Consolidation Debts to be Paid Pro Rata - Application of The Limitation of Civil Rights Act

Walker v Bank of Montreal , 2017 SKCA 42

This recent decision confirms the importance of The Limitation of Civil Rights Act (the “LCRA”) for homeowners, and in particular section 2. The LCRA is based on 1930s depression-era legislation designed to protect debtors (i.e. farmers) during times of stagnant growth and poor markets. The overarching objective of the LCRA is to minimize the economic effects of default by debtors who undertake debt obligations in the purchase of land or machinery. Section 2 of the LCRA specifically limits a mortgagee’s remedy to the property and protects an individual mortgagor from being personally liable on any deficiency. This section provides that a 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, and that no action shall lie on the covenant for payment contained in the agreement for sale or mortgage. This means that once a lender has foreclosed upon a property, they cannot then sue for any outstanding amounts remaining. However, this section applies only to purchase money mortgages, that is, only to mortgages where the money is loaned for the purposes of the mortgagor purchasing the land.

The case of Walker v Bank of Montreal confirms the continued beneficial impact that this section provides for debtors who cannot pay their debts and clarifies how section 2 of the LCRA operates in the event of a consolidation loan. In this case, the Walkers granted a residential mortgage to BMO securing a loan in the amount of $460,800.00. This loan was a consolidation of existing debt in the amount of $373,089.00 and included an additional $87,711.00 for non-purchase money financing (money that was not provided directly for the transaction in question). The Walkers defaulted on their payments, and BMO foreclosed on the property. However, the proceeds were not sufficient to satisfy the loan, so BMO further sought an order entitling it to the deficiency. The Chambers judge found that BMO was entitled to credit all proceeds of the security against the balance then owing in respect of the purchase of land. Accordingly, BMO was entitled to a deficiency judgment in the amount of $162,675.99. The Court of Appeal allowed the Walker’s appeal.

In coming to its decision, the Saskatchewan Court of Appeal considered two decisions it had previously rendered dealing with this issue: Bank of Montreal v Hyrnewich Holdings Ltd. (1989), 79 Sask R 134 (Sask CA) [“Hyrnewich”], and Farm Credit Canada v Andrews , 2006 SKCA 31 [“Andrews”]. Hyrnewich was found to be the governing authority. While Andrews was decided after Hyrnewich, the court’s decision in Andrews was at odds with that of Hyrnewich. Therefore, the Court found that Andrews was decided per incuriam, meaning that it was a decision made without reference to judicial or statutory authority binding on it, and which, had the panel considered this authority, would have lead to the case being decided differently.

For this reason, Hyrnewich was determinative of the question in issue. Hyrnewich 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. That meant that the proceeds, whether from the land initially purchased or land held as collateral security, cannot be applied exclusively to the purchase money debt first while ignoring the non-purchase money debt. Rather, the proceeds must be distributed between the two portions on a pro rata basis. As a result, BMO was not entitled to a deficiency judgement for $162,675.99 against the Walkers, but rather only for $31,160.23 - the proportionate share remaining on the non-purchase money debt.

Section 2 of the LCRA provides certain protection to debtors that can, in some circumstances, appear to extend to non-purchase money debt. While debtors are subject to losing the land through foreclosure proceedings, the purchase money debt does not follow a debtor after foreclosure. In the event of a consolidation debt, section 2 applies only to that portion of a mortgage that was used to secure the purchase price of the land. Section 2 does not prevent the lender from recovering any of the debt owed in the case of a consolidation loan, but importantly, Walker shows that the payments should be allocated on a pro-rated basis to purchase money and non-purchase money debt balances. A lender is not entitled to apply the realized security proceeds to the purchase money balance first, which would allow for a greater deficiency judgment, as a result of the non-purchase money debt being unpaid. In this way, the LCRA’s objective of protecting debtors is upheld.