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Date: |
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Docket: |
H990060 |
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Registry: |
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IN THE SUPREME COURT OF |
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BETWEEN: |
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UNITED SAVINGS CREDIT UNION |
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PETITIONER |
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AND: |
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JAGROOP SINGH GILL, RAJPAL KAUR GILL |
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RESPONDENTS |
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REASONS FOR JUDGMENT
OF THE
HONOURABLE MR. JUSTICE WONG |
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Counsel for the Petitioner: |
D. Moonje |
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Counsel for the Respondents: |
Brian C. Markus |
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Date and Place of Hearing: |
September 18, 2002 |
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Vancouver, BC |
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Every why hath a wherefore. Shakespeare
The Comedy of Errors, II, 2.
1592 – 1593
INTRODUCTION
[1] This is an application by the petitioner United Savings Credit Union (the Credit Union) to list for sale the matrimonial home of Mr. and Mrs. Jagroop and Rajpal Gill, and an order for conduct of sale in the usual terms.
BACKGROUND
[2] The factual background of this case is somewhat complex. Mr. Gill was at one time the registered owner of a vacant lot in Maple Ridge (Lot 3). Mrs. Gill was, and is, the sole registered owner of the couple’s matrimonial home located in Delta, B.C.
[3] Mr. Gill made arrangements with the Canadian Imperial Bank of Commerce (CIBC) to borrow funds (the first loan). The principal funds of $240,000 were secured by a collateral mortgage and assignment of rents registered on August 17, 1994 giving CIBC a first mortgage against Lot 3, (the first mortgage). The funds were also secured by a limited personal guarantee from Mrs. Gill (up to the amount of $240,000) of all present and future debts and liabilities of Mr. Gill to CIBC. The guarantee was executed on August 16, 1994. This personal guarantee was in turn secured by a collateral mortgage registered against the matrimonial home. Mrs. Gill in turn took a second mortgage against Lot 3 as security for her guarantee.
[4] In 1998, Mr. Gill applied to the Credit Union for a loan in the amount of $150,000 (the second loan). The second loan was to be secured by a second mortgage against Lot 3 (the second mortgage). In order to ensure that her husband received the loan, Mrs. Gill had to agree to the discharge of her second mortgage, which she did. The Credit Union’s second mortgage was registered on March 20, 1998. Mrs. Gill was not a party to the Credit Union loan and was not a registered owner of Lot 3. Moreover, Mrs. Gill refused to guarantee the second mortgage.
[5] Mr. and Mrs. Gill failed to comply with the terms of the first loan. By virtue of such default, in January 1999, CIBC commenced foreclosure proceedings and filed a certificate of pending litigation (CPL) against both Lot 3 and the matrimonial home. On February 4, 1999, CIBC obtained an Order Nisi of Foreclosure together with Judgment against Mr. and Mrs. Gill in the amount of $136,418.45 plus costs in the foreclosure proceeding.
[6] On June 22, 1999, the Credit Union obtained an Order granting it Conduct of Sale of Lot 3.
[7] By instrument dated November 17, 1999, CIBC assigned to the Credit Union: all CIBC’s right, title and interest in and to the first mortgage against Lot 3; the assignment of rents; the limited guarantee of Mrs. Gill; the foreclosure proceeding; the Order Nisi; the Judgment and the CPL. Notice of this assignment was given to Mr. and Mrs. Gill by letter dated November 22, 1999.
[8] On November 26, 1999, the Court granted an Order substituting the Credit Union as Petitioner in the foreclosure proceeding.
[9] On February 2, 2000, the Credit Union registered a priority agreement granting priority to the second mortgage over the first mortgage. No notice of this variation was given to Mr. or Mrs. Gill.
[10] Lot 3 was sold by Court Order in May, 2002, for $210,000. The sale did not generate sufficient funds to clear title of both the first and second mortgages. The proceeds would have been sufficient to pay out in full the first mortgage. Due to the change in priority, however, the proceeds from the sale were used to pay out the second mortgage. The Credit Union now seeks to collect on the amount outstanding on the first loan.
[11] Thus, the Credit Union seeks an order forcing the sale of the matrimonial home, and conduct of that sale. The Gills oppose such an order, and seek an order that the first mortgage has been satisfied by having been paid out in full.
