Court of Appeal for Saskatchewan Docket: CACV2923 Citation: Walker Bank of Montreal, 42 Date: 2017-06-08 Between: John Alphonse Walker and Rachael Doris Walker Appellants (Defendants) And Bank of Montreal Respondent (Plaintiff) Before: Jackson and Herauf JJ.A. and Wilkinson J. (ad hoc) Disposition: Appeal allowed Written reasons by: The Honourable Mr. Justice Herauf In concurrence: The Honourable Madam Justice Jackson The Honourable Madam Justice Wilkinson On Appeal From: QBG 215/13, Prince Albert Appeal Heard: November 15, 2016 Counsel: Bernie Kopera for John Alphonse Walker No one appearing for Rachael Doris Walker Collin Hirschfeld, Q.C., for the Respondent Herauf J.A. I. Introduction [1] This appeal concerns the application of s. of The Limitation of Civil Rights Act, RSS 1978, L-16 [LCRA], in relation to motion for deficiency judgment by the respondent bank. [2] The main issue relates to how the proceeds of sale of property by judicial listing should be applied against mortgage balance when there are both purchase money and non-purchase money balances. The determination of this issue will resolve the correct amount of the deficiency judgment and involves consideration of two prior decisions of this Court, namely, Bank of Montreal Hrynewich Holdings Ltd. (1989), 1989 CanLII 4737 (SK CA), 79 Sask 134 (CA) [Hrynewich Holdings], and Farm Credit Canada Andrew, 2006 SKCA 31 (CanLII), 265 DLR (4th) 651 [Andrew (CA)]. It also requires review of these decisions to ascertain whether or not the conclusion reached in Andrew (CA) is contrary to that reached in Hrynewich Holdings. [3] The appellants granted residential mortgage in favour of the respondent on January 10, 2011, securing loan in the amount of $460,800.00. This loan was consolidation of existing debt. Part of the debt was the balance of $373,089.00 owed on an original loan, which had enabled the appellants to purchase the land. The remaining $87,711.00 was non-purchase money financing approved by the respondent. The appellants fell into default and the respondent commenced foreclosure proceedings. At that time, the balance owed had grown to $536,186.72. The property was sold through judicial listing orders and the net sale proceeds were paid to the respondent. However, these proceeds were not sufficient to satisfy the loan. The respondent then sought an order entitling it to the deficiency. [4] The Chambers judge considered s. 2 of the LCRA and held that the amount of the deficiency judgement should be $162,675.99. This amount was calculated as follows: $536,186.72 total amount owed to March 23, 2016 ($372,444.01) amount paid out of court (sale proceeds) ($ 1,066.72) amount of remaining LCRA protection $162,675.99 balance owed and amount of deficiency judgment III. issues [5] There are two issues to determine: a) how should the proceeds of the sale be applied against the mortgage balance, and b) what is the proper amount of the deficiency judgment? will deal with each issue in turn. A. How should the proceeds of the sale be applied against the mortgage balance? 1. The Limitation of Civil Rights Act [6] The issue on appeal revolves around s. of the LCRA. The section reads: Action on personal covenant prohibited in certain cases 2(1) Where land is hereafter sold under an agreement for sale in writing, or mortgaged whether by legal or equitable mortgage for the purpose of securing the purchase price or part of the purchase price of the land affected, or where mortgage is hereafter given as collateral security for the purchase price or part of the purchase price of land, the vendor’s or mortgagee’s right to recover the unpaid balance due shall be restricted to the land sold or mortgaged and to cancellation of the agreement for sale or foreclosure of the mortgage or sale of the property, and no action shall lie on the covenant for payment contained in the agreement for sale or mortgage. 2. Purpose of s. [7] The LCRA is one of Saskatchewan’s depression-era Acts designed to protect debtors (i.e. farmers) during time of stagnant growth and poor markets. As stated by Professor Ronald C.C. Cuming, the overarching objective of the LCRA was the “minimization of the economic effects of default by debtors, who undertook debt obligations in the purchase of land or machinery, by protecting their unencumbered assets from enforcement of money judgments for deficiency claims until economic conditions improved” (Ronald C.C. Cuming, “Section 18 of the Saskatchewan Limitation of Civil Rights Act: Good Idea or Troublesome Relic?” (2014) 78 Sask Law Rev at 4). [8] Section 2, which limits mortgagee’s remedy to the property and protects an individual mortgagor from being personally liable on any deficiency, is one of the mechanisms enacted in furtherance of the LCRA’s overarching objective. As noted by the Supreme Court of Canada