Re 807933 Ontario Inc. carrying on business as 1516 Engineering et al. and Paddon and Associates, Trustee
in Bankruptcy for R. Myles Allison et al.
[Indexed as: Allison (Re)]
38 O.R. (3d) 337
 O.J. No. 820
Docket No. C23169
Court of Appeal for Ontario,
McMurtry C.J.O., Finlayson and Moldaver JJ.A.,
February 27, 1998
Mortgages — Marshalling — Mortgagee obtaining security from two property owners as security for single debt — Each property owner granting mortgage and cross-guaranteeing other’s mortgage — Creditor of one of mortgagors seeking marshalling order requiring that mortgagee to recover debt from security on property of other mortgagor — Doctrine of marshalling requiring common debtor — Doctrine of marshalling not applying.
The appellant was a creditor in the bankruptcy of Mr. A., who, before his bankruptcy in 1994, had been the owner of a property, parcel B. This parcel abutted the property of his wife, parcel A.
In July of 1992, the As had decided to borrow $185,000 from DT. As security for the loan, Mrs. A granted a mortgage on parcel A, which was guaranteed by Mr. A, and Mr. A granted a mortgage on parcel B, which was guaranteed by Mrs. A. The mortgage on parcel A provided that it was cross-collateral to the mortgage on parcel B.
In March 1994, Mr. A entered into an agreement to sell parcel B, and, save for a small deficiency, the funds for the sale would have been sufficient to discharge the DT mortgage on both parcels. Mr. A made an assignment into bankruptcy, and, in order to complete the sale, an agreement was entered into among his trustee in bankruptcy, Mr. and Mrs. A, and DT to discharge the mortgage on parcel B. The mortgage registered against parcel A was to remain in place until it was determined whether the doctrine of marshalling was applicable in the circumstances.
The appellant’s position was that DT should marshall and recover her debt as against Mrs. A’s parcel, which would allow Mr. A’s parcel to be available for his creditors including the appellant. Ground J. dismissed the appellant’s application for a marshalling order on the grounds that the appellant was not a secured creditor. The appellant appealed.
Held, the appeal should be dismissed with costs.
It was not necessary to decide whether the doctrine of marshalling did not apply on the grounds relied on by Ground J. The doctrine of marshalling did not apply for other reasons.
The doctrine of marshalling securities is an equitable one intended to prevent a creditor who can resort to two funds from defeating another creditor who can resort to only one of them. As it applied to this case, there were two criteria that must be met before the doctrine applied. The first criterion was that there must be a creditor (or mortgagee) who has access to two properties of a debtor to which he or she can resort for the payment of the amount owing. This criterion was satisfied. The second criterion was that there must be a creditor ranking behind or inferior to another creditor of a common debtor with a claim against only one of the properties available to the superior creditor. The second criterion was not satisfied because Mr. and Mrs. A were not common debtors to the appellant. While it was conceded that they were common debtors to DT, they were not common debtors to the appellant; rather, only Mr. A was a debtor of the appellant. Although there was but one debtor in the circumstances of the cross-guarantees, this merely made the As liable to the same debt to DT; there was nothing in the two guarantees that permitted Mr. A to claim
over against Mrs. A with respect to his indebtedness to the appellant. If the doctrine of marshalling was applied in this case, Mrs. A would be forced to pay Mr. A’s debts for which she had no obligation and for which she had not agreed to assume liability. It would be inequitable to permit the securities to be marshalled if, in the result, one who was not under any obligation to pay both debts should suffer. Accordingly, the doctrine of marshalling did not apply and the appeal should be dismissed.
Cases referred to
Aldrich v. Cooper (1803), 8 Ves. 382, 32 E.R. 402 (L.C.);
Brown v. Canadian Imperial Bank of Commerce (1985), 50 O.R. (2d) 420, 37 R.P.R. 128 (H.C.J.); Ernst Brothers Co. v.
