2008 BCSC 1138 CareVest Capital Inc. v. Chychrun

Before: The Honourable Madam Justice Garson

Reasons for Judgment

Counsel for the Plaintiff	B.W. Dixon
Counsel for Defendant, Glen Chychrun et al.	D.W. Donohoe
Counsel for the Defendant, Laura Kennelly-Mohr et al.	S.D. Coblin
Appearing in person	C. Ceyedsadr
Date and Place of Hearing:	July 10, 11 and 14, 2008
	Vancouver, B.C.

[1] In this foreclosure action CareVest Capital Inc. (“CareVest”) applies for a declaration that its security ranks in priority to any unregistered equitable interest the defendants may have acquired under their cancelled pre-sale contracts.

[2] The defendants who oppose the application had all entered into agreements to purchase strata titled units in the property that is the subject of this foreclosure action. They say that the plaintiff’s conduct in requiring the developer to cancel their contracts and to resell their units at a higher price constitutes equitable fraud and consequently the plaintiff lender does not have the priority it claims.

BACKGROUND

[3] The primary lender for the Riverbend development was MCAP Financial Corporation. It took security as first mortgagee. Its mortgage is not at issue in these proceedings.

[4] The mortgage that is the subject of this foreclosure action is a mortgage entered into between the developer and the plaintiff on June 30, 2004, in the amount of $4,200,000 (the “First Riverbend Mortgage”) registered as a second mortgage at the New Westminster Land Title Office on June 30, 2004. The First Riverbend Mortgage secures both principal and interest accruing thereafter at 15% per annum to the date of repayment (on the sale of the units).

[5] By February, 2005, the developer was seeking financing for cost overruns and CareVest agreed to extend the term of the June 30, 2004, mortgage and to increase the loan. The plaintiff registered a mortgage modification agreement (the “First Modification”) in the Land Title Office on March 1, 2005, increasing the principal amount of the mortgage to $5,070,000.

[6] The defendants have been described as pre-sale purchasers. They entered into purchase contracts with the developer on various dates from April 6, 2005, to January 15, 2006.

[7] Prior to April 6, 2005, the developer had repaid $156,033.40 to the plaintiff (see Exhibit T to the affidavit of J. Plasteras of May 20, 2008).

[8] The First Riverbend Mortgage secures a running account, as can be seen from the register of mortgage documents (Exhibit “C” to the Plasteras affidavit #4). Under the Land Title (Transfer Forms) Regulation, B.C. Reg. 53/90, being a regulation to the Land Title Act, R.S.B.C. 1996, c. 250, a running account is defined as follows:

14 If the mortgage form states that this mortgage secures a current or running account, the lender may, on one or more occasions, advance and readvance all or part of the principal amount and this mortgage

(a) will be security for payment of the principal amount as advanced and readvanced and for all other money payable to the lender under this mortgage,

(b) will not be considered to have been redeemed only because

(i) the advances and readvances made to the borrower have been repaid, or

(ii) the accounts of the borrower with the lender cease to be in debit, and

(c) remains effective security for further advances and readvances until the borrower has received a discharge of this mortgage.

[9] The mortgage document indicated that CareVest filed Standard Mortgage Terms, registered as MT930036. Articles 28 and 29 of those terms read as follows:

28. That the mortgage, assignment and charge hereby created shall be effective whether or not the whole or any portion of the moneys hereby intended to be secured or any part thereof shall be advanced before or after or on the date of the execution of this Mortgage and all such sums together with all fees and expenses of the Lender shall be deemed to be secured by this Mortgage from the date of registration hereof notwithstanding the date the same may be advanced or incurred.

29. That until this Mortgage has been discharge as hereinbefore provided, this Mortgage and the charges hereby created shall be and remain valid and continuing security and shall cover and secure the payment of any and all indebtedness and liability, present and future, direct or indirect, absolute or contingent of the Borrower to the Lender, including, without limitation, obligations of the Borrower to indemnify or pay the Lender in respect of any Cash-Equivalent Instruments. This Mortgage shall be deemed to secure, inter alia, the repayment to the Lender of the full face amount of all Cash-Equivalent Instruments from the date hereof notwithstanding that at the time of realisation hereunder, the Lender has not been called on to pay any moneys thereunder. This Mortgage is made to secure a running account, inter alia, and shall not be redeemed by reason only that advances secured hereunder are repaid. Any such payment shall be deemed not to be a cancellation pro-tanto of this Mortgage and any subsequent advance or re-advance by the Lender to the Borrower shall be secured hereby to the same extent as if such advance or re-advance had been made on the granting of this Mortgage.