in National Trust Co. Mead, 1990 CanLII 73 (SCC), [1990] SCR 410, this section is important because “[i]ndividuals usually take out mortgages to secure residential houses or farms,” “[t]heir home is typically the largest single asset they have,” and “once that is lost the individual in many instances has little else to seize and imposing the additional burden of personal liability would be onerous and perhaps futile” (at 422). [9] Professor Cuming has also discussed the policy objective of s. 2: The policy objective of section is to protect non-corporate person who has entered into loan contract providing for mortgage on the land being purchased with the proceeds of the loan from liability in excess of the value of the land. In National Trust Mead the Supreme Court of Canada recognized the public policy basis of the section and gave broad interpretation to its provisions consistent with this policy. Viewed in its historic context, it would appear that the legislative objective was to preclude purchasers of land from being subject to large judgments that could be enforced through seizure and sale of other property of the mortgagors (most likely, unencumbered farm land or machinery). [Footnotes omitted] Ronald C.C. Cuming Q.C., Overview of Saskatchewan Real Property Security Law, (Regina: Queen’s Printer, 2016) at 10-2 to 10-3. [10] Finally, this Court has spoken on the historical background of depression-era legislation in Lozinski Mayoh and Mayoh (1984), 1984 CanLII 2579 (SK CA), 32 Sask 312 (CA) [Lozinski]: [11] During the “Great Depression of the Thirties” and for some years following, purchasers and mortgagors in this province were visited with series of misfortunes over which they had no control economic stagnation with its elements of drought, depressed prices for primary products and massive unemployment. With no legislative protection from creditors, property owners, both urban and rural, faced the prospect of losing their homes and their potential source of livelihood from farming and other occupations. Some were in fact forced from their homes to join the ranks of the itinerant or migratory unemployed. The legislature finally intervened to stem this tide and extended protection to prevent further disaster at the hands of aggressive financial institutions and creditors. “New Deal” legislation was not confined to the United States of America. Our legislature introduced and passed numerous legislative programs to grapple with the perils of the depression and its aftermath Even though the referenced legislation at issue in Lozinski was The Land Contracts (Actions) Act, RSS 1978, L-3, it is instructive when interpreting the spirit and intent of s. of the LCRA. 3. Applicable Case Law and Analysis [11] The Chambers judge was correct when he considered Hrynewich Holdings to be the controlling authority in this case. Hrynewich Holdings dealt with circumstances similar to the case at hand. Hrynewich Holdings Ltd. granted mortgage to the Bank of Montreal following consolidation of debts that included purchase money mortgage debt. The new consolidated loan principal amount was $345,000.00. This amount was made up of: (a) the balance owed on the purchase money mortgage: $158,707.00; and (b) the balance owed on non-purchase money debt: $186,293.00. [12] As of the time of trial, the debt owing under this mortgage was $609,458.00. This amount was made up of: (a) the original principal: $345,000.00; (b) arrears of interest: $255,065.78; and (c) arrears of taxes: $9,393.52. [13] This Court held that where there is consolidation of purchase money and non-purchase money mortgage debt, the protection of s. of the LCRA continues to apply but only to that portion of the mortgage loan that was given to secure the purchase price of land (at para 6). Therefore, the Court stated that the benefit of s. should apply to the purchase money debt balance ($158,707.00) but not apply to the remaining non-purchase money debt balance ($186,293.00). The Court then remitted the matter to the court below for the purpose of “fixing the amount of the mortgage subject to s. of The Limitation of Civil Rights Act, the prorating of the value of land to that portion of the debt subject to the said s. …” (at para 8). [14] When the matter was returned to Queen’s Bench, the Chambers judge issued the following fiat: take the “value of the land” to be the sale price and take the Court of Appeal judgment to mean that the sale price is to be divided and applied proportionately between the amount of the debt represented by the prior mortgage and the amount represented by later advances. It follows then that because the portion of the loan attributable to the purchase price of land represented forty-six percent of the total, the sale price should be divided and applied accordingly. That is, forty-six