ISSUES FOR DETERMINATION
[12] The following issues require determination:
1) Where a property is encumbered by two mortgages, can the mortgagees effectively agree to alter the priorities of the mortgages?
2) If the variation of priorities is permitted, is Mrs. Gill’s guarantee void for any reason?
POSITION OF THE PARTIES
[13] Briefly, counsel for the respondent Gills submits that this case turns on the guarantee being void for lack of independent legal advice, undue influence, and the variation of priorities without consent.
[14] Counsel for the petitioner, submits that the validity of the guarantee is a red herring, and that the Credit Union was able to switch the priorities of the mortgages without the mortgagor’s, or for that matter, the guarantor’s consent.
THE LAW
Issue 1:
[15] Mrs. Gill was a co-covenantor of the loan granted by CIBC to her husband, Mr. Gill, by virtue of the limited guarantee that she provided. As security for the guarantee, she provided CIBC a collateral mortgage over the matrimonial home.
[16] The guarantee signed by Mrs. Gill includes a “principal debtor” clause:
Clause (7) Principal Debtor
All moneys and liabilities, whether matured or unmatured, present or future, direct or indirect, absolute or contingent, obtained from the bank shall be deemed to form part of the customer’s liabilities…. I will pay to the Bank as principal debtor any amount that the Bank cannot recover from me as a guarantor, immediately following demand… .
[17] The effect of such a clause was discussed in Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415, where Cory J., for the majority, confirmed that a principal debtor clause converts a guarantor into a full-fledged principal debtor. He said at para. 21:
The principal debtor clause converts the guarantor into a full-fledged principal debtor with all the duties and obligations which that term implies. If the guarantor is to be responsible to the lending institution as a “full-fledged principal debtor” then he or she is entitled to the same notice of a renewal agreement as the principal mortgagor…. Not just fairness and equity but the designation of the guarantor as a principal debtor leads to the conclusion that the guarantor must have notice of and agree to the renewal before he is bound by its terms.
[18] This view has also been discussed in Halsbury’s Laws of England, 4th ed., vol. 32, para. 346:
Third persons may be made parties to mortgages in order to guarantee the payment of principal and interest or interest alone, the performance of covenants, or the maintenance of the security. Although a surety only undertakes for the default of another, the practice in mortgage deeds is to make him contract and become bound as a principal so far as concerns the mortgagee, but to let him remain a surety so far as concerns the mortgagor.
[19] CIBC’s actions in this present matter reflect this approach. Mrs. Gill’s guarantee included a principal debtor clause, which had the effect of making her independently liable in contract to CIBC. In other words, Mrs. Gill was obligated as a principal debtor for the loan granted to her husband.
[20] A mortgagor must consent to a material change in the mortgage. In Manulife, Cory J. also outlined that if a lending institution wishes to have the guarantor obligated as a principal debtor, then the guarantor must be entitled to the same rights as the principal debtor. The consent of the guarantor is also therefore required to a material change.
[21] Counsel for the respondents in this case submits that Mrs. Gill’s rights include notice of the change in priorities of the Lot 3 mortgages and consent to this allegedly material alteration, since it was not specifically agreed to in the first mortgage contract.
[22] The question thus is whether the change in priorities of the first and second mortgages over Lot 3 is a material change requiring the mortgagor’s and thus the guarantor’s consent.
[23] Counsel for the petitioner submitted that Cheah v. Equiticorp Finance Group Ltd. and another, [1991] 4 All E.R. 989, [1992] 1 A.C. 472, (P.C.) [hereinafter cited to All E.R.] is determinative of this issue.
[24] Unfortunately, there seems to be a lack of authorities in this area. There do not appear to be any cases that have considered Cheah, but the general ratio from the case is now reflected in Halsbury’s 4th ed., vol. 32 at para. 488.
[25] In Cheah, the Privy Council decided that where there were successive mortgages over the same property, mortgagees could alter the priority of the mortgages without the consent of the mortgagor. In my view, this result implies that the variation in priorities is not a material change to the mortgage.
[26] The facts in Cheah are very similar to the facts in the case at bar. By a mortgage deed, (mortgage 1), the appellant (the debtor) covenanted to pay certain sums of money to the company Equiticorp Securities Ltd. As security for such payment, the debtor charged 14 million shares in London Pacific Ltd “by way of fixed first charge”. By a further mortgage deed (mortgage 2) the debtor covenanted to pay further sums of money to Capitalcorp Investments Ltd and as security for such payment charged, inter alia, the same 14 million shares in London Pacific Ltd “by way of second fixed charge”. By a series of transactions, both of the mortgages became vested in the respondent Equiticorp Finance Group Ltd who ultimately obtained judgment against the debtor for the sum of $7,556,442.47, being moneys the payment of which was secured by mortgage 1.
