Court File and Parties

Court File No.: CV-22-17-00 Date: 2023-09-06 Superior Court of Justice – Ontario

Between: Saugeen Economic Development Corporation, Plaintiff

And: Karl Peuser, Karen Peuser and the Toronto Dominion Bank, Defendants

Counsel: N. Lovell, for the Plaintiff J. Lillie, for the Defendants

Heard: June 1, 2023

Endorsement

FOWLER BYRNE J.

[1] Both the Plaintiff and the Defendants have brought a motion for summary judgment.

[2] The Plaintiff seeks judgment entitling it to enforce a second mortgage registered against title to the property owned by the Defendants: Karl and Karen Peuser. This mortgage was registered to secure a debt of approximately $26,000.

[3] The Defendants, Karl and Karen Peuser, seek a final order discharging this second mortgage without any payment to the Plaintiff.

[4] The Toronto Dominion Bank, the first mortgagee, was served but took no position on the motions.

I. Background

[5] Karen Peuser (“Karen”) purchased her home, located at 728 Queen Street, Neustadt, Ontario (“the Property”) on December 23, 2009, for the sum of $150,000. To finance this purchase, she borrowed approximately $146,000 from the Toronto Dominion Bank (“the Bank”). The debt was secured through a first mortgage on the Property (“First Mortgage”).

[6] In or about January 2010, Karen started a business operating as Lipinski’s Coffee & Old Oak Books (“the Business”). In order to do so, she obtained a business loan from the Plaintiff for the sum of $20,000. She signed the documentation on May 10, 2010. The terms of this loan were as follows (“the First Loan Agreement”):

a. Monthly blended payments of principal and interest were required, commencing June 15, 2010.

b. Interest was to be charged at a rate of 9.5%, calculated semi-annually, for a term of 90 months (7.5 years).

c. Karl Peuser (“Karl”) was to execute a personal guarantee.

d. Karen was to execute a general security agreement, giving the Plaintiff a general security interest over the inventory, equipment, assets, and property of the Business.

[7] Unfortunately, the Business failed. The Peusers asked the Plaintiff to renegotiate the First Loan Agreement to allow for lower monthly payments, and to release their security interest so that they could sell the assets and pay their bills.

[8] Accordingly, in 2011, the Peusers and the Plaintiff negotiated an amendment to the First Loan Agreement, which they signed on December 23, 2011. The amendments were as follows (“the Amended Loan Agreement”):

a. The principal was increased to $20,123.73.

b. A second mortgage on the Property was granted to secure the loan (“the Second Mortgage”).

[9] When they signed the Amended Loan Agreement, the Peusers also signed an acknowledgement of explanation and receipt of draft mortgage and standard charge terms, a waiver of independent legal advice which specifically referenced the Amended Loan Agreement, the Second Mortgage, and a promissory note. In their affidavit materials, the Peusers claim they did not understand that they were agreeing to a second mortgage.

[10] The Second Mortgage was registered on title to the Property on December 23, 2011.

[11] It is not disputed that the Peusers started missing payments on the Second Mortgage in May 2013.

[12] On May 3, 2013, Karen filed a claim in bankruptcy. She listed the debt to the Plaintiff as an unsecured debt in the sum of $20,800, though she also indicated that she pledged the Property to secure this debt, second only to the Toronto Dominion Bank.

[13] On May 29, 2013, the Plaintiff filed a Proof of Claim as a secured creditor for the sum of $21,348.59.

[14] In or about June 2013, the parties were advised by the trustee in bankruptcy that the Property was only valued at $130,000 -- less than the value of the First Mortgage. Clearly, if either of the mortgagees sold the Property at that time, there would be no residual value for the benefit of the unsecured creditors. Accordingly, the trustee in bankruptcy advised that it was releasing its interest in the Property.

[15] Accordingly, on August 22, 2013, the Plaintiff filed an Amended Proof of Claim in Karen’s bankruptcy, wherein it claimed an unsecured debt of $21,348.59. The exact wording on the pre-printed Proof of Claim is as follows:

I, [name of Plaintiff’s representative] DO HEREBY CERTIFY

4. (Check the Appropriate category)

A. UNSECURED CLAIM OF $21,348.59.

That in respect of this debt, I do not hold any assets of the debtor as security and (check appropriate description)

Regarding the amount of $21,348.59, I do not claim a right to a priority.