percent ($105,100) is to be applied to the debt represented by the prior mortgage, and fifty-four percent ($123,400) is to be applied to the remainder. The deficiency can then be calculated by reducing the total amount outstanding by forty-six percent and deducting from the resulting figure the further sum of $123,400. The formula will look like this. $717,275-(46/100x717,275)-123,400=$263,928.50 These figures must, of course, be adjusted to reflect interest which accrued between April 3, 1990, and the date of the sale, the expenses of the sale, and the costs of the action. [15] It is obvious from this fiat that the Chambers judge, in the calculation of the deficiency judgment, pro-rated the calculation pursuant to the percentage owing on both the purchase money and non-purchase money balances. The fiat is in accord with the direction from this Court when it remitted the matter to Queen’s Bench. [16] The other relevant decision from this Court is Andrew (CA). In that case, this Court considered the deficiency calculation conducted by Kyle J. in Farm Credit Canada Andrew, 2005 SKQB 197 (CanLII), 266 Sask 187 [Andrew (QB)], in relation to s. 25 of The Saskatchewan Farm Security Act, SS 1988-89, S-17.1.[1] In that case, loan in the amount of $93,700.00 was given by Farm Credit Canada (FCC) to Mr. Andrew in 1981. Of this amount, $60,000.00 was used to finance land purchase and the remaining $33,700.00 was used to pay off existing debt held by Mr. Andrew. The loan was secured by mortgage granted to FCC in relation to the land purchased and another quarter section of land already owned by Mr. Andrew. In 2000, Mr. Andrew sold the land he had purchased with part of the loan for $48,000.00 and applied the proceeds against the debt, reducing the debt from $104,280.00 to $56,280.00. [17] In his deficiency calculation, Kyle J., without reference to Hrynewich Holdings, found the portion of the loan attributable to the purchase of the land was 64.03% ($60,000.00 $93,700.00). In 2000, when the land was sold, Kyle J. held that the balance of the loan attributable to the purchase of land was $66,770.48 ($104,280.00 64.03%). The $48,000.00 in proceeds from the sale went against this portion of the loan, leaving balance attributable to the purchase of land of $18,770.48. Justice Kyle then found the proceeds of the other security covered by the mortgage may be credited against the purchase money balance. When that balance (which includes accrued interest) had been exhausted, Kyle J. stated that the s. 25 protection would no longer apply and the mortgagee can then sue on the non-purchase money portion of the debt. Reference can be made to the portions of the judgement of Kyle J. that are relevant: [10] Under the provisions of The Saskatchewan Farm Security Act the right of lender to recover the unpaid balance of mortgage securing the purchase price of farmland is restricted to the land to which the mortgage or agreement relates as well as to any collateral security including guarantee. Where mortgage secures the purchase price of land as well as indebtedness incurred for other purposes the lender is entitled, after identifying the share of the loan applicable to purchase money, to credit all of the proceeds of security against the balance then owing in respect of the purchase of land. [11] In the case at bar that would mean that the original percentage of the total loan applicable to the purchased land, 64.03%, might be reduced by the realization of any security. [13] When other security covered by the mortgage is realized the proceeds may be credited against the remaining purchase balance. When that purchase balance has been fully met, with accrued interest, the protection accorded by the Act will no longer be factor and the personal covenant will be enforceable to retire the remaining loan. If all security is realized and the purchase balance plus accrued interest has not been fully met, the lender will sustain loss to the extent of the remaining purchase balance (absent some third party guarantee). Inherent in this approach is the fact that the borrower will not be exposed to any claim on the personal covenant which exceeds 35.97% of the original loan principal plus accrued interest with all regular payments on the loan having been credited against the principal and interest owing on the entire loan at the time they were made. [Emphasis added] [18] Justice Kyle’s decision clearly indicates that the lender is entitled to apply the realized security proceeds to the purchase money balance first. [19] Mr. Andrew appealed the decision and sought determination as to the extent to which s. 25 of The Saskatchewan Farm Security Act protects the debtor from an action on the personal covenant to pay the unpaid balance owing for mortgage taken in part to secure the purchase price of