Jun 1, 2019

BLANEY'S APPEALS: ONTARIO COURT OF APPEAL SUMMARIES (MAY 27-31, 2019)

Hilson v. 1336365 Alberta Ltd., 2019 ONCA 434 (CanLII)

[Hoy A.C.J.O., Feldman and Paciocco JJ.A.]

COUNSEL:

J. Rosenstein, for the appellants/respondents by way of cross-appeal

H.W. Reininger, for the respondent/appellant by way of cross-appeal

FACTS:

The appellants are principals of the corporate defendants. In 2007, they personally guaranteed second mortgages entered into by the corporations as part of an investment in a real estate complex. The respondent, an individual investor, provided the financing secured by way of a second mortgage. Each of the mortgages included a standard form guarantee covenant, and there were also five stand-alone guarantee agreements. When the second mortgages went into default, the respondent commenced an enforcement action.

In a separate action, the respondent sued her lawyer, who acted for her in a number of investments, including the one at the centre of this matter. This action was later settled for $1.3 million.

ISSUES:

(1) Is the limitation period applicable to the stand-alone guarantees ten years under s. 43(1) of the Real Property Limitations Act (the “RPLA”) or two years under the Limitations Act, 2002?

(2) Were the guarantees contained in the mortgages authorized by and binding upon the appellants in their personal capacities?

(3) Did the trial judge err in reducing the amount of the judgment on the guarantees to account for any double recovery resulting from the settlement of the negligence action against the respondent’s lawyer?

HOLDING:

Appeal dismissed. Cross-appeal allowed in part.

REASONING:

(1) The appropriate limitation period is ten years under s. 43(1) of the RPLA. Section 4(1) of the Limitations Act, 2002 prescribes a basic two-year limitation period. However, Section 2(1)(a) of the Limitations Act, 2002 provides that the Act does not apply to proceedings to which the RPLA applies. Section 43(1) of the RPLA states that “no action upon a covenant contained in an indenture of mortgage or any other instrument…to repay the whole or part of any money secured by a mortgage shall be commenced after the later of…10 years.”

The appellants submit that the stand-alone guarantees are not “instruments” within the meaning of Section 43(1). The trial judge did not agree with this submission, and the Court of Appeal concluded that the trial judge was correct.

The Court of Appeal noted that prior to 1939, the predecessor to s. 43(1) of the RPLA referred only to “a covenant contained in an indenture of mortgage.” In the 1924 case of Martin v. Youngson, the Ontario Court of Appeal considered the meaning of that phrase in the context of a guarantee contained in an indenture of mortgage under seal. However, the Court left open the question of whether a guarantee contained in a separate collateral document could also be included. It was the view of the Court in this present case that it is likely the 1939 addition of the words “or any other instrument” were made to address this very question.

The appellants also draw attention to the definition of “instrument” in the Registry Act, due to the fact that there is no definition of “instrument” in the RPLA. The definition in the Registry Act states that it “includes every instrument whereby title to land in Ontario may be transferred, disposed of, charged, encumbered or affected in any other way…” The trial judge found that the stand-alone guarantees met this definition, and cited the 2012 Ontario Court of Appeal decision of Equitable Trust Company v. Marsig as his authority to do so. The Court agreed, and held that where the guarantee relates to the payment of a mortgage debt, the guarantor maintains the potential for an interest in land as soon as payment is made on the guarantee. In other words, the guarantee meets the definition of an instrument, because title to land may be affected.

The appellants also submitted that the trial judge erred in applying a policy approach in his analysis. On this point, the Court reiterated the statement made by Perell J. in Equitable Trust that it was the intention of the legislature that all limitation periods affecting land be governed by the RPLA. It would cause confusion and uncertainty if the limitation period for enforcing the mortgage debt were different from the limitation period for enforcing a guarantee of that same debt.

The appellants’ final submission on this issue was that the decision in Equitable Trust was qualified by the Court of Appeal in Zabanah v. Capital Direct Lending Corp. The Court rejected this argument by clarifying that Equitable Trust was distinguished in Zabanah. In the former, as in this case, the action concerned a covenant in an instrument that affected the land to repay any money secured by the mortgage. The latter concerned an action for negligence and breach of contract in respect of misrepresentations in the assignment of a mortgage.

(2) No. The appellants argued that they did not sign the documents personally, but only on behalf of the corporate mortgagors. The respondent argued that because the stand-alone guarantees contained language that refers to the guarantees in the charges and schedules to the charges, the appellants personally authorized the registration of the charges which included their personal guarantees. The respondent also relied on s. 21 of the Land Registration Reform Act (the “LRRA”) in arguing that an electronic document is not required to be signed by the party to be effective.

The trial judge found as a fact that the appellants did not sign the guarantees contained in the mortgages, and that they had not agreed to be bound by the guarantee contained in the mortgage documents merely by signing other documents including the stand-alone guarantees. The standard of review on appeal for findings of fact or mixed fact and law is palpable and overriding error or extricable error of law.

The Court of Appeal saw no reason to interfere with the trial judge’s findings on this issue. While the stand-alone guarantees contained acknowledgements that the appellants had read the charges, the stand-alone guarantees did not state that the appellants agreed to be personally bound by the terms of the charge.

The Court was also in agreement with the trial judge’s finding that although s. 21 of the LRRA permits electronic documents to be registered without a signature, this does not remove the necessity for anyone who is to be bound by the documents to have provided their authorization in writing to the electronic registration of those documents.

(3) Yes. The Court of Appeal reached this conclusion by first drawing attention to the lack of any evidentiary basis on which the trial judge could draw his inferences. The Court found the trial judge’s allocation to be an arbitrary one, a view which the trial judge himself acknowledged, before adding that he did not see it as such. However, the Court of Appeal determined that the trial judge had no evidence that any part of the settlement could be said to be referable to this specific investment project, and thus there was no basis to reduce the amount of the judgment. The action against the lawyer was for negligence in the steps he took in respect of the loans on a number of projects. The action against the appellants was to recover the amount of the mortgage loans on this specific project from the guarantors of the mortgages.