Canada Permanent Mortgage Corp. (1920), 47 O.L.R. 362 (H.C.J.),
affd (1920), 48 O.L.R. 407, 57 D.L.R. 500 (C.A.); G. Ruso
Construction Ltd. v. Laviola, (1976), 27 Chitty’s L.J. 136
(Ont. S.C.); Kendall (Ex parte) (1811), 17 Ves. 514 Statutes referred to
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 38 Construction Lien Act, R.S.O. 1990, c. C.30
Authorities referred to
Halsbury’s Laws of England, vol. 16, 4th ed. (1980), p. 786, para. 877
APPEAL from a judgment of Ground J. (1995), 22 O.R. (3d) 102, 30 C.B.R. (3d) 144, 44 R.P.R. (2d) 237 (Gen. Div.), dismissing an application for an order marshalling the indebtedness of mortgages against land.
Peter C. Card, for appellant.
William J. Leslie, Q.C., for respondent, Mary Teeter Allison.
The judgment of the court was delivered by
FINLAYSON J.A.: — 807933 Ontario Inc., carrying on business as 1516 Engineering, appeals the judgment of the Honourable Mr. Justice Ground of the Ontario Court (General Division) [reported (1995), 22 O.R. (3d) 102, 30 C.B.R. (3d) 144] dismissing its action for certain relief directed towards the land of the respondent Mary Teeter Allison (“Mrs. Allison”).
The appellant claims as a judgment creditor of the respondent
R. Myles Allison, a bankrupt (hereinafter “Mr. Allison”). In fact, since its default judgment was signed after the bankruptcy of Mr. Allison on April 5, 1994, the appellant has the status only of a creditor with a claim proven in the bankruptcy.
The appellant brings the action that is the subject of this appeal pursuant to the order of Ground J. dated October 21, 1994 granting it leave under s. 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended, to:
(a)pursue a claim of marshalling in respect of a mortgage granted by Rosswell Myles Allison, the Bankrupt, to Diane Tomas, in Trust;
(b)pursue a claim in the alternative of unjust enrichment against Mary Teeter Allison.
The bankruptcy of Mr. Allison arose out of the practice of his profession as an architect. He was the architectural sub- consultant to Delcan Corporation, the prime consultant for a dining hall and mess building at the Meaford Tank Range of the Department of National Defence (the “Meaford Project”). He received certain funds for this project from Delcan that he was to disburse to sub-consultants. He failed to do so. One of those sub-consultants was the appellant, which had been engaged to provide electrical and mechanical engineering services. The appellant maintains that Mr. Allison took some of these funds which he was to pay out for the benefit of the subcontractors on the Meaford Project and co-mingled them with personal funds in a joint bank account for the benefit of himself and Mrs. Allison.
In the judgment under appeal, Ground J. declined to give effect to the claim for marshalling of certain properties owned by Mr. and Mrs. Allison on the basis that the appellant was not a secured creditor. He dismissed the action against Mrs.
Allison for unjust enrichment with respect to the above-noted funds. In this court, the appellant attempted for the first time to advance a claim that the moneys in the joint bank account were held in trust for the benefit of subcontractors on the Meaford Project under the provisions of Part II of the Construction Lien Act, R.S.O. 1990, c. C.30.
The court did not call upon the respondent with respect to the dismissal of the claim for unjust enrichment. We were satisfied that the disposition of Ground J. was the correct one on the evidence before him. The court declined to consider the new claim under the Construction Lien Act because it was not raised in the court below. Accordingly, the trial judge was not in a position to make the findings of fact that would be crucial to a determination of this issue. Further, the claim is beyond the scope of the order for leave to proceed of Ground J. dated October 21, 1994.
The only remaining issue that need be addressed is then: Does the doctrine of marshalling have application to the subject lands of Mr. and Mrs. Allison for the benefit of the appellant creditor and other creditors in its class?
Facts as they relate to marshalling
In December of 1965, Mrs. Allison purchased a farm property and registered it in her own name. On March 8, 1978, she applied for and received the right to sever the said property into two parcels, Parcels A and B. She then conveyed Parcel B to her husband, Mr. Allison.
