Green v. Bank of Montreal

Green v. Bank of Montreal Collection Decisions of the Court of Appeal Date 1999-12-07 Docket numbers C31829 Judges Finlayson, George Duncan; Weiler, Karen Merle Magnuson; Moldaver, Michael James Subject Civil Decision Content DATE: 19991207 DOCKET: C31829 COURT OF APPEAL FOR ONTARIO FINLAYSON, WEILER and MOLDAVER JJ.A. BETWEEN: IRVING GREEN, IRVING GREEN ) S. Harvey Starkman, Q.C. and IN TRUST and BOSTON ) Kevin Fisher for the appellants CONSTRUCTION INC. ) ) (Appellants) ) ) –and– ) ) BANK OF MONTREAL and THE ) Irving Marks and Adam Babker, CORPORATION OF THE TOWN OF ) for the respondent Bank of Montreal AJAX ) ) N. Cameron Murkar, for the (Respondent) ) respondent The Corporation of the ) Town of Ajax ) ) Heard: November 18, 1999 On appeal from the judgment of Sachs J. dated February 26, 1999. FINLAYSON J.A.: [1] This is an appeal from the summary judgment of the Honourable Madam Justice Sachs dated February 26, 1999, wherein she awarded the Bank of Montreal (“Bank”) $212,152.05 and upheld the assignment to the Bank by the Corporation of the Town of Ajax (“Town”) of a portion of its municipal lien created under a subdivision agreement for a plan of subdivision in the Town. [2] The appellants were the original owners of the properties in issue in this action. They sold the property to a developer and took back a mortgage as part of the purchase price. The appellants, the developer, the Town and the Bank executed the subdivision agreement. The Bank had provided the developer with credit facilities amounting to $15,000,000. The credit included commercial letters of credit totalling $3,500,000 issued by the Bank to the Town to provide guarantees for the performance by the developer of his obligations under the land servicing arrangements. The security arrangements of all the parties consisted of the following: i) the Bank held a $15,000,000 first charge pursuant to a debenture on the residential portion of the subdivision referred to as the housing lots; ii) the appellants had a collateral second mortgage on the housing lots for $700,000; iii) the appellants had a first mortgage over the portions of the property known as the school block, the apartment block and the commercial block; iv) the Town was given a first lien over all of the property as security for any obligation of the developer under the subdivision agreement. Both the Bank and the appellants agreed to postpone and subordinate their respective security interests to the lien of the Town. v) the Bank received a conditional assignment by the developer of all contracts and agreements including a profit sharing agreement the developer had with two builders. [3] The developer became insolvent and defaulted on its obligations to the Bank and on its mortgage to the appellants. A receiver was appointed. The appellants exercised their power of sale under their mortgage that covered the school block and agreed to sell the property to the School Board. One of the problems that emerged was that the developer had stock piled topsoil on the school block and this had to be removed. The question arose as to who was to assume the burden and the cost of removing the topsoil. [4] The Town made a demand on the developer to remove the top soil and to grade and seed the school block and stated that if this was not done, it would call on the letters of credit provided by the Bank to complete the necessary work. The Bank then agreed to complete the grading of the school block and in exchange the Town agreed to assign to the Bank its first charge over the school block. [5] The effect of this assignment was that the Bank had acquired the first security interest of the Town in the school block and on the closing of the sale to the School Board, it insisted upon being reimbursed for the cost it had incurred in carrying out the obligations of the developer with respect to the school block. In order to close the sale, the parties agreed that the amount in dispute would be paid into a trust account pending the determination of the right of the parties. [6] The appellants initiated this action for a declaration that the transfer of the Town’s municipal lien to the Bank was of no force or effect. The respondents moved for summary judgment to dismiss the appellants’ action with costs and for the release of the monies paid into trust sufficient to pay out what was now the Bank’s lien on the school block. [7] The appellants’ position was that the Bank’s actions in obtaining a transfer of the Town’s lien was merely an attempt to shift the Bank’s financial obligations to the appellants, for the Bank had provided the Town with irrevocable and unconditional letters of credit and agreed to pay the Town for the same obligations which the Bank sought to enforce against the appellants. [8] The motions judge found that the Town had the authority to enter into the subdivision agreement and to assign its lien created thereby to the Bank. No serious complaint was made in this court as to these findings. To the extent that the issues were raised in the factum of the appellant, I would accept the reasoning of the motions judge that the authority existed in both cases. The real complaint, here and below, was that somehow the Town had improperly preferred the Bank over the appellants by declining to call on the Bank to honour its letters of credit to pay for the cost of removing the topsoil from the school block. In my view, this approach was totally misconceived. Absent any express agreement restricting the manner in which the security holders could realise on their respective securities, they were all entitled to act in their own best interests. If the Town thought that its interests were best served by