Mistaken Discharge of Mortgage

In a recent appeal decision, the Court of Queen’s Bench has prevented borrowers from taking a $200,000 windfall from a mistake by a mortgage. In Crystal Wealth Management System Ltd. v. JC Food Services Ltd. (2019 ABQB 59), Justice Browne considered an appeal from Master Schlosser. The mortgage lender, Crystal, had discharged a mortgage granted by JC Food Services Ltd. in error. For several years following the error, both lender and borrower were unaware of the error and carried on with the mortgage as if it were still registered. The mortgage went into default and Crystal commenced foreclosure proceedings. JC defended the foreclosure, arguing that the discharge of mortgage, even if accidental, serves to extinguish the underlying debt.

In the initial application, argued by Hendrix Law, Master Schlosser sided with the borrower. However, on appeal, Justice Browne found JC’s authorities – cases where the lender intentionally discharged its security for strategic reasons – were distinct from a situation of a discharge in error, and upholds the position argued by Hendrix Law. She holds “In sum, it seems clear that the unilateral and accidental discharge of a mortgage discharges that mortgage, but does not satisfy the underlying debt secured by the mortgage. This case calls for equitable relief since the obvious fact is that JCF has gained an unintended windfall of almost $200,000 through Crystal Wealth’s negligence or error. There is no juristic reason to allow JCF to retain this windfall”.

Lesson learned. Courts in Alberta are still courts of equity and they will not allow a borrower an unjust remedy or advantage from a mistake.

As always, if you have any questions or concerns, please do not hesitate to contact me.