2005 BCSC 89 Scott and K'Kugener v. Mustonen

Before: The Honourable Mr. Justice Slade

Reasons for Judgment

Counsel for the Plaintiffs:	P. Kuchar
Counsel for the Defendant:	J. Burgoyne
The Third Party, Carole Anne Shindell:	Appearing on her own behalf
Date and Place of Trial:	July 26-30, 2004
	New Westminster, B.C.

I. INTRODUCTION

[1] The plaintiffs sold a property which they had originally acquired for investment purposes. The purchaser lacked the funds to bridge the gap between the purchase price and the amount he was able to raise based on first mortgage security. The plaintiffs took back a second mortgage.

[2] The defendant is a notary public. She prepared the property transfer documents, and the second mortgage documents.

[3] The purchaser went into default of the terms of the first mortgage, and his interest in the property was foreclosed. The amount received on the sale of the property did not satisfy the full amount payable on the terms of the first mortgage, and nothing was left for the plaintiffs.

[4] The plaintiffs claim that their loss was due to the negligence of the defendant in failing to warn them of a term of the first mortgage which had the potential to materially diminish the value of their second mortgage security. This term, clause 10, permitted the first mortgagee to incorporate other debt obligations of the borrower into its mortgage security.

II. EVIDENCE AND FINDINGS OF FACT

A. Relationship among Mr D'Kugener, Ms Scott and Ms Shindell

[5] The plaintiff, Ms Scott, is the mother of the plaintiff Mr D'Kugener. They, together with the third party, Ms Shindell, purchased properties for investment purposes. The subject property was one of numerous properties they had purchased.

[6] Mr D'Kugener was in a common-law relationship with Ms Shindell. They separated in 1996. They remained co-invested in the subject and other properties. Issues arose between Mr D'Kugener and Ms Shindell over property interests. Once these issues were resolved in 1999, the group started to divest their holdings.

[7] Mr D'Kugener is an experienced investor. His mother, Ms Scott, trusted his judgment, and relied on him in connection with property investments in which she participated.

[8] Ms Shindell, the third party, was, up to and at the time of the sale of the subject property, employed by a credit union ("the Credit Union"). Her employment required a comprehensive knowledge of the Credit Union's loan policies and the terms of her employer's standard forms of loan agreement.

B. Chronology

[9] The subject property was purchased in 1994 as a revenue property. It was owned by the plaintiffs and Ms Shindell. The purchase price was $253,000.

[10] When the decision was made to sell, the property was not listed with a realtor. A purchaser was found through contacts. On January 21, 2000 an agreement was made between Mr D'Kugener, Ms Scott, and Ms Shindell, as vendors, to sell the property to the purchaser. The purchase price was $253,000. The agreement stipulated that the purchase was subject to the purchaser obtaining a CMHC first mortgage in the amount of $240,350.

[11] The vendors had not obtained an appraisal for the purpose of establishing the sale price. Mr D'Kugener knew that the 1999 property tax assessment showed a value of $248,500, and that properties in the area were selling for several thousand dollars over their assessed values.

[12] The purchaser needed an appraisal for the purpose of his mortgage application. Mr D'Kugener asked Ms Shindell to order the appraisal, which she did. It was paid for by cheque drawn on the account of Mr D'Kugener, Ms Scott and Ms Shindell. The property was appraised at $250,000.

[13] The purchaser's application for a CMHC guaranteed mortgage was rejected due to the purchaser's non-qualification based on debt to income ratio.

[14] The Credit Union approved the purchaser for a loan of $202,000, to be secured by first mortgage. The plaintiffs financed $42,000 of the balance, to be secured by a second mortgage. The sale completed on March 1, 2000.

[15] The purchasers defaulted on the first mortgage in December 2001. The plaintiffs were served with legal process relating to the foreclosure. They testified that it was then they learned of clause 10, and the Credit Union's claim to a secured indebtedness of approximately $226,000. This was approximately $27,000 in excess of the remainder of the principal sum set out on the loan agreement made between the Credit Union and the purchaser.