farmland. In his factum, Mr. Andrew argued Hrynewich Holdings held that the lender can only sue on the portion of the balance owing that is greater than the original purchase money mortgage balance. Since, at the time of trial, the balance of the mortgage was $37,490.30 and the original purchase money amount was $60,000.00, the lender was precluded from suing for the balance. In the alternative, Mr. Andrew argued that any deficiency claim should be limited to the portion of any shortfall to which the original purchase money advanced related to the initial funds advanced. Essentially, Mr. Andrew argued that the proceeds should be applied to the non-purchase money balance first or, in the alternative, the proceeds should be distributed between the two portions on pro rata basis. [20] The respondent, FCC, argued the trial judge was correct and that it was entitled to rely upon the land it held as security to recover the purchase money portion of the loan and then pursue Mr. Andrew on his personal liability to pay the non-purchase money portion. FCC stated that s. 25 of The Saskatchewan Farm Security Act was not intended to give the mortgagor immunity from liability for the portion of the indebtedness that was not purchase money funds, and nothing in the section requires mortgagee to treat its security as securing pro-rated amounts of the purchase money and non-purchase money portions of the debt. [21] In considering the appeal, this Court described the decision of Kyle J. as holding that the lender can apply the proceeds of sale against the balance owing on the portion of the loan applicable to the purchase money mortgage and then sue for the balance: [7] Mr. Justice Kyle found that where mortgage secures the purchase price of land as well as indebtedness incurred for other purposes, the lender can, after identifying the portion of the loan applicable to the purchase money mortgage, apply the proceeds realized against the balance owing on the purchase of the land and sue for the balance. [8] He found that the portion of the loan attributable to the purchase of the land was 64.03% or $66,770.48. The NW 22-8-10 W3 sold for $48,000 and was credited against the $66,770.48 leaving balance of $18,770.48. [9] He found that when the other security covered by the mortgage is realized, the proceeds may be credited against the balance of the purchase money balance and when the purchase money balance together with all accrued interest has been fully met, the protection afforded by s. 25 will no longer apply. The mortgagee can therefore sue on the covenant for the balance owing, which represents the non-purchase money portion of the debt. [10] In an order dated June 14, 2005, Kyle J. concluded that given that the sale proceeds of the SE 20-9-10 W3 of $35,419.32 exceeded the balance of the purchase money of the loan, s. 25 of the Act did not prohibit FCC from suing on the covenant and FCC was entitled to judgment in the amount of $37,490.30 as at February 2, 2005 together with interest at 12.75% until April 25, 2005. [22] This Court agreed with the analysis of Kyle J. stating that “Mr. Justice Kyle correctly set out the principles to apply in establishing the amount of the loan that was not advanced to purchase land and in determining the amount that was not subject to the protection of s. 25 of the [Saskatchewan Farm Security] Act” (Andrew (CA) at para 15). Therefore, the appeal was dismissed. [23] It is obvious that this Court’s endorsement of Andrew (QB) is at odds with its previous ruling in Hrynewich Holdings. There was no indication in Hrynewich Holdings that sale proceeds were to be applied to the purchase money debt first. As noted in the previous references to Hrynewich Holdings, the direction was to simply pro-rate the proceeds to purchase money and non-purchase money percentages to ascertain the amount of the deficiency judgment. [24] In my view, the decision in Andrew (CA) was made per incuriam. Reference can be made to this Court’s decisions in Hawrish (1986), 1986 CanLII 3208 (SK CA), 32 CCC (3d) 446 (Sask CA) at 455–456, and Grumbo (1998), 1998 CanLII 12345 (SK CA), 159 DLR (4th) 577 (Sask CA) at para 21, for an explanation of per incuriam. [25] Simply put, decision is one made per incuriam if the following conditions are met: (a) the panel deciding the case did not advert to judicial or statutory authority binding on it; and (b) had the panel considered this authority, it would have decided the case differently. [26] The finding that the decision in Andrew (CA) was made per incuriam is somewhat unusual in these circumstances, as this Court did avert in Andrew (CA) to its previous ruling in Hrynewich Holdings. This Court in Andrew (CA) made brief reference to Hrynewich Holdings as follows: [14] This matter was considered in Bank of Montreal v. Hrynewich Holdings