[10] At the request of the developer, CareVest made several further advances. On March 15, 2007, the plaintiff agreed to loan a further $5 million to the developer as the plaintiff’s second mortgage to the developer (the third mortgage against the property). By May 10, 2007, the developer was indebted to CareVest in the amount of $8,049,885.90.

[11] On May 28, 2007, CareVest commenced these foreclosure proceedings and the Court appointed a receiver-manager.

[12] The most recent report of the receiver-manager, dated May 22, 2008, indicates that the total estimated net recovery to creditors is $4.3 million. Any re-payment of the First Riverbend Mortgage, and of the receiver-manager’s borrowings and expenses for completion of phase 3 will come from that $4.3 million. The plaintiff says that the principal outstanding on the First Riverbend Mortgage was never less than $4.3 million at any time after March 2, 2005, which pre-dates any of the purchase contracts, and therefore it has priority to the net proceeds of the receivership.

[13] The issue with the pre-sale purchasers arose as follows. On May 26, 2004, the plaintiff issued a commitment letter to the developer, to which the developer agreed. In that letter, the plaintiff and the developer agreed to a minimum gross sale price for each strata lot in phase 3. The letter set out the exact prices for which the plaintiff would provide a partial discharge of its mortgage security for each strata lot.

[14] On March 15, 2007, the plaintiff issued a new commitment letter, to which the developer agreed, that changed the partial discharge terms. The letter required each lot to be sold at “fair market value … as determined by CareVest.”

[15] What this meant was that because the market value of the lots had appreciated between the time that the defendants entered into their agreements and the time that the developer ran into financial problems, CareVest determined that the only way it could minimize its losses would be for the developer to cancel the agreements and re-sell the lots at the then higher market value.

[16] On May 7, 2007, the developer announced that it was unable to fulfil its contractual obligations to the pre-sale purchasers and that it would return all deposit monies placed with it by the pre-sale purchasers. Those deposit monies were returned to all the purchasers, including the defendants.

[17] The financial difficulties of the developer are set out in Mr. Justice Pitfield’s reasons in an earlier application in this action (CareVest Capital Inc. v. CB Development 2000 Ltd. et al., 2007 BCSC 1146), from which I quote:

[2] The fact is that significant cost overruns have been experienced on the project. Building and development costs were originally financed by proceeds from a first mortgage in favour of MCAP Financial Corporation. That mortgage is in default. The total of principal and interest owing at this date approximates $4,423,000. CareVest Capital Inc. has provided additional financing on the security of a second mortgage, collateral security and several guarantees.

[3] The aggregate of the debts owing to CareVest is approximately $8,525,000 at today's date. Other debts on the project approximate $3,848,000. The cost of completing the project not including the cost of landscaping and the cost of some detached garages and certain other costs is estimated at $3,200,000. Existing trade payables approximate $600,000. Some of the trades have filed liens against the property in phase 3 and against strata lots in other phases of the project. If you add up the numbers, the total of the secured and unsecured liabilities and the cost to complete, approximates $20,596,000.

[4] The developer marketed the units on a "sale before building" or presale basis. The total price of all units under contract for sale approximates $11,936,000. There are some holdbacks and goods and services tax recoverable to a total of $135,000, such that revenue will total $12,071,000. The economic reality is that costs will exceed revenue by approximately $8,525,000. The ultimate question is who will bear the loss: the presale purchasers, CareVest, or both. The situation for all concerned is regrettable, to say the least, and one can only have sympathy for all involved in this rather disastrous project.

[5] CareVest recognizes that it will incur some loss. By way of petition filed May 28, 2007, it sought relief in the form of an order permitting the sale of the units with vacant possession, conduct of the sale and the appointment of a receiver/manager of the rents and profits of the Riverbend property. If that relief should be granted, additional funding would be provided by CareVest to complete construction and the units would be sold at market, free and clear of encumbrances without regard for the developer's obligations under the presale contracts. CareVest anticipates that if that course were followed, its loss would be reduced from approximately $5,022,000 to $2,629,000.

