Victor Investment Corp. Ltd. et al. v. Fidelity Trust Co., [1975] 1 SCR 251

Supreme Court of Canada

Victor Investment Corp. Ltd. et al. v. Fidelity Trust Co., [1975] 1 S.C.R. 251

Date: 1973-10-02

Victor Investment Corporation Ltd., Victor James Thiessen and Margaret Thiessen (Plaintiffs) Appellants;

and

The Fidelity Trust Company (Defendant) Respondent.

1973: February 1; 1973: October 2.

Present: Martland, Judson, Ritchie, Spence and Laskin JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR MANITOBA

Mortgages—Series of mortgage transactions and mortgage actions—Mortgage debt covering two adjoining properties—Respective equities of redemption in different hands—Application of doctrine of apportionment.

In 1964 the corporate plaintiff, V, mortgaged two adjoining properties (referred to respectively as the TGT property and the Strains property) to Canada Permanent Trust. Some years later this first mortgage was sold to Fort Garry Trust. In the interval a second mortgage on both properties was taken by the individual plaintiffs, T and T, then a third mortgage on the TGT property alone was taken by Investors Trust, and later a subsequent mortgage on both properties was taken by the defendant, F. Thereafter the individual plaintiffs postponed their second mortgage position to that of F with the result that Investors was put in the position of second mortgagee as to the TGT property, and F third mortgagee thereof and second mortgagee of the Strains property. Mortgage sale proceedings were taken by Investors with respect to its second mortgage and at a public auction a bid by F was successful.

As a result of the purchase at public auction, F obtained title to the TGT property subject only to the first mortgage held on both properties by Fort Garry, and both V and the individual plaintiffs had lost their interests in the TGT property, retaining only their equity of redemption and mortgage interest in the Strains property. Shortly afterwards the first mortgage became due and Fort Garry took mortgage sale proceedings. F paid the full amount of Fort Garry’s mortgage claim. At F’s request, and on an arbitrary

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basis (in so far as neither V nor the individual plaintiffs were involved in what was done) Fort Garry apportioned the mortgage debt, giving F a discharge of the first mortgage in the TGT property and a transfer of mortgage on the Strains property. Thereafter F took foreclosure proceedings to obtain title to the Strains property.

The arbitrary apportionment of the burden of the first mortgage debt on the two properties gave rise to proceedings out of which the present appeal came to this Court.

Held: The appeal should be allowed and the judgment below in favour of V varied. The appeal of T and T and the cross-appeal should be dismissed.

The individual appellants had no enforceable claim against F. At the time of the enforcement proceedings by Fort Garry, T and T, as holders of a security on one property only compared with the security on the two properties held by Fort Garry, would have been entitled to invoke the doctrine of marshalling and have Fort Garry or any successor look first to the TGT property to realize the mortgage debt owing to it. This was not, however, sought against Fort Garry, or against F, which took over Fort Garry’s position.

As between V and F, however, apportionment of the first mortgage debt could properly be sought because, at the time of its maturity and enforcement, the two properties were in separate hands but subject to the one mortgage debt covering both of them.

APPEAL and CROSS-APPEAL from a judgment of the Court of Appeal for Manitoba[1]. Appeal allowed and judgment below in favour of the corporate appellant varied. Appeal of the individual appellants and cross-appeal dismissed.

Paul V. Walsh, for the plaintiffs, appellants.

A.S. Dewar, Q.C., for the defendant, respondent.

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The judgment of the Court was delivered by

LASKIN J.—The issues in this appeal arise out of a series of mortgage transactions and mortgage actions, ultimately involving a claim that the doctrine of apportionment was not properly applied in respect of a mortgage debt on two properties of which the respective equities of redemption, in the events that happened, were in different hands. Two adjoining pieces of land and buildings on them are involved, known respectively as the TGT and Strains buildings. The latter building was only seventeen feet wide, and two feet thereof encroached on the site of the TGT building; and, further, the west wall of the TGT building was the fourth wall of the Strains building. The properties are valuable, located in downtown Winnipeg, and were both owned by Victor Investment Corporation Limited at the time of the chain of events that gave rise to this litigation. The principle shareholders of Victor were the Thiessens, husband and wife.

Victor mortgaged both properties in 1964 to Canada Permanent Trust Corporation for $250,000 without apportionment. Some years later this first mortgage was sold to Fort Garry Trust Company for $277,492.99. In the interval a second mortgage on both properties was taken by the Thiessens for $25,000, then a third mortgage on the TGT property alone was taken by Investors Trust Company for $101,151.75, and later a subsequent mortgage on both properties was taken by Fidelity Trust Company, the respondent herein, for $100,000. Thereafter the Thiessens postponed their second mortgage position to that of Fidelity with the result that Investors was put in the position of second mortgagee as to the TGT property, and Fidelity third mortgagee thereof and second mortgagee of the Strains property.