[16] The Plaintiff made no claim at this time as a secured creditor. The Second Mortgage remained on title. The Plaintiff produced bankruptcy documents that show that Karen’s bankruptcy was suspended on March 24, 2016. Nonetheless, on May 1, 2023, the Peusers served a Request to Admit on the Plaintiff, asserting the fact that Karen was discharged on March 24, 2016. The Plaintiff did not dispute this fact. Karen argues that had the Plaintiff disputed this fact, she would have had an opportunity to file evidence to show that she had in fact been discharged. Accordingly, the Plaintiff is deemed to admit this fact and cannot now retract this admission. I find that Karen has been discharged.

[17] On October 28, 2014, Karl made an assignment in bankruptcy.

[18] On December 15, 2014, the Plaintiff filed a Proof of Claim in Karl’s bankruptcy, wherein it claimed an unsecured debt in the sum of $25,966.31.

[19] Karl Peuser was discharged from bankruptcy on July 29, 2015.

[20] The Plaintiff did not receive any dividend payment as an unsecured creditor from Karen’s bankruptcy. It did receive a small amount as an unsecured creditor from Karl’s bankruptcy, namely in the sum of $415.18.

[21] The value of the Property increased over the years. Given that the Toronto Dominion Bank took no steps to enforce its security, nor did it respond to these motions, it can be assumed that the First Mortgage remains in good standing. No party ever took any steps to discharge the Second Mortgage from title to the Property.

[22] The loan by the Plaintiff to Karen and the payments under the Second Mortgage remained in default. On February 26, 2021, the Plaintiff served a Notice of Sale Under Mortgage with respect to the Second Mortgage.

[23] As of the Plaintiff’s affidavit on November 4, 2022, the total amount owing was $27,889.17.

II. Issues

[24] The material facts are not in dispute. Despite the numerous issues raised by the Peusers in their materials, at the argument of the motion, the Peusers indicated that they are only relying on the argument that the Second Mortgage is not an enforceable debt as a result of the Karen’s bankruptcy and the position the Plaintiff took in that bankruptcy.

[25] Accordingly, the issues to be determined are:

a. Are there any genuine issues that require a trial?

b. Did the Plaintiff surrender its security interest in the Property?

III. Analysis

A. Are there Genuine Issues that Require a Trial?

[26] The parties submit, and I agree, that there are no material facts in dispute. While they may disagree on some of the details surrounding the material facts, these facts would have no impact on the outcome of this motion.

[27] It is clear that both Karen and Karl have made assignments in bankruptcy. The Plaintiff argues that they have a valid secured interest in the Property which survived the bankruptcy. The Peusers argue that the Plaintiff released its secured interest in the Property when it filed its Amended Proof of Claim.

[28] I am satisfied that there is no genuine issue that requires a trial. I am able to make the necessary findings of fact and apply the law to those facts. In this situation, summary judgment is the most proportionate and expeditious means to achieve a just result: Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 49.

B. Did the Plaintiff Surrender its Security?

[29] When an individual makes an assignment in bankruptcy, a secured creditor may proceed in one of three ways.

[30] Under s.69.3(2) of the Bankruptcy and Insolvency Act (“the Act”), the bankruptcy does not prevent a secured creditor from enforcing their security in the normal course. It does not have to prove its claim. If required by the trustee in bankruptcy, it may have to provide full particulars of the security and the value at which it is assessed. While I have no evidence of this particular demand, it appears that a valuation of the Property was provided to the trustee, given the trustee’s decision to release the Property from the bankruptcy.

[31] Alternatively, the secured creditor can proceed under s. 127 of the Act. Under this section, where a secured creditor realizes its secured interest and there is anything left due and owing, it may prove that remaining amount as a claim in the bankruptcy: s.127(1).

[32] Thirdly, if a secured creditor surrenders its security to the trustee for the general benefit of the creditors, it may prove its entire claim in the bankruptcy: s. 127(2). The surrender of the creditor’s security may be expressed or inferred from a course of conduct: Price Waterhouse Ltd. v. St. Louis (1990), 72 O.R. (2d) 142 (Ont. Bktcy.), at p. 13, aff’d, 15 O.R. (3d) 125 (C.A.).

a. Express Surrender

[33] The Plaintiff states that the record shows no express surrender of its security interest.

