Bankruptcy STILL is not the end!

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In our blog post Bankruptcy – it’s not the end! Posted on August 21, 2013[1] we discussed case law which permitted a lender to obtain a deficiency judgment against a mortgagor notwithstanding that the mortgagor had filed for bankruptcy.  In CIBC Mortgage Corp. v. Stenerson,[2] the Court permitted the deficiency judgment even though the mortgagor was bankrupt because the mortgagor had made payments under the mortgage post-bankruptcy.  The Court held that by making the payments, the mortgagor had affirmed the mortgage contract and therefore continued to be liable.

However, other cases disputed imposing such liability on the mere basis of payment and a divergent line of authority developed.[3]  “These cases hold that mere possession and continued payment is insufficient to warrant liability on a personal promise to pay.  Rather, there must be a clear acknowledgement of the continuing obligation…some Courts impose the additional requirement of fresh consideration.”[4]

The conflicting line of cases was recently considered by Justice Topolniski of the Alberta Court of Queen’s Bench in Servus Credit Union v. Sulyok (“Sulyok”).[5]  In Sulyok, the debtor granted a high ratio mortgage to Servus Credit Union (“Servus”).  Years later the debtor filed for bankruptcy.  Servus filed a proof of claim as a secured creditor in the bankruptcy.  The debtor was separated from his spouse during the bankruptcy period and she continued to make the payments on the mortgage.  After the debtor was discharged from bankruptcy, the debtor’s wife stopped paying the mortgage.  The debtor notified Servus that he intended to move back into the property and make the payments.  The debtor made partial payment of the arrears and cured the default on payment of the condominium arrears.  Servus started foreclosure proceedings once the debtor advised that he could not make any more payments.  Servus obtained an Order – Sale to the Plaintiff.  The issue was whether the debtor was still liable for the deficiency given his prior bankruptcy.

At the initial hearing, the Master refused to grant the deficiency judgment.  The Master stated that further consideration was required and that there needed to be evidence that the parties had turned their minds to the continuation of personal liability.  Servus appealed.

On the appeal, Justice Topolniski reviewed the provisions of the Bankruptcy and Insolvency Act (“BIA”).[6]  She made particular note that when the BIA was amended in 2009, the issue of reaffirmation of contracts was considered in the Senate Reports.  The reports specifically recommended that reaffirmation of contracts post-bankruptcy be prohibited for unsecured transactions and that a principled approach be adopted for the reaffirmation of secured transactions.  Parliament chose not to follow these recommendations.

The Justice found that the requirement of fresh consideration or an express reaffirmation failed to adequately balance the rights of all stakeholders involved in these situations.  The Court quoted, “The rehabilitative purpose of s. 178(2) [of the BIA] is not meant to give the debtors a fresh start in all aspects of their lives.  Bankruptcy does not purport to erase all the consequences of a bankrupt’s past conduct.”[7]

The Court found that where a debtor remains in possession of property after bankruptcy and continues to make payments due under the contract then the debtor has affirmed the contract, including the covenant to pay.

Lenders should be particularly happy with this decision as they do not have to turn their mind to whether new consideration is provided or take any extra steps to get the borrower to reaffirm their contractual obligations subsequent to bankruptcy.  At least in Alberta, all the lender has to do is carry on with the contract in the normal course if the debtor is also prepared to do so.

[Originally published in http://www.albertaforeclosureblog.com]

[1] www.albertainsolvencyblog.com.

[2] 1998 CarswellAlta 388 (Alta. Q.B.)

[3] Scotia Mortgage Corp. v. Winchester, (1997) 205 A.R. 147 (Alta. Q.B.); Day c. Banque Laurentienne du Canada, 2014 QCCA 449 (Que. C.A.); Scotia Mortgage Corporation v. Berkers, 2016 NSSC 12 (N.S.S.C)

[4] Servus Credit Union v. Sulyok, 2018 ABQB 860 (Alta. Q.B.) at 62

[5] Ibid.

[6] R.S.C. 1985, c. B-3

[7] Quoting from Alberta (Attorney General) v. Moloney, [2015] 3 S.C.R. 327 at 83

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Bankruptcy – it’s not the end! (a reprise)

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Bankruptcy frequently interacts with other areas of law.  One area of interface is the world of foreclosure.  We originally published this post in our other blog http://www.albertaforeclosure.ca, but it is an interesting case and so we decided to reprint it here:

Under the Law of Property Act,[1] a mortgagee is limited to recovery of the property unless the mortgage is high ratio, insured by CMHC, or granted by a corporation.  If one of these latter circumstances exist, then the mortgagee is entitled to both recovery of the property and a judgment against the mortgagor for the deficiency in the event that the amount owed under the mortgage exceeds the value of the property.  The mortgagee can then take steps to collect on the deficiency judgment in order to make itself whole.

Unfortunately for mortgagees, the deficiency judgment is an unsecured debt, and if the mortgagor makes an assignment into bankruptcy, the mortgagee ends up lumped in with all of the other unsecured creditors ranking at the bottom of the distribution list of the bankrupt mortgagor’s estate.  If bankruptcy occurs, should the mortgagee give up?  Is bankruptcy the end of the mortgagee’s rights to collect?  As with most things, timing (in this case, the timing of the bankruptcy) is everything.

In CIBC Mortgage Corp. v. Stenerson,[2] the Donalds granted a mortgage to CIBC which was insured by CMHC.  Subsequently, the Donalds transferred the property to the Stenersons and by operation of the Land Titles Act, the Stenersons became liable for payment of the mortgage.  In March 1996, Cherie Stenerson assigned herself into bankruptcy.  For seven months after the assignment, she continued to make the mortgage payments.  In November 1996, the mortgage went into default, and in December 1996, Ms. Stenerson was discharged from bankruptcy.  Foreclosure proceedings were started by CIBC in February 1997.  Because the amount owed under the mortgage exceeded the value of the property, CIBC was granted a deficiency judgment against Mr. Stenerson.  The issue before the Court was whether CIBC was also entitled to a deficiency judgment against Ms. Stenerson given her bankruptcy.

The Court held that yes, CIBC was entitled to its deficiency judgment because Ms. Stenerson had affirmed the contractual relationship with CIBC by making the required mortgage payments during the bankruptcy.

The mortgagee’s right to a deficiency judgment is therefore dependent upon the timing of the date of bankruptcy and the date that payments are made.  If the default under the mortgage occurs before the date of bankruptcy and no further payments are made under the mortgage, then the mortgagee will be limited to recovery of the property and a declaration of the deficiency.  The mortgagee will then be able to register a proof of claim in the bankruptcy for the amount of the deficiency, but will rank alongside the other unsecured creditors.  However, if even one payment is made under the mortgage after the date of bankruptcy, the mortgage is affirmed and the mortgagee will be entitled to claim for both the property and any deficiency judgment against the bankrupt mortgagor.  Bankruptcy is not always the end to the rights of creditors!

Ksena J. Court and Francis N.J. Taman practice commercial and residential foreclosure, and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.  Originally published in http://www.albertaforeclosure.ca – used with permission.