[16] On the final day for redemption, May 10, 2002, the balance owing under the mortgage was $230,522.55. On September 18, 2002, an order was made which permitted the credit union to list the property for a total price of $230,000.

[17] The net amount received by the Credit Union on the sale, after deduction of commissions, taxes, and the like, was $212,269.80. After legal fees, the net received was $209,70.23. A Credit Union representative testified that this represented a loss to the credit union of approximately $3,600, taking account only the amount advanced under the mortgage, exclusive of amounts claimable under clause 10, plus per diem interest.

C. The Plaintiff's Evidence

[18] The plaintiffs had employed the services of the defendant, a notary public, in connection with other real estate transactions. She was retained to prepare the documents and register the property transfer and second mortgage.

[19] The completion of the purchase, and possession, was set for March 1, 2000. Mr. D'Kugener attended at the defendant's office on February 23, 2000 to give her a copy of the contract of purchase and sale. He informed her that he would be away from February 24 until after the completion date, and that Ms Shindell would provide the particulars for the second mortgage.

[20] Mr D'Kugener attended at the defendant's office on February 24th. He signed the property transfer document. It is common ground that there was no discussion between Mr D'Kugener and the defendant of the terms of the first mortgage in favour of the Credit Union.

[21] Mr D'Kugener left town on February 24th. He gave Ms Scott his power of attorney, in order that she could execute documents as needed to complete the transaction.

[22] Ms Shindell provided the defendant with the terms of the second mortgage. The defendant prepared the mortgage document.

[23] On February 28th, Ms Scott attended at the defendant's office. She signed the property transfer form, and the documents relating to the second mortgage.

[24] Ms Scott had dealt with the defendant before. She testified that the defendant generally ran through the paperwork, and explained any significant things she should be aware of. She testified that the defendant did not show her a copy of the first mortgage, and that she had no recall of a discussion of its terms. She said she was not informed of a term of the first mortgage, clause 10, which permitted the Credit Union, in the event of default, to claim security for other debts of the borrower. It was her evidence that if she had been advised, she would not have proceeded, and would have contracted Mr D'Kugener.

[25] Ms Scott testified that the defendant never advised her of the risks of taking a second "take back" mortgage.

[26] Ms Scott endorsed the Land Title Act, Form B, Mortgage Document. Her signature appears at the top of the first page, and on the second page at paragraph 11, which specifies the following:

"Mortgage with Vancity having a registration number 1 lower than the within instrument."

[27] Ms Scott was shown the vendor's statement of adjustments, which refers to the second mortgage in favour of her and Mr D'Kugener, and the authorization to proceed with the conveyance. The latter was signed by her, for herself, and as attorney for Mr D'Kugener.

[28] The foregoing summarizes the evidence of the plaintiffs. The evidence of the defendant is materially different on the central issue.

D. The Defendant's Evidence

[29] The defendant met with Mr D'Kugener twice. She saw him briefly on February 23rd, when he dropped off the contract of purchase and sale.

[30] Mr D'Kugener returned on February 24th to sign the property transfer document. He was there no more than five minutes. He was in a hurry, and instructed the defendant to deal with Ms Shindell for the terms of the second mortgage. He had given Ms Scott his power of attorney.

[31] Mr D'Kugener had attended the defendant's office on February 24th for the sole purpose of signing the Form A Property Transfer document. She did not advise Mr D'Kugener of the Credit Union's first mortgage terms on February 24th, and did not do so later, as she had been instructed to deal with Ms Shindell.

[32] The defendant had a clear recollection of her dealings with Ms Scott. She had met Ms Scott on previous occasions. Ms Scott attended at her office on February 28th. In the course of their meeting, the defendant went over the vendor's statement of adjustments, and answered questions raised by Ms Scott.

[33] The defendant was asked about her recall of the discussion with Ms Scott concerning the second mortgage. She said it was very important that Ms Scott to understand she was in a second position behind the Credit Union, and that she understand clause 10 of the Credit Union mortgage. The defendant testified that she felt Ms Scott may not have been as sophisticated as Mr D'Kugener or Ms Shindell, and she wanted to emphasize this clause. The defendant was very familiar with this clause, as her practice regularly involved the registration of the Credit Union mortgages.