Ltd. There the Court dealt with s. of The Limitation of Civil Rights Act which is virtually identical to s. 25 of the Act. stated, on behalf of the Court: [6] the benefit of s. should apply to $158,707.00, which is that part of the amount of the consolidated loan of $345,000.00 which was secured by mortgage given to secure the purchase price of land. Section will not apply to the remaining $186,293.00. [Footnotes omitted] [27] It is important to reiterate that Kyle J. did not reference Hrynewich Holdings in Andrew (QB). [28] The Andrew (CA) decision makes no further reference to Hrynewich Holdings other than what is reproduced above. While it was clear the Court was aware of its previous decision, it was forgetful of its conclusions as to how sale proceeds should be allocated to the respective purchase money and non-purchase money debt balances. As indicated earlier, Hrynewich Holdings held that the sale proceeds should be allocated proportionately between the purchase money debt and the non-purchase money debt in order to determine the deficiency judgment. This was the binding authority at the time Andrew (QB) and Andrew (CA) were decided. However, in Andrew (CA), it was held that all the proceeds, whether from the land initially purchased or land held as collateral security, should be applied exclusively to the purchase money debt first, ignoring the non-purchase money debt. [29] These are obviously contrary conclusions. However, the conclusion in Andrew (CA) would not have been made had the Court considered Hrynewich Holdings in its entirety. Therefore, Andrew (CA) is not binding and the reasons in Hrynewich Holdings should guide the disposition of this appeal. In my view, Hrynewich Holdings respects the spirit and intent of s. of the LCRA and is the correct interpretation to be placed on that provision. In addition, Hrynewich Holdings accords with the policy behind the legislation as set out earlier in this judgment. [30] Finally, the decision in Hrynewich Holdings accords with the view of Professor Cuming that payments should be allocated on a pro-rated basis to the purchase money and non-purchase money portions. Reference can be made to his comments on the accounting issues for the purposes of applying s. in situations where purchase money and non-purchase money mortgage debt is consolidated: Where the agreement provides that the mortgage secures prior or additional new debt, the mortgagee is entitled to bring action against the mortgagor only for the amount of owing to the mortgagee that is not related to the acquisition of the mortgaged property. Prima facie, this amount is determined by deducting from the total debt the amount of the debt owing at the date of the refinancing. The picture becomes more complicated when the mortgagor has made payments to the mortgagee under refinancing arrangement providing for single “consolidated” debt composed of purchase-money and non-purchase-money obligations, including prior debt or additional money loaned to the mortgagor. When the mortgagor makes payments under the refinancing arrangement that are applied by the mortgagee to the consolidated debt, it is not possible to determine what portion of the payments made by the mortgagor are allocated to the purchase-money obligation and non-purchase-money obligations, respectively. At common law, debtor has the right to allocate payments made to creditor to whom he or she owes more than one debt. Failing allocation by the debtor, the creditor may allocate the payments. In the absence of any specific designation by the debtor or the creditor, the payments are allocated to the various obligations in the order in which they were incurred. However, it is doubtful that the common law rules dealing with allocation of payments were designed to address allocation where the two or more debts have been consolidated and the payments are made by the debtor toward discharge of the consolidated amount. Under such an arrangement, there is only one debt, not two or more. It is the understanding or agreement of the parties that payments are allocated to the consolidated debt and not the separate component of that debt. In the absence of such provision, neutral approach involves allocation of the payment on pro-rated basis to debt affected by section and the non-purchase-money debt. [Emphasis added; footnotes omitted] Ronald C.C. Cuming Q.C., Overview of Saskatchewan Real Property Security Law, (Regina: Queen’s Printer, 2016) at 10-4 to 10-6. B. What is the proper amount of the deficiency judgment? [31] The parties did not make extensive submissions on this point. The appellants simply contend that s. of the LCRA should be interpreted liberally thereby permitting the sale proceeds ($372,444.01) to be applied to the purchase money debt and the non-purchase money debt on pro rata basis to