[34] The Peusers argue that by filing an amended proof of claim as an unsecured creditor, which indicated that the Plaintiff did not hold any assets of the debtor as security, this amounts to an express surrender.

[35] The Plaintiff relies on the case of Hollingshead (Re) (Trustee of), 1999 ABQB 355 in support of its position. In that case, the secured creditor initially filed as a secured creditor, but was advised that its secured interest was not perfected. Accordingly, they faxed a note to the trustee and ask that their secured claim by converted to an unsecured claim. No new Proof of Claim form was filed. The court found that this was not an irrevocable, unconditional and unequivocal act of surrender.

[36] The Peusers ask that this case be distinguished, because on the facts before me, the Plaintiff clearly states on its Amended Proof of Claim, “I do not hold any assets of the debtor as security...”.

[37] This case is not of assistance to either party with respect to an express surrender. The court in Hollingshead considered the secured creditor’s faxed note, not as an indication of an express surrender, but whether it was evidence of an implied surrender by conduct, which argument it rejected.

[38] On the facts before me, I find no express surrender of the Plaintiff’s security interest. I have been provided with no evidence that the Plaintiff expressly stated to the trustee that they surrendered their secured interest for the general benefit of the creditors. Such a surrender must be clear and specific to the secured interest. In the Amended Claim, the Plaintiff stated it held no assets of the debtor as security, but this was after the Property was no longer part of the bankruptcy, by choice of the trustee, and the Plaintiff believed their secured interest had no value at that time. In these circumstances, the decision to make a claim as an unsecured creditor is not an express surrender of security, as contemplated by the Act.

b. Implied Surrender

[39] Whether a secured creditor has made an election to surrender its security by a course of conduct is a question of fact. In order to constitute a surrender, the actions taken must be irrevocable, unequivocal and unconditional: Andrew v. FarmStart (1988), 54 D.L.R. (4th) 406 (Sask. C.A.), leave to appeal to S.C.C. refused, 73 C.B.R (N.S.) xxvii.

[40] In FarmStart, the Saskatchewan Court of Appeal stated that a proof of claim itself, without reference to a security or without valuation of it, is not per se such a surrender, because it does not meet the criteria for surrender. It is, however, evidence that would tend to show that the creditor has elected to surrender. The court must consider all the relevant facts and circumstances, such as whether the secured creditor acted deliberately or as a result of an error, and whether the acts of the secured creditor mislead or caused prejudice to the trustee or other creditors. The acceptance of a dividend as an unsecured creditor may indicate surrender and may prejudice other creditors. On the other hand, it may simply indicate a claim above and beyond the value of the security. There may be many other relevant factors. However, the determining criteria must be whether the actions of the creditor amounted to an unequivocal, unconditional, and irrevocable surrender of the security.

[41] In Houlden & Morawetz’s 2021-2022 Annotated Bankruptcy and Insolvency Act, at p. 755, after reviewing FarmStart, they summarize the question to be asked as follows:

Does the conduct of the secured creditor show that the creditor has elected to share in the bankruptcy for his or her full claim and is abandoning his or her security to the trustee for the benefit of creditors?

[42] This issue has been addressed in several cases in Ontario.

[43] In Pelyea v. Canada Packers Employees Credit Union Ltd., [1970] 2 O.R. 384 (C.A.), the creditor had a secured interest. When the debtor made an assignment in bankruptcy, the creditor submitted a claim and underlined “secured”. The creditor then took no further part in the bankruptcy other than appearing and opposing discharge. The creditor received no dividends in the bankruptcy. In these circumstances, the court found that because the creditor received no dividends, it should not be precluded from exercising their security.

[44] At para. 31, the Court of Appeal for Ontario further stated that:

[I]f in the unlikely event that a secured creditor failed to disclose a security held by it, voted in respect of its whole claim and received a dividend in respect of his whole claim, equitable principles would require that the creditor turn the security, as an asset of the debtor, over to the trustee for the benefit of all the creditors and the secured creditor would be estopped by his conduct from disputing a claim by the trustee to the security.

[45] The reasoning in FarmStart has been adopted in Ontario in Abraham v. Coopers & Lybrand Ltd. Trustee in Bankruptcy for Canadian Admiral Corp. (1993), 13 O.R. (3d) 649 (Ont. S.C.). In Abraham, the court also stated, “it is clear that filing a proof of claim as an unsecured creditor is not an irrevocable or unconditional act.”