Between March 1, 1978 and April 1994, Mr. and Mrs. Allison financed the severed parcels through a succession of seven mortgages. These were joint mortgages whereby in one instrument Mr. and Mrs. Allison charged or mortgaged both Parcels A and B and covenanted to pay to the mortgagee the full amount of the indebtedness with respect to both parcels. In July of 1992, the two Allisons decided to refinance the two parcels by borrowing $185,000 from Diane Tomas to discharge the existing mortgages on both parcels. In return for the loan, two separate instruments of charge or mortgage were entered into: one by Mrs. Allison with respect to Parcel A for $185,000 in favour of Tomas and the other by Mr. Allison in the same amount to Tomas with respect to Parcel B. The proceeds of the loan of $185,000, along with some other money, were used to pay off all prior encumbrancers on both parcels. The two instruments evidencing the first mortgages to Tomas were dated July 21, 1992 and registered simultaneously on July 30, 1992. The instrument charging Parcel A was signed by Mrs. Allison as the primary debtor for the sum of $185,000 with Mr. Allison as the guarantor thereof and the instrument charging Parcel B was signed by Mr. Allison as the primary debtor for the same $185,000 with Mrs. Allison as the guarantor thereof.
For the sake of completeness, the mortgage by Mrs. Allison on Parcel A alone contained the following clause:
THIS MORTGAGE (“Prime Mortgage”) is secured by a collateral mortgage dated the 21st day of July, 1992 effecting premises [Parcel B] (“Collateral Mortgage”). The parties acknowledge that a payment on account of this mortgage shall be a payment on account of the collateral mortgage and a payment on account of the Collateral Mortgage shall be considered as a payment on account of this mortgage.
In March of 1994, Mr. Allison entered into an agreement of purchase and sale with one Bryn Styles to sell Parcel B for $200,000. The amount realized on this sale would be sufficient to discharge the $185,000 Tomas mortgage on both Parcels A and B, save for a shortfall of $1,632.97. Prior to the date of closing, Mr. Allison made his assignment in bankruptcy. In order to complete the sale, an agreement was entered into among Paddon & Associates (trustee in bankruptcy), Mr. and Mrs.
Allison, and Diane Tomas in trust dated April 29, 1994. Following this agreement, the sale to Styles was closed. The mortgage, given by Mr. Allison on Parcel B in favour of Tomas and cross-guaranteed by Mrs. Allison, was discharged to allow the sale of the property by the trustee in bankruptcy to Styles. The mortgage registered against Mrs. Allison’s Parcel A was to remain in place but would be assigned to the trustee in bankruptcy until the issue of the applicability of marshalling was settled and, upon the resolution of that issue, any benefit from that mortgage would be subject to the claim for the shortfall of $1,632.97 owed to Tomas.
In Aldrich v. Cooper (1803), 8 Ves. 382, 32 E.R. 402 (L.C.), Lord Eldon defined the principles upon which a court of equity will apply the doctrine of marshalling. The right to marshal securities is an equitable one intended to prevent a creditor who can resort to two funds from defeating another creditor who can resort to only one of them. Fundamentally, the doctrine is applied for the purpose of regulating the rights of the two creditors among themselves, though in so regulating their rights the court will never interfere with the paramount claim of the superior creditor (or one which has the choice of two funds upon which to collect) to pursue his or her remedy against either fund, but provides that if he or she resorts to the fund which the other creditor can alone resort, then the other creditor shall not be prejudiced. The doctrine is applicable unless some other equity prevents its application such as in the case where its application would prejudice third parties.
As it applies to this case, there are two criteria that must be met before the doctrine of marshalling can be applied. The first criterion is that there must be a creditor or mortgagee who has access to two properties of a debtor to which he or she can resort for the payment of the amount owing. There is no issue that this criterion has been satisfied in this case. The second criterion is that there must be a creditor ranking behind or inferior to another creditor or mortgagee of a common debtor with a claim against only one of the properties available to the superior creditor or mortgagee. Such an inferior creditor can invoke the assistance of equity to cause or marshal the superior creditor or mortgagee to satisfy the mortgage debt from the property against which the inferior creditor has no recourse so that property will be available to the inferior creditor, or if this is impossible, or unfair to the superior creditor, equity may allow the inferior creditor to stand as the superior creditor in relation to the property against which the inferior creditor otherwise has no recourse.
