Page: 1 PROVINCE OF PRINCE EDWARD ISLAND IN THE SUPREME COURT - TRIAL DIVISION

Transcription

1 Page: 1 PROVINCE OF PRINCE EDWARD ISLAND IN THE SUPREME COURT - TRIAL DIVISION Citation: Bank of Nova Scotia v. Farm Credit Canada 2008 PESCTD 22 Date: Docket: S1-GS Registry: Charlottetown BETWEEN: THE BANK OF NOVA SCOTIA APPLICANT AND: FARM CREDIT CANADA RESPONDENT Before: The Honourable Justice D.H. Jenkins (In Chambers) Appearances: James C. Travers, Q.C., counsel for the Applicant M. Lynn Murray, Q.C., counsel for the Respondent Place and Date of Hearing Place and Date of Judgment Charlottetown, Prince Edward Island January 31, 2008 Charlottetown, Prince Edward Island April 21, 2008

2 Page: 2 MORTGAGES - priorities - tacking - advances of funds under prior mortgage after registration but without actual notice of subsequent mortgage - prior mortgage was an open-ended collateral mortgage for all obligations of the mortgagor present and future - priorities determined as between two valid mortgages - common law doctrine of tacking, i.e. the tacking of subsequent advances to the initial priority of the first mortgage, applied - judgment for the applicant prior mortgage holder Authorities Cited: CASES CONSIDERED: Hopkinson v. Rolt, [1861] 9 H.L.C. 514, E.R. 829 (PC); Bradford Banking Co. v. Briggs, [1886] 12 App. Cas. at 29 (PC); Pierce v. Canada Permanent Loan and Savings Company, [1894] 25 O.R. 671 (Ont.H.C.J..-Chancery Division); Michael v. Bank of Montreal (1982), 38 Nfld. & P.E.I.R. 398, 108 A.P.R. 398, 141 D.L.R. (3d) 169 (PEISC) TEXTS CONSIDERED: Traub, Walter M.: Falconbridge on Mortgages - 5 th Ed. (Canada Law Book) ARTICLES CONSIDERED: Kirkham, D. Barry: Comment: Priorities of Mortgages - Mortgage for Present and Future Advances - Whether First Mortgagee May Tack Future Advances Where There Has Been an Intervening Encumbrance (1968) 6 Alta. L.R. 310 Reasons for judgment: Jenkins, J.: [1] The Bank of Nova Scotia (the Bank ) brought this application for the settling of priority between the charge over a parcel of land (the property ) contained in its open-ended collateral mortgage made to secure all obligations of a mortgagor, present and future, which mortgage was duly registered when made, and the charge contained in a subsequent collateral mortgage made to the respondent Farm Credit Corporation, now Farm Credit Canada ( FCC ) to secure the principal sum of $70,000., which mortgage was also registered when made, regarding advances made by the Bank to the mortgagor after registration but before actual notice to the Bank of the FCC subsequent mortgage. [2] When the mortgagor was still indebted to both the Bank and FCC, the mortgagor defaulted in his obligations to both lenders. The mortgagor then sold his

3 Page: 3 equity of redemption in the property to a third party. The net proceeds of the sale in the amount of $90,815. are being held in escrow for distribution to a lender pending determination of this application. SUBMISSIONS [3] The Bank relies on the common law doctrine of tacking, i.e. the tacking of subsequent advances to the initial priority of the first mortgage. The Bank submits that: its mortgage secures all present and future obligations of the mortgagor to the Bank; the mortgagor has continuously been indebted to the Bank since the execution of the bank mortgage; that the Bank mortgage was registered prior in time to the FCC mortgage; and no agreement, assurance or undertaking was ever given by the Bank to FCC or the mortgagor to release or postpone the Bank mortgage to FCC s mortgage. [4] FCC submits that the FCC mortgage has priority status over the Bank mortgage; or alternatively, over Bank advances to or on behalf of the mortgagor subsequent to the registration of the FCC mortgage; or in the further alternative, over advances to or on behalf of the mortgagor subsequent to the Bank receiving actual notice of the FCC mortgage. FCC does not allege fraud or negligence by the Bank in connection with taking of the Bank mortgage, and recognizes the doctrine of tacking applies in this province, but states that there are strong policy reasons that should prevent the Bank from claiming priority over the FCC mortgage. FCC submits that the Bank is not entitled to the benefit of the doctrine of tacking in the circumstances of this case because: (i) the subsequent advances made pursuant to the Bank mortgage were not installments; (ii) the Bank mortgage did not secure an express amount or an express upper limit but is an open-ended collateral mortgage; (iii) the Bank should have completed a search of title prior to making subsequent advances of funds; and (iv) policy reasons should prevent the Bank mortgage from being deemed a prior charge over the FCC mortgage. DECISION [5] In my opinion: (i) The Bank collateral mortgage is a valid mortgage security. (ii) Under the terms of the Bank mortgage and in its relationship with the mortgagor, the common law doctrine of tacking applies and provides priority for future advances made by the Bank to the mortgagor after registration of the FCC mortgage up until the Bank received actual notice of the FCC mortgage. (iii) The Bank s priority and the operation of tacking is not vitiated by the