[46] I have also considered decisions from outside the province to help determine whether the Plaintiff’s actions constitute an irrevocable, unequivocal, and unconditional surrender of its security.

[47] As indicated above in Hollingshead, the mere fact that a creditor changed its claim in the bankruptcy from that of a secured creditor to an unsecured creditor, was not sufficient conduct to constitute a surrender of security. The court found that there were insufficient facts before it to conclude that the bank knew anything about the concept of surrender and the benefits that may flow to the creditors as a result of making a surrender.

[48] The Plaintiff also relies on Bank of Montreal v. King, 2003 ABQB 491. In that case, the court determined that a creditor did not surrender its secured interest by filing a proof of claim as an unsecured creditor. This case is slightly different than the case before me though, in that at the time the proof of claim as an unsecured creditor was filed, the creditor was not aware that it had a security interest. The court found that a party cannot give up a secured interest of which they are unaware: para. 27.

[49] In the Albert King’s Bench decision of Toronto-Dominion Bank v. Bachand, 2021 ABQB 271, the court found that if a condominium corporation did not mislead or cause prejudice to the trustee or other creditors, the acceptance of a dividend does not indicate surrender. This does not amount to an unequivocal, unconditional, and irrevocable surrender of its security: para. 222.

[50] FarmStart is most on point with this case. In FarmStart, the bankrupt, Mr. Andrew, was the owner of a parcel of land which was subject to three mortgages. It was always known that there was no value to the third mortgage in favour of FarmStart, because the amount owing on the first and second mortgages exceeded the value of the land. During the administration of the bankrupt’s estate, the trustee released its interest in the parcel of land. FarmStart filed a proof of claim with the trustee in bankruptcy claiming preference as a Crown Corporation and received a dividend. Subsequent to the bankrupt’s discharge, the first and second mortgagees were paid out and these mortgages were discharged. The land was sold and the proceeds held in trust pending the application by the bankrupt to remove the FarmStart mortgage from title. The application was denied as the judge found that Farmstart had not surrendered its security. The matter was appealed. In dismissing the appeal, the Court of Appeal for Saskatchewan stated the following:

In this case, the secured creditor did disclose his security. The Chambers judge found, as a matter of fact, that the secured creditor acted as it did because everyone concerned knew the value of the security at that time to be zero. The judge in effect found that the appellant had disclosed its security, valued it at zero, and was therefore entitled to claim for the full amount due to it as an unsecured creditor and entitled to take a dividend as an unsecured creditor. The controlling factors are that the secured creditor did not misrepresent the situation to anybody, and that the mortgage was disclosed both in the particulars of the appellant's claim and in the bankrupt's own statement of affairs. Since it was disclosed, and since there was no demand for valuation, there was no prejudice to other creditors or the bankrupt by the respondent in filing as an unsecured creditor and in taking a dividend. There was no irrevocable, unconditional and unequivocal act of surrender. Thus, on the facts as found by the Chambers judge, which are supported by the evidence, he was entitled to find no surrender of the security.

[51] The Defendants relied on Morrison v. Toronto Dominion Bank. In that case, the court held that where it was clear that the creditor had elected to prove its entire debt in the bankruptcy, the creditor was held to have abandoned its security. While relying on an earlier version of the Act, the court stated that the purpose of the regime was to prevent a secured creditor from benefitting from a security and at the same time sharing in the bankruptcy, except to the extent of any deficiency. The court concluded that the secured creditor loses its security when its conduct or its omission indicates that it has elected to share in the bankruptcy for its full claim and is therefore taken to have abandoned its security: paras. 15-20. This case was also followed in Toronto-Dominion Bank v. Bachand, 2021 ABQB 271, which quotes Morrison with approval at para. 211.

[52] In Bachand, a condominium argued that it had not surrendered its secured interest in a property when it made a claim as an unsecured creditor. After reviewing the various cases in the area, many of which are cited here, the court determined the following at para. 230:

[T]hat the acceptance of the dividends as an unsecured creditor indicates a claim in excess of the value of the security. The conduct of the condominium corporation does not show that it had elected to share in the bankruptcy for its full claim and had abandoned the security to the trustee for the benefit of the creditors. The condominium corporation has not expressly or impliedly surrendered its security.