[34] The defendant said she asked Ms Scott to sign beside paragraph 11 of the Form B Mortgage document, to ensure she knew the mortgage was in second position behind the Credit Union, and that the first mortgage had special terms.

[35] The defendant had Ms Shindell, who attended separately, sign the Form B document as well, as it was her who provided the instructions on its terms. She would not have given as much detail to Ms Shindell as she did to Ms Scott.

[36] On cross-examination, the defendant agreed that she had a duty, in these circumstances, to look out for the interests of the plaintiffs on the sale of the property, and to look out for their interests in connection with the "take back" mortgage. She agreed that, when a vendor is taking back a second mortgage, she would try to obtain a copy of the first mortgage. She did not have the Credit Union's first mortgage document, but had the first page of the loan agreement, which set out the mortgage amount. She showed this to Ms Scott. This page does not include clause 10. However, she was very familiar with clause 10 from doing so many mortgages for the Credit Union.

[37] The defendant kept notes on the progress of this transaction, but had no note that she had advised Ms Scott about clause 10.

[38] The defendant acknowledged that she had not sent a reporting letter to the plaintiffs.

[39] The defendant's evidence conflicts with that of Ms Scott on the central question of whether the latter was informed of clause 10 and its effect.

E. Analysis and Findings

[40] The defendant is an experienced notary. She understood her duty to the plaintiffs in a transaction in which they were taking back a second mortgage. She knew that the terms of the first mortgage would have a bearing on the value of the second mortgage security. Although she did not have a copy of all of the documentation relating to the first mortgage, she had reviewed the same mortgage documentation on numerous occasions, and knew of the existence and effect of clause 10.

[41] The defendant had a clear recollection of meeting with Ms Scott, and of advising her on the existence and effect of clause 10.

[42] The credibility of the defendant is not diminished by the absence of a note in her file of the advice she gave to Ms Scott. The primary purpose for keeping the notes was to record the steps taken toward the completion of the transaction.

[43] Ms Scott testified that the defendant said nothing about the risk associated with second mortgage security. It is clear that she knew of the existence of the first mortgage, as she had endorsed a reference to it in the second mortgage document. It is implausible that the defendant would take great care to refer her to the existence of the first mortgage, but not advise her of its significance.

[44] Ms Scott's demeanour gave me little confidence in her credibility. She presented, alternately, with righteous indignation and wide-eyed innocence in the course of her testimony. I give little credit to her claim that, had she been told about clause 10, she would have declined to sign the mortgage form, and discussed her concern with Mr D'Kugener. It is more likely that she paid little heed to the defendant's advice on the effect of clause 10, as it was her practice to rely on Mr D'Kugener for the business aspects of these property transactions. Moreover, the transaction was to complete on March 1, 2000, while Mr D'Kugener, who had departed on February 24, was going to be away. Mr D'Kugener was somewhere off the Pacific coast performing his duties as second mate on a tow boat.

[45] I accept the evidence of the defendant where it conflicts with the evidence of Ms Scott.

[46] I did not find Mr D'Kugener a credible witness. He was somewhat argumentative and evasive. He claimed he had no special knowledge of property investment, though it is obvious that he has. I do not accept Mr D'Kugener's claim that he had no knowledge of the terms of the first mortgage. He and Ms Shindell had cohabited for ten years up to 1996, and had, together, invested in numerous properties. She was, during this period, employed as a loans officer by the Credit Union. The Credit Union held the mortgage on the subject property when it was owned by Mr D'Kugener, Ms Scott, and Ms Shindell. Ms Shindell, though she denied it in her evidence, obviously knew of the existence and effect of clause 10.

[47] I find implausible the plaintiffs' assertion that they would not, had they known about clause 10, proceeded with the sale transaction as it was then structured. They were highly motivated to sell. The property had not appreciated in value since it was purchased in 1994. It was encumbered by a substantial mortgage. Although the property had two separate rental accommodations, only the top floor was tenanted. The property is in a flood plain, which raised a question over the conformity of the ground level suite. The sale price exceeded the assessed value of $248,500 and the appraised value of $250,000. Mr D'Kugener and Ms Shindell wanted the property sold as part of a resolution of matters which arose between them after their separation. They had taken unusual measures, as vendors, to facilitate the purchaser's application for financing.