4 Page: 4 (iv) presence or absence of any impugned terms, i.e. not being for installments, or not being for a fixed amount or limited upper amount. The Bank mortgage ranks in priority to the FCC mortgage with respect to the net proceeds of the property. REASONS FOR DECISION: - Facts [6] The bare pertinent facts are as follows: (1) Bryanton and Jorgensen were the registered owners and held the equity of redemption in the property. (2) Bryanton and Jorgensen had made a first mortgage over the property to Frizzell on May 26 th, 1997 to secure the principal amount of $50,000. and that mortgage was duly registered. (3) Bryanton and Jorgensen carried on a cattle farm business together under the registered business partnership name D & S Livestock. (4) Bryanton and Jorgensen executed a collateral mortgage in favour of the Bank which included in its security their interest in the property on May 26 th, 1998, and the Bank duly registered that mortgage. (5) The Bank mortgage included the property and other lands as security. The mortgage stated the obligations secured as follows: You give us this mortgage to secure the payment to us on demand of all debts and liabilities present or future, direct or indirect, absolute or contingent, matured or not, at any time owing by you to us or remaining unpaid by you to us, whether arising from dealings between you and us or from any other dealings or proceedings by which we may be or become in any manner whatever your creditor, and wherever incurred, and whether incurred by you alone or with another or others and whether as principal or surety including... (6) According to the mortgage terms, discharge of the mortgage could be made as follows:...although this mortgage is not satisfied

5 Page: 5 or discharged by any intermediate payment of all or part of the obligations secured but is a continuing security for payment of the obligations secured, our interest in the property under this mortgage will end when: - you have repaid the obligations secured on our demand and repaid all additional amounts to which we may become entitled under this mortgage, and - you have fulfilled all of your other obligations to us under this mortgage, and - we have reconveyed the property to you or discharged this mortgage. (7) From the time of making the Bank mortgage onward, the Bank made advances to or on behalf of Jorgensen for various businesses and purposes and Jorgensen has continuously been indebted to the Bank. (8) Bryanton and Jorgensen each made a collateral mortgage to FCC that included as security his interest in the property to secure the principal amount of $70,000. on October 18, 1999 and those mortgages were duly registered. The FCC financing was in support of the mortgagors business, D & S Livestock, and regarding Jorgensen was intended to be a first charge over the property. (9) Part of the proceeds of the FCC loan to Bryanton and Jorgensen was used to pay out and discharge the Frizzell mortgage, and a satisfaction of the Frizzell mortgage was registered on October 29, (10) After registration of the Bank mortgage, the Bank did not further search the title to the property, discharge its mortgage, postpone its mortgage to the FCC mortgages, or until July 2003, receive actual notice of the Jorgensen to FCC mortgage. (11) Bryanton conveyed his interest in the property to Jorgensen by deed dated June 1, 2001 which deed was duly registered. (12) The Bank conducted a subsearch on the property in July 2003, which first disclosed to the Bank the registration of the FCC mortgage and the conveyance by Bryanton to Jorgensen.