[53] The Peusers also rely on Hollingshead, which stated that the filing of a proof of claim as an unsecured creditor is evidence which tends to show that the creditor has elected to surrender. This case indicated that whether the creditor acted deliberately or mistakenly is also a relevant consideration.

[54] In determining whether the Plaintiff’s course of conduct showed an irrevocable, unequivocal, and unconditional intention to surrender its security, I have considered the following:

a. In Karen’s bankruptcy, she claimed the debt to the Plaintiff as an unsecured debt, but also indicated that she pledged the Property for this debt; this Statement of Affairs would have been circulated to all creditors.

b. In its first proof of claim dated May 29, 2013, the Plaintiff identified its claim as a secured claim of $21,348.59.

c. The amended proof of claim, dated August 22, 2013, only indicates an unsecured claim for $21,348.59 and references a telephone conversation with “Barb” at BDO in Kitchener. I have no evidence from “Barb”.

d. In this amended proof of claim, the Plaintiff did indicate that it held no assets of the debtor as security and identified itself as an unsecured creditor.

e. All creditors were aware that the Plaintiff had a second mortgage and that there was insufficient equity in the Property to pay anything towards the Second Mortgage.

f. The Plaintiff received no dividends from the bankruptcy and thus no other creditor was prejudiced by the steps taken by the Plaintiff.

g. No party took any steps to discharge the Second Mortgage.

h. There is no evidence before me to show that the Plaintiff understood that they were surrendering their security interest and the benefits that could flow to the creditors; there were simply no benefits flowing to any other creditors.

i. As in Farmstart, the mortgage was disclosed in Karen’s statement of affairs; it was not disclosed in the amended proof of claim, but was previously also disclosed in the original proof of claim.

j. The Plaintiff took no steps to realize on their security during the three years of the bankruptcy, and until this time, approximately nine years later.

k. The trustee released the Property from Karen’s bankruptcy, and thus it was not available for the general benefit of the creditors; in fact, in para. 37 of their factum, the Peusers admit that the Plaintiff’s secured interest was not surrendered for the general benefit of the creditors.

l. The Plaintiff was entitled to make an unsecured claim for the amount of the debt not satisfied by its security, without that being consider a surrender of its interest.

[55] In these circumstances, I cannot find that the Plaintiff irrevocably, unequivocally, and unconditionally intended to surrender their security. The facts of this case are similar to that in FarmStart, where it was accepted that when the security has no value, one can make a claim as an unsecured creditor without surrendering your security interest. The case law is clear that the mere fact of filing as an unsecured credit, in and of itself, does not indicate a surrender of a security interest for the general benefit of the creditors. The Plaintiff’s actions are consistent with proceeding under s.127(1) of the Act. As seen in FarmStart, the secured interest is not surrendered just because the creditor did not realize its security at the time of the bankruptcy.

[56] In this case, the amended proof of claim is the only evidence that the Peusers rely on. The Defendants’ position does not take into consideration that the Plaintiff never sought to discharge its mortgage, and that the Defendant never attempted to do so either. There was no prejudice to any of the other creditors, as the Plaintiff received no dividends from the bankruptcy, and if they had, it would be part of their claim in excess of the value of their security. There was no intention on the part of the Plaintiff to deceive or mislead anyone as to its position. All creditors would have been aware of its security interest. Their actions were deliberate, but only with all parties’ full knowledge of the value of its security at that time. There is insufficient evidence to show that the Plaintiff surrendered its interest to the benefit of all creditors, and certainly no evidence that is unconditional, unequivocal and irrevocable.

IV. Conclusion

[57] For the foregoing reasons, I make the following orders:

a. The Plaintiff is granted summary judgment in accordance with its Notice of Motion.

b. The enforcement of this judgment is stayed for 45 days, to allow the Defendants an opportunity to satisfy this judgment without the necessity of a sale.

c. The Defendants’ motion for summary judgment is dismissed.

d. The parties are encouraged to determine the issue of costs between themselves. If they are unable to do so, the Plaintiff is to serve and file a Bill of Costs, and written costs submissions, no longer than three pages, double spaced, on or before September 29, 2023. The Defendants are to serve and file their Bill of Costs, and their written costs submissions, with the same size restrictions, no later than October 20, 2023. Any reply submissions are to be served and filed no later than November 3, 2023.

Fowler Byrne J Released: September 6, 2023