[6] If CareVest is granted the relief it seeks, the presale buyers will be denied the acquisition of their units at presale contract prices. Some are first‑time buyers. In addition to losing their units and their intended homes, the purchasers would lose the benefit of market appreciation in the value of the units. The estimate of that loss on average, as I appreciate the evidence, approximates $80,000 per unit.

[18] On June 14, 2007, Mr. Justice Pitfield made the following order:

[12] For the reasons that follow, I conclude that the appropriate order in these circumstances is the following:

1. Except to the extent any of the additional clauses requested by the receiver are inconsistent with the terms of this order, the application to add the additional terms is granted.

2. The receiver shall be and is hereby authorized to borrow the sum of $3,800,000 on the security of a mortgage that will rank subsequent to the MCAP Financial Corporation mortgage, but in priority to all other registered or unregistered charges against the property of any nature and kind whatsoever.

3. The application for a direction that the receiver be permitted to disclaim contracts of purchase and sale in respect of units 88 through 119 is dismissed.

4. The receiver is authorized and directed to sell each of the units at market value free and clear of any obligation of the developer, CB Development 2000 Ltd., that may arise under any contract of purchase and sale pertaining to any strata lot.

5. The receiver shall hold in trust for CareVest and any purchaser under a presale contract, the excess of the sale price payable to the receiver upon the sale of any strata lot without deduction of selling costs or vendor and purchaser closing adjustments over the purchase price stipulated in the presale contract pertaining to the strata lot, such funds to be held pending determination of priority and/or entitlement thereto as between the presale contract buyer and CareVest.

[19] In order #5, Mr. Justice Pitfield ordered the receiver-manager to create a fund (the “Fund”). The Fund is comprised of the proceeds of sale reflecting the increase between the pre-sale purchase contract price and the actual sale price. The subject matter of this application is the disposition of the Fund. In making his order of June 14, Mr. Justice Pitfield said:

[16] I do not think it is appropriate to attempt to resolve, on a summary application of this kind, the question of whether the presale buyers have an unregistered equitable charge which will entitle them to recover their damages out of the sale proceeds of the strata lot which they were to be the purchaser in priority to the registered second charge in favour of CareVest. That claim warrants more detailed consideration in the circumstances surrounding the financing of this development.

POSITION OF THE DEFENDANTS

[20] The defendants state the issues as follows:

(1) whether or not the Fund was created in lieu of the pre-sale purchasers’ equitable interest in the development as at the date of the court order; and

(2) whether or not, as at the date of the Court’s order, the pre-sale purchasers’ equitable interest in the development went in priority to the plaintiff’s first mortgage and second mortgage in whole or in part.

[21] Implied in the statement of these issues is a third issue: if the answer to the second issue is yes, then what is the value of that equitable interest?

[22] The defendants say that the Fund stands separate and apart from the monies available for the foreclosure and receivership and is not subject to any costs or expenses incurred by the receiver-manager. The defendants say the Fund cannot be subject to the expenses of the foreclosure because no such expenses existed on the date the Fund was created, and the purpose of the Fund was to preserve competing property interests as at June 14, 2007. The defendants contend that to make the Fund available to compensate the plaintiff for the cost to complete the project defeats the entire purpose of its creation. The defendants argue that upon entering into their respective pre-sale contracts, each pre-sale purchaser acquired an unregistered equitable interest in their strata lots. The defendants argue that Mr. Justice Pitfield did not determine that the pre-sale contracts were incapable of specific performance as is contended by the plaintiff.

[23] The defendants rely on s. 29(2) of the Land Title Act, R.S.B.C. 1996, c. 250, which provides as follows:

29 (1) For the purposes of this section, "registered owner" includes a person who has made an application for registration and becomes a registered owner as a result of that application.

