Appeal Court protects equity for subsequent encumbrancers

In a decision from last fall, the Alberta Court of Appeal upheld a judge’s order that preferred a sale of a property in foreclosure over transferring title to the highest priority lender, where that sale generated surplus funds for other creditors.

In 1387388 Alberta Ltd v. Irwin (2016 ABCA 314), a foreclosing lender applied for a foreclosure order after unsuccessfully attempting to sell the mortgaged property. When the Order was granted, the foreclosing first mortgagee was owed approximately $414,000 but had been unable to sell the property at a list price of $995,000. The defendants appealed the foreclosure order and at the appeal, at offer to purchase the property for $995,000 was presented. The chambers justice granted an order directing that the offer be accepted.

The lender appealed, arguing that it was entitled to “select its remedy” and asking for the original foreclosure order to be restored. It argued that the defendant borrowers were not entitled to bring an application to have an offer accepted and the other lenders had not brought any such application.

The Court of Appeal held that the foreclosure order would clearly have granted the first-place lender a windfall as the value of the property exceeded the mortgage debt, while the sale, by contrast, produced enough funds to pay the mortgage debt as well funds to be put toward the claims of Revenue Canada and a subsequent lender. The Court of Appeal noted that it is the court – not any of the parties – which controls a foreclosure sales process and the court was entitled to accept the offer regardless of which party put the offer before the court. The Court notes: “As long as the first mortgage was paid in full, it was within the discretion of the chambers judge to order a sale, rather than a foreclosure, in order to enable some recovery by the subsequent encumbrancers.”

This decision is a significant one for subsequent encumbrancers and underscores the importance to second and third priority lenders to monitor and take an active role in proceedings of higher priority lenders. As the evidence is described in the appeal decision, it does not appear that the initial foreclosure order – which had significant prejudice to the subsequent lenders – was warranted.