6 Page: 6 (13) At the time when the Bank received actual notice of the FCC mortgage, the obligations of Jorgensen to the Bank were comprised of commercial loans to Jorgensen and his spouse and to Jorgensen s businesses and guarantees on behalf of three other businesses; and Jorgensen s indebtedness to the Bank substantially exceeded the eventual net proceeds from Jorgensen s sale of the property. (14) Jorgensen went into default in his obligations to the Bank and to FCC. (15) In 2007 Jorgensen sold the property to a third party. The net proceeds of the sale were put in escrow for payment to a mortgagee pending resolution of the priorities of the Bank mortgage and the FCC mortgage. (16) In January 2008 the Bank obtained a judgment against Jorgensen in an amount substantially exceeding the net proceeds of the sale. (17) FCC first became aware of the Bank collateral mortgage in August 2007 when Jorgensen conveyed the property, and an issue arose with respect to disbursement of the balance of the sale proceeds. (18) FCC s review of the Bank records filed on this application advised FCC that: 1) the Bank opened an account in the name of D & S Livestock in 1998, regarding a line of credit with a limit of $150,000.; 2) when the Bank mortgage was registered the Bank did not appear to have other active accounts in the names of Bryanton, Jorgensen, or D & S Livestock; 3) the D & S Livestock account fluctuated within the maximum of the line of credit between 1998 and 2003 and in October 2003, the account balance was zero and account activity ceased; 4) afterwards, Jorgensen continued to operate a cattle farm operation with his wife under the business name Terra Nova Farms. 5) Jorgensen had numerous other land holdings, and other land holdings were made subject to the Bank collateral mortgage. 6) Jorgensen gave the Bank an additional collateral mortgage in July (19) At the time of this application, $48,663. remains outstanding on the Jorgensen mortgage to FCC. - Initial priority question [7] The initial priority question is quite straightforward. The Bank mortgage was duly registered first. Upon application of the basic registry principle, the Bank mortgage has priority.

7 Page: 7 [8] The issues in this application are not affected by the Bank mortgage being a legal or an equitable mortgage. It started out as an equitable mortgage, and upon satisfaction of the Frizzell mortgage, it became a legal mortgage. [9] FCC having paid out the Frizzell mortgage did not affect the priority of the Bank mortgage as between the Bank and FCC. FCC did not follow a route of taking over the first mortgage position of Frizzell either by taking an assignment of that mortgage or obtaining a postponement of the Bank mortgage. - Tacking of future indebtedness to the Bank mortgage [10] The main question in this application is the status of future indebtedness of Jorgensen to the Bank that was incurred during the time period after registration of the FCC mortgage and before the Bank had actual notice of the FCC mortgage. This question is determinable upon application of the common law doctrine of tacking. The question in tacking situations is how much of the indebtedness of the mortgagor to the first mortgagee is secured in priority to the second mortgage. The doctrine of tacking dictates that all funds advanced under the prior mortgage are tacked on to the priority of the first mortgage up to the point where the first mortgagee had actual notice of the second mortgage. [11] The common law doctrine of tacking was developed in 19 th century English jurisprudence, was subsequently modified to comport with the registry system, has been adopted in Canadian jurisprudence including in this jurisdiction, and remains intact except in provinces where legislation has been enacted to modify the rules regarding priorities and notice pertaining to subsequent advances. [12] Most discussions of tacking start with reference to the English case of Hopkinson v. Rolt, [1861] 9 H.L.C. 514, E.R. 829 (PC). That case addressed a number of related issues that do not affect the outcome of this application; but the main proposition from the case applies: that the first mortgage on its terms, secured all past advances and also secured future advances to the stated amount of the mortgage, absolutely, until the first mortgagee received notice of a second mortgage, and continuously as between mortgagor and mortgagee although there should be a second mortgage. [13] Bradford Banking Co. v. Briggs, [1886] 12 App. Cas. 29 (PC) explained the rationale, mechanics, and interrelationships involved in tacking:... The owner of the property does not, by making a pledge or mortgage of it, cease to be the owner of it any further than is necessary to give effect to the security which he has thus created. And if the security is, as that in Hopkinson v. Rolt (1) was, a security for present and also further advances, the pledgee or mortgagee, though not bound to make fresh advances, may, if he pleases, do so, and will, if the property at the time of