determine the amount of the deficiency judgment. [32] The respondent relies upon this Court’s decision in Andrew (CA) and the clear direction that the sale proceeds be applied to the purchase money debt first. [33] Since we have found the decision of this Court in Andrew (CA) was decided per incuriam, it should not be followed. The determination of the amount of the deficiency judgment is governed by the principles set out in Hrynewich Holdings. An application of these principles to this appeal leads to the following calculation for the amount of the deficiency judgment. [34] On January 10, 2011, the appellants borrowed $460,800.00 from the respondent. Of this amount, $373,089.00 (approximately 80.97%) represented purchase money debt and $87,711.00 (approximately 19.03%) represented non-purchase money debt. At the time of the Chambers hearing, the total balance owed by the appellants, including all accrued interest, was $536,186.72. The purchase money portion of this amount is $434,150.39 (80.97% of $536,186.72) and the non-purchase money portion is $102,036.33 (19.03% of $536,186.72). [35] To determine the sum to which the respondent is entitled, the proceeds from the judicial sale must be distributed pro rata between the purchase money and non-purchase money balances. The sale proceeds were $372,444.01. Of this amount, $301,567.91 (80.97% of $372,444.01) is to be applied against the purchase money portion. The purchase money debt balance is decreased to $132,582.48 and is protected by s. of the LCRA. The remaining sale proceeds of $70,876.10 (19.03% of $372,444.01) are applied against the non-purchase money portion. The remaining non-purchase money debt balance is decreased to $31,160.23. It follows that the order below should be varied to entitle the respondent to take out deficiency judgment against the appellants in the amount of $31,160.23. IV. conclusion and disposition [36] The appeal is allowed with respect to the amount of the deficiency judgment. The respondent is entitled to take out a deficiency judgment in the amount of $31,160.23 as at March 23, 2016, against the appellants. [37] During oral submissions, the respondent consented to the order for solicitor-client costs being set aside. In its place, the parties agreed there should be an order that either party may return the matter of costs relating to the motion for the deficiency judgment to the Chambers judge. The appeal will also be allowed to this extent. [38] The appellants have been successful on this appeal. While the Court appreciates the concessions made by the respondent, these were only made at the hearing of the appeal after counsel for the appellants had made his submissions. In our view, this is an appropriate case in which to order costs of the appeal to the appellant, John Alphonse Walker. Costs are set at $2,500.00 payable forthwith. “Herauf J.A.” Herauf J.A. concur. “Jackson J.A.” Jackson J.A. concur. “Herauf J.A.” for Wilkinson J. (ad hoc) [1] In Andrew (CA) at para 14, this Court stated that s. 25 of The Saskatchewan Farm Security Act is “virtually identical” to s. of the LCRA.
Statutes – Interpretation – Limitation of Civil Rights Act, Section 2The appellants had granted a residential mortgage in favour of the respondent that secured a loan in the amount of $460,800. The loan was a consolidation of existing debt, part of which was the balance of $373,089 owed on the original loan that had enabled the appellants to purchase the land. The remaining $87,711 was non-purchase money financing approved by the respondent. The appellants fell into default, and the respondent commenced foreclosure proceedings when the balance owed had increased to $536,186. The property was sold through judicial listing orders and the net sale proceeds were paid to the respondent. As the proceeds were insufficient, the respondent sought an order entitling it to the deficiency. The Chambers judge considered s. 2 of The Limitation of Civil Rights Act (LCRA) and held that the amount of the deficiency should be $162,675.99. The issues on appeal were how the proceeds of sale should be applied against the mortgage balance and what the proper amount of the deficiency was. HELD: The appeal was allowed. The court reviewed the purpose and policy behind the LCRA. It then examined its conflicting decisions in Hrynewich Holdings and Andrews and held that the latter was a per incuriam judgment and therefore not binding and the approach set out in Hrynewich would guide the disposition of this appeal. Therefore, it found with respect to each issue that the holding in Hrynewich meant that payments should be allocated on a pro-rated basis to purchase money and non-purchase money debt balances and the proper amount of the deficiency to which the respondent was entitled to judgment against the appellants was $31,160.23.