[27] The respondent then exercised its power of sale under mortgage 2 over, inter alia, the 14 million shares in London Pacific Ltd. Apparently it was overlooked that those shares were subject to a first charge under mortgage 1. The proceeds of sale of the shares were applied towards discharging the debts secured by mortgage 2, rather than first satisfying the moneys due under mortgage 1 (being the judgment debt).
[28] The debtor took the view that he was entitled to insist that the proceeds of sale should have been applied in accordance with the priorities of the mortgages, in which case the judgment against him would have been fully satisfied.
[29] At trial, the New Zealand High Court found in the debtor’s favour. The Court of Appeal reversed that decision and held that the respondent mortgagee, as the holder of both mortgages, could unilaterally decide whether to apply the proceeds of sale of the London Pacific Ltd shares in satisfaction of mortgage 1 or mortgage 2.
[30] The Court of Appeal determined that in no circumstances can the mortgagor recover the mortgaged property until all the debts secured by it have been satisfied; therefore, there is no need for a mortgagor to consent to any variation in the priorities.
[31] Lord Browne-Wilkinson at the Privy Council agreed entirely with the reasoning of the Court of Appeal, but outlined that the Board also felt it desirable to shortly state their own reasons, given that there is no Commonwealth decision on point.
[32] He held that the question must be approached on the basis that mortgage 1 and mortgage 2 had remained vested in two separate mortgagees. The respondent, as holder of both mortgages, cannot be in a better position than the original mortgagees. Then the question he had to consider was whether two mortgagees can, without the consent of the mortgagor, agree to vary the priority of their mortgages. He found that in the ordinary case, the mortgagor is not affected by the order in which his debts are satisfied. He stated at 991:
The mortgagor is bound to satisfy all his secured debts before he can recover the mortgaged property. In the ordinary case priority of mortgages affects only the rights of mortgagees inter se, in particular where the security is inadequate to pay all the secured debts in full.
And further:
Moreover, the mortgagor has no right to insist on the mortgagee pursuing one of his remedies rather than another. It is for the mortgagee to decide whether to rely on the personal covenant for payment, or to sell the security or to take possession of the mortgaged property.
[33] Thus, where there are two mortgages of the same property, the mortgagees can agree to alter the priority of their mortgages without the consent of the mortgagor, because the mortgagor’s debt total and repayment obligations are not affected by the order in which his debts are satisfied. On foreclosure, he is bound to satisfy all secured debts before recovering the mortgaged property.
[34] Accordingly, the appellant Cheah was not entitled to insist that the proceeds of sale of the shares be applied in satisfaction of the first mortgage in priority to the second mortgage because, although the charge in the first mortgage was described as being a first charge, that was merely a description of the nature of the security which the debtor had given and it did not confer on the debtor a contractual right to insist on the satisfaction of his debts in any particular order. Impliedly, then, the variation in priorities does not result in a material change to the mortgage.
[35] As mentioned, the petitioners rely on Cheah as being determinative of the issue. While it is persuasive authority only, I find myself in agreement with the position advanced by the petitioners, namely, that Cheah is determinative of the issue in the case at bar. As in Cheah, here there are two mortgages of the same property; Mr. Gill granted a first mortgage over Lot 3 to CIBC, and later granted a second mortgage over Lot 3 to the Credit Union. As in Cheah, it makes no difference to the mortgagor, Mr. Gill, in which order the debts are satisfied, as he is bound to satisfy all his secured debts before he can recover the mortgaged property.
[36] Understandably, I think, the guarantor in this case had an expectation based on the initial priority of the mortgages that her guarantee would not be called upon. It was her understanding that there would always be enough equity in Lot 3 to satisfy the first mortgage.
[37] However, it is important to recollect the manner in which Mrs. Gill is bound. She is bound according to the proper meaning and effect of the written agreement that she entered into. Mrs. Gill was a co-covenantor of the CIBC loan. She provided a guarantee as security for the loan. By signing the guarantee with the principal debtor clause, she agreed to be liable for the loan to the amount of $240,000.