8 Page: 8 the further advances remains that of the pledgor, have the security of that property. But the mortgagor (unless there is something against conscience in him to do so) may cease to take from the first mortgagee, and borrow money from anyone else ready to lend it on the security of the property remaining in him not already pledged to the first, subject to the priority of the first pledge for advances made or begun to be made. The first mortgagee is entitled to act on the supposition that the pledgor who was owner of the whole property when he executed the first mortgage continued to do so, and that there has been no second mortgage or pledge until he has notice of something to show him that there has been such a second mortgage, but as soon as he is aware that the property on which he is entitled to rely has ceased so far to belong to the debtor, he cannot make a new advance in priority to that of which he has notice... [Emphasis added.] [14] Ten years later, in Ontario, Pierce v. Canada Permanent Loan and Savings Company, [1894] 25 O.R. 671 (Ont.H.C.J.-Chancery Division), at paras and 20, described the function of tacking within the registry system, and the mortgagees respective obligations for searching and notice:... The instrument securing all the advances past and prospective has been registered - the function of the Registry Act has been satisfied by this initial transaction, and the scope of the Act contemplates no further registration and consequently no further search in order to justify the payment of the further advances, is called for by the mortgagor. The onus is not on the first mortgagee who has registered to do something more to complete his claim upon the land for all that is specified in the mortgage: the onus is on the one subsequently acquiring an interest in the land by conveyance from the mortgagor to give express notice of that to the first mortgagee in order to intercept payments or advances thereafter made pursuant to the first mortgage. In the absence of notice, (i.e., notice which gives him real and actual knowledge, and so affects his conscience), the mortgagee is entitled to assume and act on the assumption that the state of the title has not changed. That protection is given to him by virtue of the Registry Act, as well as by the doctrine enunciated in Hopkinson v. Rolt, until he is made aware of a change, not by the hypothetical operation of an instrument registered subsequent to his, but by a reasonable communication of the fact by the one who comes in under the subsequent instrument These cases turn on the value attached to the possession of the legal estate whereby subsequent advances are attracted thereto if there is no notice of an intervening incumbrance. Our registry law would interfere in such a case, because the subsequent advance would be a thing independent of the first mortgage, but where the further advance is in pursuance of the terms of the first and registered mortgage, there is no room left for the operation of a subsequent registered incumbrance,...

9 Page: 9 [Emphasis added.] [15] Forty years ago, a lawyer wrote about tacking. The Alberta Law Review published a Comment: Priorities of Mortgages - Mortgage for Present and Future Advances - Whether First Mortgagee May Tack Future Advances Where There Has Been an Intervening Encumbrance (1968) 6 Alta. L.R. 310, by D. Barry Kirkham. This treatise was focused on the western Canadian land titles system which has differences regarding title from our registry system. However, the author canvassed tacking from its source, then followed its development in the English common law and its introduction and application in Canadian jurisdictions, particularly in western Canada. Kirkham observed that the presence of the land titles system presented opportunity for the courts to render tacking inapplicable, or prohibit it, but they did not, and they instead chose to retain the common law rule. Mr. Kirkham drew two conclusions with respect to land under the land titles system: CONCLUSIONS From the above cases two conclusions may be drawn with a reasonable degree of certainty with respect to land under a land titles system: (1) A prior mortgagee may tack (i.e. add future advances made under the mortgage to the earlier advances so as to obtain priority over an intermediate encumbrancer) provided he does not have notice of the intermediate encumbrance at the time he made the future advances. (2) The notice which will prevent the prior mortgagee from tacking is actual notice; it is not the constructive notice affected by registration of the subsequent encumbrance under the Land Titles Act. It is thus apparent that the first mortgagee may continue to make future advances to the extent permitted by the terms of the mortgage so long as he is not actually aware of a subsequent encumbrance. The onus is clearly on the subsequent mortgagee to give actual notice of his charge. However, although there are no cases on point, it is submitted that if the prior mortgagee should become aware of the subsequent encumbrance through some other means than notification from the subsequent mortgagee, as, for instance, incidentally in searching the title for mechanics liens, he would not be able to tack further advances. It is the fact of notice, not the method thereof, which disentitles the prior mortgagee to tack. [16] Michael v. Bank of Montreal (1982), 38 Nfld. & P.E.I.R. 398, 108 A.P.R. 398, 141 D.L.R. (3d) 169 (PEISC) applied tacking in this jurisdiction, in a distinguishable fact scenario. Campbell (A.B.) J. stated at para. 13: I am of the opinion that the doctrine of tacking as it applies in Prince Edward Island is as follows: advances made pursuant to a first mortgage