(2) Except in the case of fraud in which he or she has participated, a person contracting or dealing with or taking or proposing to take from a registered owner

(a) a transfer of land, or

(b) a charge on land, or a transfer or assignment or subcharge of the charge,

is not, despite a rule of law or equity to the contrary, affected by a notice, express, implied, or constructive, of an unregistered interest affecting the land or charge other than

(d) a lease or agreement for lease for a period not exceeding 3 years if there is actual occupation under the lease or agreement, or

(e) the title of a person against which the indefeasible title is void under section 23 (4).

[24] The defendants contend that the fraud referred to in s. 29(2) is not limited to deceit; they argue that equitable fraud is sufficient. They say that the plaintiff acted towards the pre-sale purchasers in a way that constitutes fraud within the meaning of s. 29(2) of the Land Title Act. The conduct of the plaintiff that they refer to as constituting s. 29(2) fraud is the July 20, 2006, letter sent to the developer asking whether “… any of the sales on units not started could be collapsed or alternatively can the prices on existing sales for units not yet started be increased to reflect current market value.” After July 28, 2006, CareVest began taking an active role in controlling the project, according to the defendants. The defendants contend that the plaintiff essentially forced the developer to break the contracts, but at the same time tried to create an appearance of distance between it and the developer. The defendants say that the plaintiff was an active participant in the development and implementation of a plan to increase their secured position which required the pre-sale contracts to be cancelled. The defendants say this conduct is equitable fraud and invokes the fraud exception in s. 29(2) of the Land Title Act and, therefore, the pre-sale purchasers are entitled to a declaration that their interests rank in priority to the interests of the plaintiff from and after registration of the First Modification and that no further advances or readvances can be tacked to that security. The defendants further say that had this matter been determined on June 14, 2007, the pre-sale purchasers would have succeeded in their position that their interests rank in priority to the plaintiff’s registered interest, in whole or in part. They say the pre-sale purchasers are therefore entitled to payment out of their proportionate share of the fund.

[25] As I understand the calculations of the defendants they say that as at June 14, 2007, the anticipated revenue was $12.7 million. CareVest was secured to $3.9 million and MCAP, the first mortgagee, was secured to $4.4 million, for a total of $8.3 million. The receiver-manager then estimated the cost to complete at $3.8 million, which leaves a surplus of $600,000 that could be paid to the defendants.

[26] The actual completed cost was $6.9 million. The defendants say they should not have to bear the burden of the actual cost to complete because they were prepared to purchase their units as is on June 14, 2007. On that date the units were not completed. The receiver-manager’s report of June 5, 2007, includes, at p. 5, the total cost to complete the project, which illustrates that the units were incomplete.

[27] It is not clear to me if the defendants were offering to conclude their contracts on an “as is” basis with some discount representing the portion of the unit uncompleted. I assume that is so.

[28] Mr. Donohoe, for the 22 Chychrun defendants, asserts that the “game plan” of the plaintiff to arrange for the collapsing of the pre-sale contracts arose from discussions between the plaintiff and the developer at a site meeting on September 14, 2006. He says the defendants were “tricked” by CareVest and that is not the sort of conduct that should be condoned by this Court. He alleges a number of breaches of the disclosure requirement contained in the Real Estate Development Marketing Act, S.B.C. 2004, c. 41 and its predecessor statute, the Real Estate Act, R.S.B.C. 1996, c. 397. They claim that the failure to disclose induced the defendants to assume that there was little or no risk to entering the pre-sale contracts. If the plaintiff had disclosed the information, the defendants likely would not have entered the pre-sale contracts. These defendants argue that the plaintiff should be equitably estopped from obtaining the assistance of the Court to enforce its security interest when it has breached a statutory duty to disclose. He says that the conduct of the plaintiff in breach of these statutes is relevant to the argument that its conduct constitutes equitable fraud under s. 29 of the Land Title Act. He acknowledges that this same conduct may constitute a cause of action in tort and that the tort claim is not before me; his statement of defence pleading these allegations having been struck out by Mr. Justice Pitfield.

[29] In oral reasons released January 25, 2008, Mr. Justice Pitfield said, at paras. 16 and 18:

[16] The question of whether wrongs have been independently committed by virtue of any of the dealings between the buyers, the developer, and the lender are properly the subject matter of a separate cause of action which should be advanced by counterclaim.

…

[18] For the reasons I stated, the claims are properly the subject matter of independent causes of action which, as the plaintiff acknowledges, may be pursued by counterclaim. They do not properly comprise a defence to the foreclosure proceeding.

