2005 BCSC 20 College Park Projects Inc. v. 430872 B.C. Ltd. et al

Before: The Honourable Madam Justice Humphries

Supplemental Reasons for Judgment

Counsel for the plaintiff	W.D. Simpson
Counsel for the defendants	R.L. Basham, Q.C. J. Lacroix
Date and Place of Hearing:	October 6, 2004
	Vancouver, B.C.

[1] The plaintiff commenced an action alleging a fraudulent conveyance and/or preference in respect of a mortgage held by two of the corporate defendants over a condominium project owned by the numbered company. The mortgage had been foreclosed upon in a separate proceeding, and the order absolute granted on March 13, 2000. The plaintiffs had obtained a judgment in the amount of $425,000 against the numbered company in a previous action on December 24, 1999 and had registered it on February 18, 2000. They did not appear on the foreclosure application.

[2] My findings at trial resulted in the conclusion that the impugned mortgage was a fraudulent conveyance insofar as it was supported by an interest component in the amount of $465,055.97; the portion supported by the principal of $694,512.22 was valid. I said counsel could speak to the distribution of moneys held in trust from the sale of condominium units which took place after the order absolute. That amount is $399,881.90. The title in those units has passed to third party bona fide purchasers for value.

[3] Counsel for the defendant takes the position that, regardless of subsequent findings made in this trial, the effect of the order absolute was to extinguish all equities and to vest ownership of, as well as the beneficial title to, the lands in the mortgagees. Any interest of a subsequent encumbrancer (the plaintiff) is discharged. The plaintiff could have protected its interest by participating in the foreclosure proceeding but failed to do so. The excess above the principal amount resulting from the order absolute is a legally justifiable windfall to the defendants.

[4] Alternatively, the defendants say they should receive the top-up from the funds to cover the principal, approximately $194,000, and the remainder, approximately $206,000, should be shared pro-rata, on the basis that the interest component is now due and owing. They seek a declaration to that effect.

[5] Plaintiff's counsel attempted to convince me to revisit my judgment and hold the entire transaction to be fraudulent. I refused to allow this. He then submitted the calculations should be done from the date the foreclosure proceedings were filed, using the information contained in the affidavits in support of the foreclosure. On that basis, he argues, there is enough money for everyone and the plaintiff should therefore receive all the money held in trust. In other words, he is attempting to argue the foreclosure proceeding ab initio, nothwithstanding his client's failure to participate in it. This is not appropriate.

[6] On a limited view of the issue, the defendant is technically correct. The equities were extinguished with the granting of the order absolute. Although the plaintiff still has a debt to recover, the moneys flowing from the realization of the order absolute would not, in the normal course, be available to satisfy that debt, since the plaintiff did not establish entitlement in the foreclosure proceedings.

[7] However, I held that, while the foreclosure proceedings themselves were not a sham (as alleged on the pleadings), the order absolute itself was affected by the fraud to the extent that it was founded upon a mortgage which was in turn not fully supported by a valid debt. I note as well that this is a situation where the mortgagee and mortgagor were essentially the same entity. The demand and notice periods were waived, the mortgagor did not appear at the hearing, and the calculation of interest was done in such a way as to exceed the amount of the mortgage in order to be able to say there was a shortfall. Without this shortfall, the immediate order absolute would not have been granted, and the plaintiff's interest in the property would not have been extinguished.

[8] The position taken by the plaintiff on this application was of no assistance in resolving this issue. However, in these circumstances, I am not prepared to allow the mortgagees to benefit from their own fraudulent conduct in order to keep the entirety of the proceeds of the foreclosure as a "legally justifiable windfall." Fraud cannot provide a legal justification for a windfall, and the order absolute cannot, in these circumstances, act as a shield for the mortgagees. While the order absolute can be used to protect the title of the third party purchasers, the monies from the sales is still available to do equity as between the mortgagees and the subsequent encumbrancer, College Park.

[9] Support for the proposition that the order absolute can be undone only as between certain entities and only to the extent necessary to do justice between the parties is found in Quill Lake Savings & Credit Union Limited v. Luczak (Luchak), [1976] 5 W.W.R. 597 (Sask. C.A.). In that case, the final order of foreclosure had been granted improperly, as the mortgagor had not been properly served with notice of the proceedings. The mortgagee had sold the land to an innocent third party before the mortgagor applied to reopen the foreclosure proceedings. The Court considered the authorities supporting the proposition that a final order of foreclosure may be considered ineffective as against one party, and quoted from the Appellate Division of the Alberta Supreme Court in Mackie v. Standard Trusts Co. (1922) 67 D.L.R. 201:

In equity, there is no right, that is, no right which the Court recognizes, without a remedy; and no one can take advantage, either at law or in equity of his own wrong. If, then, the mortgagee has deprived the mortgagor of his primary remedy, the Court will not fail to discover or invent a remedy to meet the case.

