurance on the Property and what specific discussions about this subject matter took place between Gwynne and Radic.

26There is a legitimate dispute as to whether Gwynne, if not told expressly by Radic that the plaintiffs’ interest was covered by the defendant’s own insurance policy, could have reasonably inferred that that was the case and refrained from taking steps to renew the policy.

27Under the principles in Combined Air Mechanical Services Inc. v. Flesch 2011 ONCA 764, the record on this motion does not provide for a full appreciation of the evidence and the issues. Credibility findings lay at the heart of the dispute and the evidence of the major witnesses conflicts on the key issues. Further, there is no reliable documentation to assist in assessing credibility on this motion. Moreover, it is important that the scope of the duty of a mortgagee in possession to act with prudence by ensuring that the Property is insured in the circumstances of this case, be fully explored, and a trial is necessary for this purpose.

Damages

28The defendant submits that plaintiffs have not provided any evidence of damages. There is some evidence of replacement costs contained in the Pow Peterman report. Moreover, the defendant has not provided evidence of whether there was any recovery on its general blanket insurance policy and if so, has not provided any accounting to the plaintiff corporation. The defendant did not disclose at the time of redemption of the Property by the plaintiff corporation, any monies received from the settlement of a claim under the blanket insurance policy. Without an accounting, it cannot be determined at this stage whether the defendant has unjustly enriched itself by receiving insurance proceeds that relate to the plaintiff’s interest in the Property.

29These are genuine issues requiring a trial.

Personal Plaintiff David Gerlach

30Gerlach was a guarantor of the mortgage and not the owner of the Property which is the subject matter of this action. He has not established any personal cause of action and, therefore, there may be summary judgment striking out his claim.

Improvident Sale Allegation

31There is no evidence of improvident sale of properties adduced by the plaintiff corporation on this motion, and accordingly, this claim may be disposed of by way of summary judgment motion and it is struck out.

Conclusion

32The defendant’s motion is otherwise dismissed. Success has been divided on the issues raised on this motion. It is hopeful that the parties can come to an agreement as to costs. If they are unable to do so, they may make written submissions within 30 days.

LEDERMAN, J.

DATE: February 14, 2012

Judgment