[48] Nothing turns on the defendant's omission of a reporting letter. The transaction had completed. The transfer, and the first and second mortgages, had been registered. I do not accept Mr D'Kugener's evidence that he would not, if he knew of clause 10 after completion, have extended the term of the second mortgage beyond its initial term of six months.

III. ISSUES

[49] I have concluded that the defendant did inform the plaintiff, Ms Scott, of the existence and effect of clause 10.

[50] The remaining issue is whether the defendant was obligated to inform Mr D'Kugener, independently, of the existence and effect of clause 10.

IV. ANALYSIS

[51] I start with the assumption that a notary public who is retained to place second mortgage security is under a duty to inform a client of the existence of provisions in a first mortgage which have the potential to diminish the value of the second mortgage security.

[52] The question in the present case is whether the defendant met this duty.

[53] In Esser v. Brown (2004), 30 B.C.L.R. (4th) 261 (C.A.) the British Columbia Court of Appeal addressed issues going to the existence of a duty of care, and the required standard of conduct in performance of a duty of care. In her reasons, Newbury J.A. held, on the facts of that case, that there was no duty of care in law upon the defendant. She went on, at ¶39, to address the question whether, if a duty of care existed, the notary in that case had failed to comply with a reasonable standard of conduct:

… The question is what a reasonably competent notary would have been expected to do in the circumstances in which Ms. Luoma found herself. (at ¶41)

[54] The question in the present matter is this: what would a reasonably competent notary have been expected to do in the circumstances in which the defendant, Ms Mustonen, found herself?

[55] The defendant had provided professional services, as a notary, to the plaintiffs in connection with other property transactions. She knew that they, together with Ms Shindell, shared in purchasing and holding investment properties. They were, to her knowledge, sophisticated investors. She had dealt with Ms Shindell in connection with Credit Union Mortgages.

[56] On February 23rd, Mr D'Kugener instructed the defendant to attend to the vendors' interests in a conveyance of the subject property to the purchaser. He was going to sea the next day, and would not return until after the completion date. He returned to the defendant's office on February 24 to sign the property transfer document. He advised the defendant that Ms Shindell would provide the particulars of the terms of the second mortgage. He had given Ms Scott a power of attorney.

[57] Therafter, the defendant, pursuant to Mr D'Kugener's instructions, dealt only with Ms Shindell and Ms Scott.

[58] Ms Shindell provided instructions on the terms of the second mortgage. She met with the defendant to review the Form B Mortgage document.

[59] Ms Scott met with the defendant, who advised her of the existence of clause 10 and its effect. Ms Scott reviewed the statement of adjustments, which refers to the second mortgage, the Form B Mortgage document, and the authorization to proceed with the sale. She signed the latter, and raised no concern about the matter proceeding.

[60] In short, the defendant did exactly what Mr D'Kugener asked her to do. He had turned the matter over to Ms Shindell and Ms Scott to carry the transaction through to completion. This she did. In doing so, she gave Ms Scott the appropriate advice. Her duty did not require her to contact Mr D'Kugener to impart the same information to him. It is unlikely that she could have done so, even if it had occurred to her that she should. Mr D'Kugener was somewhere off the British Columbia coast on a tow boat. It was for that very reason that he left Ms Shindell and Ms Scott to conclude the transaction. I do not believe Mr D'Kugener's evidence that he could at all times have been contacted on his cellular phone.

[61] I also reject the plaintiffs' assertion (premised on their claim of lack of knowledge) that they would not have proceeded had they known of the existence and effect of clause 10.

[62] The action is dismissed.

V. COSTS

[63] The defendant will have her costs at Scale 3.

[64] There will be no order for costs in favour of, or against, the third party.

“H.A. Slade J.”
The Honourable Mr. Justice H.A. Slade