10 Page: 10 but after a second mortgage is given, may be tacked on to the prior security if the advances are made (a) without actual notice of the subsequent mortgage or (b) pursuant to a contractual obligation to advance the funds.... Clause (a) of that analysis applies to this application; (b) does not. Clause (b) was stated in reference to the installment mortgage that was under consideration in the Michael case and does not apply to the situation in this application. [17] The Bank mortgage secured a running account and was security to the Bank for all present and future advances by the Bank to or on behalf of the mortgagor. Those terms are clearly stated in the registered mortgagee instrument. The Bank advances continued after the FCC mortgage was registered. According to the principle of tacking, a first mortgage that is made to secure past and future advances will secure such advances up to the point when the first mortgagor has notice of the second mortgage. The full indebtedness secured by the first mortgage up to the point of notice of the second mortgage is the amount of indebtedness secured by the first mortgage in priority to the second mortgage. Subsequent advances are tacked to the initial priority of the first mortgage. Where the future advances are in pursuance of the terms of the first mortgage, the future advances are made on the mortgagee s assumption that the state of the title has not changed. The future advance being in pursuance of the terms of the first mortgage, there is no room left for the operation of the subsequent mortgage, until the first mortgagee is made aware of the registration of the subsequent mortgage. [18] FCC recognizes that the principle applies in this jurisdiction, so that a prior mortgage is entitled to tack advances made by it subsequent to the registration of a subsequent encumbrance to its prior security document. However, FCC states that, based on the particular facts of the present matter, the Bank should not be permitted to tack the advances it made to Jorgensen after registration of the FCC mortgage. I do not accept FCC s submissions. [19] The Bank mortgage does not require installments, and does not have a stated principal amount. FCC points out that Falconbridge on Mortgages 5 th Edition, at chapter seven and eight, in discussing the doctrine of tacking within the question of priorities, refers only to installment mortgages. Certainty is a great advantage in mortgage and commercial transactions; and legal practitioners and the courts, including myself, treat Falconbridge as the primary authority and with great respect. I continue to accept Falconbridge as an accurate statement of the law of mortgages. However, its discussion of the subject of tacking is to be considered in context. The Falconbridge discussion concentrates on conventional mortgages which involve notions of stated principal amounts and sometimes advances by installment. Falconbridge does not purport to be an exhaustive discussion of banking and commercial lending facilities. It leaves room for other discussion

11 Page: 11 consideration of collateral mortgages made to secure multiple business obligations and running lines of credit. In its discussion of future advances, the discussion in Falconbridge refers to the basic principles stated in Pierce v. Canada Permanent supra in I do not view Falconbridge as implying a preclusion of tacking on collateral mortgages made to secure running or revolving accounts for commercial credit. [20] It is not demonstrated that the common law doctrine of tacking is problematic per se, or that there is valid policy reason why an open-ended collateral mortgage made to secure a revolving or running line of credit for various obligations of a borrower should be excluded from its operation. On the contrary, tacking seems to provide a favourable advantage for the commercial community. For the present case, it enables a farm producer who has a substantial land-base of equity to enhance his borrowing opportunities and have better access to capital. Tacking avoids the uneconomic cost of the lender having to subsearch the title on the occasion of every advance on the borrow s accounts. A subsequent encumbrancer can interrupt tacking by giving notice. It is quite observable that the absence of tacking or some substitute for tacking would adversely impact the availability of operating credit for farm producers and other land related businesses. [21] The commercial collateral mortgage under consideration in this application is a contract between the Bank lender and the farming or other business borrower. The contract describes the kind and extent of obligations secured by the collateral mortgage instrument. As a mortgage security, the collateral mortgage conveys the mortgagor s title to the mortgagee, describes the land covered by the mortgage, and states the terms of redemption. In the present case, Jorgensen conveyed his interest in the property to the Bank and agreed that the property would stand as security for all his obligations to the Bank, present and future. The registry law created the Bank s absolute priority. The Bank mortgage contained information sufficient for a potential lender or purchaser to determine the kind and extent of the obligations secured. The common law doctrine of tacking enabled the Bank to make future advances that would be secured by the Bank mortgage. The Bank mortgage was not made to secure the loan or loans made to a particular business, but was to secure all of Jorgensen s obligations to the Bank. Jorgensen never called upon the Bank to reconvey the property and the Bank mortgage was never discharged. Under the terms of the collateral mortgage, the Bank could make future advances to or on behalf of Jorgenson, and under the principle of tacking, future advances were secured by the Bank mortgage up to the point when the Bank received notice of the subsequent encumbrance. [22] It is interesting to observe that some other provinces in Canada have modified the common law doctrine of tacking by legislation. Counsel for both parties have provided supplemental materials that describe that legislation and some related case law. None of the statutory provisions make any reference or distinction respecting

12 Page: 12 mortgages advanced in installments, made to secure running accounts, or regarding fixed amounts, upper limits or open-ended accounts. The legislation in the other jurisdictions sometimes occurs within land title systems. The legislation creates statutory substitutes for tacking of various nature and kind. None of the provisions affects my view of the application of the common law doctrine of tacking in this Province or of the appropriate disposition of this case. COSTS: [23] The Bank will have its costs of the application against FCC on a partial indemnity basis. If the parties cannot agree, Bank s counsel may submit his bill of costs, counsel for both parties may provide their submissions in writing, and I will then fix the costs. April 21, 2008 Justice D.H. Jenkins