[30] Mr. Donohoe defends his reliance on this conduct, the particulars of which were struck out in a statement of defence, on the basis that this same conduct also constitutes equitable fraud under s. 29 of the Land Title Act. Mr. Donohoe submits that the Fund was to be preserved as a separate fund outside of the security being granted to the receiver-manager for payment of its fees and expenses and was not to be used as a backup financial resource to pay the expenses of completion of the construction of the houses. Mr. Donohoe furthers submits that Mr. Justice Pitfield did not make a binding and final determination that there was never at any earlier date any possibility of the defendants succeeding in their claims for specific performance. Mr. Donohoe says it would be contradictory for the Court to say on the one hand, as Mr. Justice Pitfield did, that he was recognizing the potential equitable interest of the defendants which could only be based on specific performance, and then say on the other hand that specific performance was not possible.

ANALYSIS

[31] On June 14, 2007, it was not possible for Mr. Justice Pitfield to determine if the net proceeds of the receivership would be greater than the sum of the advances made under the First Riverbend Mortgage before the pre-sale contracts were entered into. He could also not determine in a summary proceeding if there was a basis in fact for the claims of equitable fraud. The parties have since conducted examinations for discovery and have brought to my attention the circumstances which the defendants say is equitable fraud. However, it is not necessary for me to decide any of the issues raised in defence by the defendants because the net proceeds of the receivership are insufficient to cover the principal and accrued interest.

[32] The First Riverbend Mortgage balance outstanding as at April 6, 2005, the date just before the first defendant pre-sale contract, was $4,913,966. This sum is calculated from the exhibits to the fourth affidavit of Jill Plasteras (Exhibits “R” and “T”) as follows:

Total advances made before April 6, 2005	$5,070,000
- minus repayments to that date	(156,033)
Balance outstanding	$4,913,966 plus interest

[33] As noted above, the mortgage bears interest at 15% per annum on the running account. Plaintiff’s counsel advised the Court that the accrued interest is about $500,000 to July 24, 2007, plus a per diem amount thereafter.

[34] The May 22, 2008, receiver-manager’s Report to the Court estimates the total potential recovery (including the $2,103,370 held in trust in the Fund) at $4,297,695. It is readily apparent that the total potential recovery does not exceed, or even come close to, the balance outstanding on the First Riverbend Mortgage before any of the pre-sale purchase contracts were entered into.

[35] It is for this reason, and the fact that the mortgage secures a running account that it is unnecessary to consider the defendants arguments as set out above because they cannot succeed, owing to the poor recovery. Mr. Justice Pitfield did not determine that the Fund belonged to the purchasers. He merely ordered that it be segregated and secured so that the defendants could argue later about the entitlement and priority to the Fund. As it turns out, as I have said, there are insufficient funds to enable the defendants to establish any priority to the fund at all. Mr. Justice Pitfield did not create a fund for a damage claim the defendants may have against the plaintiff. If the recovery had been greater than the amount outstanding plus accrued interest that was advanced prior to the defendants’ agreements, it may have been necessary to consider the question of the claims to an unregistered equitable interest, but it was not.

[36] Consequently the plaintiff is entitled to the declarations it seeks as follows:

(a) the interest of the plaintiff under the First Riverbend Mortgage, as defined in the statement of claim filed October 9, 2007, are declared to rank in priority to any unregistered equitable interest of the defendants that may have been acquired by virtue of entry by the defendants into contracts of purchase and sale with the developer to the extent of the amount of loan advanced made by the plaintiff to the developer before the various dates on which the defendants and the developer entered into such contracts of purchase and sale; and

(b) the Receivership Order pronounced by Mr. Justice Pitfield on June 14, 2007, as amended by an Order pronounced August 15, 2007, be further amended by deleting para. 32 (the paragraph segregating the Fund that is the subject of this application) in its entirety.

[37] The defendants’ applications for orders declaring the equitable interests to rank in priority to the plaintiff’s, and for further consequential orders, are dismissed.

[38] Costs will follow the event.

“N. GARSON, J.”

Citation:	*CareVest Capital Inc. v. Chychrun,*
	2008 BCSC 1138