having the Bank take over the grading responsibilities of the developer rather than engaging contractors to do the work for the Town and claiming against the Bank under its letters of credit, it was entitled to do so. If the Bank was prepared to take on this responsibility in return for upgrading the quality of its security, there is no reason why it should not have done so. [9] The appellants argued that, on their reading of the subdivision agreement, the Town was obliged to have recourse to the letters of credit provided by the Bank in enforcing its rights against the insolvent developer and that it could only rely upon its first lien rights on exhausting those letters of credit. The agreement certainly does not say that this is the case and it is now conceded that there were no representations by the Bank or any one else to that effect. This brings the appellants to their primary argument that the court as a matter of equity should bring about the same result by invoking the equitable doctrine of marshalling. [10] As has been stated by this court in Re Allison (1998), 38 O.R. (3d) 337 at p.341, citing Aldrich v. Cooper (1803), 8 Ves. 382, 32 E.R. 402 (L.C.), the right to marshal securities is an equitable one intended to prevent a creditor who can resort to two funds of a debtor from defeating another creditor who can resort to only one of them. Fundamentally, the doctrine is applied for the purpose of regulating the rights of the two creditors among themselves, although in so regulating their rights the court will never interfere with the paramount claim of the superior creditor (the one which has the choice of the two funds of the debtor from which to collect) to pursue his or her remedy against either fund, but provides that if he or she resorts to the fund which the inferior creditor can alone resort, then the inferior creditor shall not be prejudiced. The doctrine is applicable unless some other equity prevents its application such as in the case where its application would prejudice third parties. There are five criteria: (a) two creditors; (b) one common debtor; (c) two funds of the debtor with the superior creditor having access to both and the inferior creditor to but one; (d) no interference with the choice of remedy of the superior creditor and (e) no prejudice to third parties. [11] There are a number of reasons why the doctrine of marshalling has no application here. In the first place, marshalling will not permit the court to instruct the Town that it must choose one avenue of relief over another. In the second place, the Town was not attempting to recover a debt from the developer, it was attempting to have remedied a default of the developer by having someone remove top soil from the school block so that it would be useable for school purposes. The issue of how it would be recompensed would only come up if it chose to do the work itself. As we know, however, it did not make this choice but instead chose to assign its lien to the Bank in return for the Bank’s commitment to see that the work was done. In the third place, there was no common debtor for both “funds”. Even assuming that the letters of credit and the lien could be treated as sources of funds for the purposes of this doctrine, while the Town had access to the two funds, only one of them was a resource of the debtor. That resource was the school block and the money that its sale would represent. The letters of credit were an obligation of the Bank to the Town. While admittedly access by the Town to the letters of credit could only be triggered by the default of the developer, it was the Bank, not the developer, which would become the debtor on the happening of that event. Accordingly, there was no common debtor to the appellants and the Town with respect to the two funds that the Town had access to such as to permit the invocation of the doctrine of marshalling. Fourthly, the effect of the order sought would prejudice the Bank, which is a third party to the marshalling scheme. [12] In summary then, there are three parties that are affected by the insolvency of the developer: the Town, the appellants and the Bank. All are creditors. The doctrine of marshalling does not permit the court to prefer the rights of one creditor to another. It cannot dictate to the Town which of a number of options it must exercise in order to protect the appellants at the expense of the Bank because to do so would not only interfere with the paramount claim of the Town as the superior creditor, it would prejudice the rights of the Bank. In this instance, the appellants are asking the Town to do two things: first to do the work itself and second to make a claim against the security it holds from the Bank. The Town apparently thought it would be more advantageous to its interests to arrange to have the Bank remove the topsoil in return for its first lien on the property affected. In this way it had no responsibility to see that the work was properly done and it retained the full value of its security with the Bank against any other defalcations by the developer. What this analysis discloses is that the appellants are asking the court to unscramble this omelette at the behest of one creditor to the detriment of the other two. The sole beneficiary of such an order would be the appellants who would receive the full proceeds of the sale of the school block. The equitable doctrine of marshalling offers no support for this request and I see no basis at all to provide the appellants with the relief that they seek. [13] Accordingly, for the above reasons, I would dismiss the appeal with costs. Released: DEC 06 1999 Signed: “G.D. Finlayson J.A.” GDF “I agree K.M. Weiler J.A.” “I agree. M.J. Moldaver J.A.”