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Victor and the Thiessens found it difficult to meet the mortgage debts on the properties. When its second mortgage fell into arrears, Investors took mortgage sale proceedings and was empowered by an order to sell the TGT property at public auction. Fidelity had a $100,000 investment to protect not only against Investors’ second mortgage but also against the first mortgage on both properties held by Fort Garry. It decided to bid at the public auction and, apparently upon an erroneous belief that Investors’ mortgage covered both properties, it bid $200,000 which was the high and therefore successful bid. The money paid off Investors, and was also used to retire Fidelity’s entire mortgage and to provide $1,000 as a payment on the Thiessens’ junior mortgage.

Clearly, the sale by public auction on judicial order was of all interests in the TGT property save that of the first mortgagee. Those interests were entitled to be paid off out of the proceeds of the sale, but Fidelity’s money was used to retire its one mortgage on both the TGT property and the Strains property. The effect was, of course, to diminish what was left to pay the Thiessens in respect of their mortgage interest in the TGT property. It was not argued below that there was any impropriety in discharging the Fidelity third mortgage, covering as it did both properties, with the proceeds of a second mortgage sale of the TGT property. The result was to improve the Thiessens’ position as mortgagees of the Strains building; they became second mortgagees for $24,000 after the Investors’ sale proceeds were distributed. There is nothing in what is now s. 127(3) of The Real Property Act, R.S.M. 1970, c. R30, that derogates from this conclusion. That provision reads as follows:

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The purchase money shall be applied, firstly, in payment of the expenses occasioned by the sale; secondly, in payment of the moneys then due or owing to the mortgagee or encumbrancer; thirdly, in payment of subsequent mortgages, encumbrances, or liens, if any, in the order of their priority; and, fourthly, the surplus, if any, shall be paid to the owner or other person entitled thereto.

Plainly, it prescribes an order of distribution without more, leaving substantive questions to be decided otherwise.

As a result of the purchase at public auction, Fidelity obtained title to the TGT property subject only to the first mortgage held on both properties by Fort Garry, and both Victor and the Thiessens had lost their interests in the TGT property, retaining only their equity of redemption and mortgage interest in the Strains property. When shortly afterwards the first mortgage became due, and Fort Garry took mortgage sale proceedings, the situation was this: the holder of a first mortgage on two properties, one of them owned by Fidelity (the TGT property), and the other by Victor (the Strains property) subject to a second mortgage in the Thiessens, moved to realize its mortgage debt against both properties.

Fidelity again went in to protect its position which, at that time, related only to its interest in the TGT property. It paid the full amount of Fort Garry’s mortgage claim of $284,239.33. At Fidelity’s request, and on an arbitrary basis (in so far as neither Victor nor the Thiessens were involved in what was done) Fort Garry apportioned the mortgage debt, giving Fidelity a discharge of the first mortgage in the TGT property for $183,965.85 and a transfer of mortgage on the Strains property for $100,273.38. Fidelity thus obtained full and sole title to the TGT property and took a first mortgage position on the Strains property for an amount which, on any of the evidence in the case, exceeded its

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value, an amount, moreover, which it arbitrarily determined.

This arbitrary apportionment of the burden of the first mortgage debt on the two properties is what gave rise to the proceedings out of which the present appeal comes to this Court. The proceedings, taken by Victor and the Thiessens, arose after the first mortgage on the Strains property fell into arrears, and after Fidelity took foreclosure proceedings to obtain title following abortive mortgage sale proceedings which produced no bids for the property.

In their action, the plaintiffs sought a declaration of entitlement to have the first mortgage debt equitably apportioned between the two properties, consequential relief and an injunction to restrain the foreclosure proceedings. Nitikman J., before whom the plaintiffs sought an interlocutory injunction, granted this relief but conditioned its continuance on payment by plaintiffs of $44,000 into Court by a certain date. This sum was represented by the plaintiffs to be the proper amount of the mortgage debt to be apportioned against the Strains property. This representation was based on an alleged value of the Strains property of $80,000 notwithstanding the peculiarity of the fact that the building encroached two feet into the TGT site. On the plaintiffs’ failure to pay the $44,000 the interlocutory injunction was dissolved. Fidelity pursued the foreclosure proceedings and obtained clear title to the Strains property. The plaintiffs pursued their action, seeking damages against Fidelity for depriving them of their interest in the Strains property by an allegedly wrongful apportionment of the mortgage debt which had covered both properties. The trial judge, Hall J., concluded that because the plaintiffs had failed to pay the $44,000, which was a term of the continuance of the interlocutory injunction, there was no need to decide the

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substantive issue of apportionment, the failure to pay being indicative of the plaintiffs’ inability to redeem on the basis of that being the mortgage debt.

I agree with the Manitoba Court of Appeal that the failure to pay the $44,000 in respect of the matter to which it was related could not have the effect of disposing of the plaintiffs’ claim. The anterior arbitrary apportionment by Fidelity had the effect of placing a burden of over $100,000 upon the Strains property when the plaintiffs’ position was that it was worth $80,000, probably a maximum figure. The Manitoba Court of Appeal, noting that the plaintiffs put their case on the footing not of marshalling but of apportionment, proceeded to a valuation of the respective properties on the evidence in the record, concluded that the Strains property had a value of $50,000 and, taking the plaintiffs’ debt apportionment of $44,000, gave judgment in the result to Victor for $6,000. It is this judgment that is in appeal at the instance of the plaintiffs. The defendant Fidelity has cross-appealed on the ground that the Strains property was not worth more than $44,000 and hence Victor was not entitled to any recovery.