[10] The court then declared the final order for foreclosure ineffective as against the mortgagor so that the mortgagor could pursue an action against the mortgagee without affecting the interest of the innocent third party purchaser. Here, of course, the subsequent encumbrancer, College Park, has already sued and obtained an order declaring the order absolute a fraudulent conveyance insofar as it was granted for a mortgage supported by an interest component that was not due and owing. While this is in the reverse order as in Quill Lake, the reasoning in respect of undoing the order absolute is still applicable.

[11] While College Park did not participate in the foreclosure proceedings, it was incumbent upon the mortgagees, not College Park, to get the amount of the mortgage right. They did not do so. They cannot benefit from that miscalculation, and it was not a mere mistake. It was an intentional inflation of the value to an amount which would allow them to get an order absolute as opposed to an order for sale.

[12] The defendants are entitled to take from the proceeds the amount of money required to make up the principal, approximately $194,000.00. The remainder, approximately $206,000.00, goes to the plaintiff.

[13] The plaintiff should not be required to share the remainder pro rata for the same reason that the interest portion of the mortgage was not valid. On the defendants' own evidence, interest is not even arguably due and owing until the principal debts are paid. Even if it could be said that all the interest is now validly claimed once the principal is topped up and satisfied, the plaintiff's judgment, filed in 2002 prior to the hearing of the foreclosure petition, supercedes the interest claim. It would not be appropriate in the circumstances of this case to further circumscribe the plaintiff's ability to recover by retroactively validating the interest component.

[14] The above figures are approximate because I do not have information on the effect of interest to the date of these reasons. Any additional interest should be shared pro rata.

COSTS

[15] Both parties claim costs at Scale 3, with the defendant claiming increased costs for certain events, including the subpoena issued to co-counsel for the defendant late in the day in respect of an issue over document production. As well, the defendant says it should have increased costs for the time spent by Natalie Whatley testifying to the loans underlying the debt, upon which she was not cross-examined, and upon which a Notice to Admit had been sent. The plaintiff says it would have admitted that the actual book entries existed, but would not admit the characterization used in the Notice to Admit. Mr. Simpson, counsel for College Park, says when he tried to clarify this with Ms. Basham during trial, the discussion was not fruitful.

[16] The defendant says it was successful on all issues pleaded and should have costs. The plaintiff said it had substantial success and should have costs. Both counsel say the other was difficult to deal with and unnecessarily complicated and lengthened the trial.

[17] This is a situation in which little bits of success and impugned conduct could be bartered back and forth. The relative personalities and styles of each counsel were constant irritants to the other. This was evident throughout the trial, not only in their personal interaction in court, but in their disparate views of what was required to make the trial run smoothly.

[18] However, the important facts in determining a just outcome on costs are these: the case as pleaded was not the case that was presented at trial. The defendant was put in the position of having to defend allegations of fraud which were not in the pleadings, and in fact, the plaintiff was successful on a basis not pleaded.

[19] On the other hand, the defendants engaged in fraudulent conduct which deprived the plaintiff of their judgment, and which the plaintiffs were forced to overcome through this action. The clear result in my view is that both parties should bear their own costs.

[20] I agree that it was not necessary to subpoena defendants' co-counsel. Plaintiff's counsel seemed to be under the impression that Ms. Lacroix could produce and testify about documents in the possession of the Hong Kong Bank because she had gone to the bank and had looked through their documents and because it would be an admission against her clients' interests. Ms. Lacroix was not the author or recipient of any of the documents.

[21] The subpoena required her to hire independent counsel and the issue was disposed of following a discussion between the court and all counsel, after Ms. Lacroix had spent a brief time on the stand, by Ms. Basham agreeing to produce Natalie Whatley as a witness and Mr. Simpson deciding to attempt to contact and call a particular accountant. Meanwhile, plaintiff's counsel had objected to Ms. Lacroix sitting at counsel table as she was under subpoena, which caused additional confrontational submissions prior to the taking of evidence.

[22] This documentary issue should have been dealt with through appropriate subpoenas or notices to admit. It was inappropriate and unnecessary to subpoena co-counsel for the defendant at the last minute. Rule 57(14) allows the court to order costs incurred as a result of an improper or unnecessary act. The defendants are entitled to the costs of having to hire independent counsel. However, the issue was a simple one and should not have required more than minimal preparation by a competent lawyer, nor did it consume much court time. Unless agreed to, this cost will be set in a reasonable amount upon presentation of a bill to the Registrar.

RESULT

[23] In the result, College Park will receive the funds held in trust after deduction of the amount required to satisfy the principal of the mortgage. The plaintiff will pay the costs of hiring independent counsel for Ms. Lacroix. In all other respects, the parties will bear their own costs.

“M.A. Humphries, J.”
The Honourable Madam Justice M.A. Humphries

Citation:	*College Park Projects Inc. v. 430872 B.C. Ltd. et al,*
	2005 BCSC 20