[38] As guarantor, Mrs. Gill moved into the position of the principal debtor. By doing so, she cannot have gained more rights than the original debtor or mortgagor. As a principal debtor, Mrs. Gill has no right to insist on the mortgagee pursuing one of his remedies, namely to take possession of Lot 3, rather than another, namely to rely on the personal covenant for payment. CIBC could have relied on Mrs. Gill’s personal covenant to pay the loan at any time after default. The switch in priorities effectively kept alive the first loan allowing the Credit Union to profit from the better or more extensive securities.
[39] Ultimately then, while the variation in priorities does personally affect Mrs. Gill, it does not affect her legal position, as she was personally liable to satisfy the secured debt of the CIBC loan.
[40] For these reasons, I find that the Credit Union could switch the priorities of the mortgages and Mrs. Gill is not entitled to insist on the satisfaction of the debts in any particular order.
[41] I am also in agreement with Lord Browne-Wilkinson in Cheah, that there may be cases (for example where the successive mortgages carry differing rates of interest) where the mortgagor has a genuine interest in ensuring that the debts are satisfied in a particular order. As he also pointed out, in such a case it will be for the mortgagor to insist upon a specific contractual provision precluding the alteration of priorities.
Issue 2:
[42] Mrs. Gill has also submitted that her guarantee should be void for lack of independent legal advice.
[43] As noted in the B.C. Mortgages Practice Manual (CLE Looseleaf, 2001 update) at para. 6.10, a prudent lender will insist on independent legal advice for any party (for example, guarantor) who does not derive benefit from the loan transaction. However, a lender must only take steps to ensure independent legal advice if there is evidence of wrongdoing or irregularity.
[44] This is discussed in the Law of Guarantee, 2nd ed. (Scarborough, Ont.: Carswell, 1996) where Professor McGuinness establishes at para. 4.83 that the question of whether a proposed surety has received proper “independent” legal advice must be approached from two perspectives. First, what are the duties that are owed by a lawyer providing “independent” legal advice to a proposed surety? Second, in what circumstances is a prospective creditor entitled to assume that such advice has been given and received? In relation to these questions, McGuinness states at para. 4.83:
A failure by a lawyer to provide proper advice to a prospective surety may well leave that solicitor open to a claim for professional negligence or for conflict of interest. Since there is no general legal requirement that a surety receive independent legal advice, it follows that except in cases where the creditor is aware or has notice of undue influence or some other vitiating factor requiring the provision of independent legal advice, the mere fact that the same lawyer acts for both the creditor and the surety is not in itself sufficient to entitle the surety to release from the guarantee.
[45] Mrs. Gill actually did meet with a solicitor before signing the guarantee; she met with her husband’s solicitor Alan Nicol to sign the mortgage, guarantee and other documents. Mr. Gill then asked Mr. Nicol to also act for CIBC in executing the loan transaction.
[46] While it is possible that Mrs. Gill may have some type of a claim against the lawyer, for conflict of interest or negligence for example, the mere fact that she may be entitled to complain against the lawyer who advised her with respect to the guarantee does not in and of itself mean that the guarantee is unenforceable.
[47] In Canada, there is no automatic presumption of undue influence between a husband and a wife; rather, courts will examine the surrounding circumstances to determine if it was appropriate for the lender to recommend independent legal advice: see Duca Community Credit Union Ltd. v. Fulco Automotive Ltd. (1994), 71 O.A.C. 351 (Div. Ct.).
[48] I find that there was no evidence of any undue influence or wrongdoing by Mr. Gill to force Mrs. Gill to guarantee his business loans. Moreover, I find that Mrs. Gill did understand the nature of the guarantee she was signing. The evidence is that she decided to take a second mortgage on Lot 3 to provide herself with security for the guarantee. In the absence of evidence of undue influence or wrongdoing, I am unable to find that CIBC was required to question the lawyer’s independence, and accordingly, I am unable to find that the guarantee should be set aside for lack of independent legal advice.
[49] Accordingly, the Petitioner’s application to list and have conduct of sale of Mrs. Gill’s home is granted. The Gill’s cross application for a declaration that the first mortgage has been satisfied by payment is dismissed.
[50] The Petitioner is entitled to costs.
“R.S.K. Wong, J.”
The Honourable Mr. Justice R.S.K. Wong