The relevant questions that arise on the foregoing facts are (1) how apportionment (as it was called in the proceedings) arises, and (2) whether if it did arise there was any right in the plaintiffs to claim damages because their interests in the Strains property were extinguished.

Apportionment arises in relation to the first mortgage debt, and as between Fidelity and Victor, because, at the time of its maturity and enforcement, the two properties were in sepa-

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rate hands but subject to the one mortgage debt covering both of them. Proration of the debt according to the respective values of the two properties must follow in the absence of any stipulation that one of the properties would bear the burden or bear it primarily as between the two holders of the equities of redemption. So far as Victor was concerned, the burden on its interest of the apportioned first mortgage debt was supplemented by the burden of the Thiessen mortgage.

The Manitoba Court of Appeal decided on a value of $50,000 for the Strains property while accepting $44,000, as contended for by the plaintiffs, as the proportionate amount of the first mortgage debt on that property. This, in my view, cannot be supported because the $44,000 figure was related to a value of at least $80,000 for the Strains building. If it had a lesser value, there would have to be a corresponding decrease in the apportioned first mortgage debt. I would, on the record, which it is as open to this Court to examine as it was to the Court of Appeal (since the trial judge made no finding on the point), find that the respective values of the two properties were $400,000 and $80,000.

In my opinion, the Thiessens have no enforceable claim against Fidelity in the present proceedings. At the time of the enforcement proceedings by Fort Garry the Thiessens, as holders of a security on one property only compared with the security on the two properties held by Fort Garry, would have been entitled to invoke the doctrine of marshalling and have Fort Garry or any successor look first to the TGT property to realize the mortgage debt owing to it. This was not, however, sought against Fort Garry, or against Fidelity, which took over Fort Garry’s position.

As between Victor and Fidelity, however, apportionment of the first mortgage debt could

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properly be sought. This does not engage the first mortgagee, which can proceed as it wishes so far as the holders of the respective equities are concerned, but their rights inter se are subject to adjustment on an apportionment basis. Taking the values that I have assigned to the two properties, there would be an apportionment of $47,373 of the first mortgage debt to the Strains property.

Fidelity’s apportionment, when it succeeded to Fort Garry’s position, might seem to have prejudiced not only Victor but the Thiessens as well in respect of their right to redeem. There is the fact that the foreclosure proceedings taken by Fidelity on the Strains property and the ensuing abortive sale involved a claim to realize a first security of over $100,000, which exceeded the value of the property and explains why no bids were received. However, as already pointed out, the Thiessens’ claim should have been a marshalling claim against Fort Garry to compel it to realize its mortgage debt out of the TGT property before turning to the Strains property. No such claim was made.

I do not think that it was open to the Thiessens as it was to Victor, especially after Fidelity paid off the first mortgagee, to claim apportionment. True enough, as a result of the foreclosure on the Strains property the Thiessens’ second mortgage was wiped out, but this fact alone does not entitle them to join with Victor to claim $36,000 from Fidelity (on the basis of a $44,000 allotment to the Strains property of the first mortgage debt). The statement of claim in the action brought by the plaintiffs sought, in effect, to have the foreclosure re‑opened, but this position does not appear to have been pursued at the trial or on the appeal to the Manitoba Court of Appeal where damages alone were sought.

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In my opinion, the Thiessens cannot now claim damages either by reliance on marshalling or on apportionment. So far as marshalling is concerned, only the Strains property remained to satisfy both the Thiessens’ mortgage and the proper prior claim of Fidelity; and the latter’s interest cannot now be charged with a default of which the Thiessens did not complain when the issue was alive. As to apportionment, it is a claim open, in the present case, to Victor alone as against Fidelity.

That claim is to recover the value of its equity of redemption on the basis of a proper apportionment; but Victor’s interest must be burdened with the $24,000 debt to the Thiessens as well as with the sum of $47,373 representing the allocation of the first mortgage debt to the Strains property. I would not agree that, because the Thiessens’ mortgage on the Strains property was wiped out by the foreclosure, the value of Victor’s equity of redemption was correspondingly increased as against Fidelity. The claim for damages, being based on a wrongful apportionment, must be related to the position that Victor would have enjoyed under a proper apportionment of the first mortgage debt. In the result, the sum for which Fidelity must answer to Victor is $8,627.

To the degree that the calculations I have made and the consequences thereof are the result of Fidelity’s overgenerous bid on the sale of the Investors’ second mortgage of the TGT property, it has no one to blame but itself.

I would allow the appeal and vary the judgment below to give Victor a recovery of $8,627 against Fidelity, but I would make no order as to costs in this Court. I would dismiss the

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appeal of the Thiessens and I would dismiss the cross-appeal, both without costs.

Judgment accordingly.

Solicitors for the plaintiffs, appellants: Nozick, Akman & Walsh, Winnipeg.

Solicitors for the defendant, respondent: Thompson, Dewar, Sweatman, Winnipeg.