The key issue in the case on appeal is whether Mr. and Mrs. Allison were common debtors to the appellant. While it is conceded that they were common debtors to Tomas, it would appear to me on the facts of the case that only Mr. Allison was a debtor of the appellant and all the other creditors whose claims arose out of the Meaford Project. Mrs. Allison had nothing to do with those debts. If the court was to apply the doctrine of marshalling to Mrs. Allison’s Parcel A so that Mr. Allison’s Parcel B will be available to satisfy the appellant, then Mrs. Allison would be forced to pay her husband’s debts for which she is not in law obligated. Marshalling was not intended to create such an inequity between two debtors.
Ground J. found that Mrs. and Mr. Allison were common debtors and therefore the second criterion for the applicability of the equitable doctrine of marshalling was satisfied. He stated [at p. 109]:
The second criteria is that there must be a common debtor for the doctrine to be applicable. I am satisfied that in this situation, where there were cross-guarantees given on both mortgages and where the mortgages provided that the mortgagee could proceed directly against the guarantor without first exhausting the mortgagee’s rights as against the mortgagor, both Allison and Mrs. Allison are common debtors with respect to both mortgages in that the mortgagee could have proceeded against either of them with respect to the claims under both mortgages.
Ground J. then quoted at length the decision of Orde J. in Ernst Brothers Co. v. Canada Permanent Mortgage Corp. (1920), 47 O.L.R. 362 (H.C.J.), affirmed (1920), 48 O.L.R. 407, 57 D.L.R. 500 (C.A.), for the proposition that the “doctrine of marshalling can apply in situations where there is a joint debt to one creditor and a second debt to another creditor which is given directly by one of the joint debtors and assigned by the other joint debtor”.
However, Ernst is readily distinguishable from the facts of the present appeal. In Ernst the joint debtor of the first mortgage was assigned the second debt owed to the other creditor, and thereby created, in the equities among the persons interested, a reason for the two debts to be paid by the same person. In Ernst, Frank McAsey wished to buy a lot of land from his mother’s estate, but required his brother Jeremiah to pledge part of an adjoining lot he owned as security for a mortgage large enough to purchase the land. The brothers both executed a mortgage in favour of Canada Permanent Mortgage Corporation, and it was registered upon both lots.
Both brothers also covenanted to repay the full amount of the mortgage. Frank later became indebted for the purchase of agricultural implements to the plaintiff, Ernst Bros. Co., and the debt was secured by a charge upon his lot. Orde J. found as a fact (which was not disturbed on appeal), at pp. 366-67, that Frank some years later had conveyed his lot to Jeremiah, and thereby Jeremiah had assumed both the Canada Permanent Mortgage Corporation first mortgage and the plaintiff’s second charge.
Orde J., at p. 366, made clear in his reasons, which were upheld on appeal, that the plaintiff’s right to have the securities marshalled, if it existed at all, depended upon the plaintiff establishing that Jeremiah purchased the lot from Frank with the obligation to assume and pay off the Canada Permanent mortgage and the plaintiff’s charge. Furthermore, as quoted by Ground J. below, Orde J. stated at pp. 368-69:
There are two estates mortgaged to the Canada Permanent for the one debt, for which Jeremiah McAsey is liable, not only directly by virtue of his covenant, but also as between himself and Frank by virtue of his agreement to assume Frank’s share of the debt, and there is the second charge or mortgage in favour of the plaintiffs, upon only one of the estates — given, it is true, by Frank, but which Jeremiah has agreed to pay.
Does the fact that Jeremiah is not directly liable to the plaintiffs exclude the application of the doctrine? I am of the opinion that it does not. It must, of course, be almost universally the case that in the application of the doctrine there will be a single debtor and two creditors, and that in cases where there are two debtors the doctrine is inapplicable, not because there are two debtors but because it would be inequitable as between those debtors to marshal the securities. The illustration given in Story’s Equity, sec. 642, makes this clear: “Supposing the case of a joint debt due to one creditor by two persons, and a second debt due by one of them to another creditor. In such a case if the joint creditor obtains a judgment against the joint debtors, and the second creditor obtains a subsequent judgment against his own several debtor, a Court of Equity will not compel the joint creditor to resort to the funds of one of the joint debtors so as to leave the second judgment in full force against the funds of the other several debtor.” But the underlying principle involved is brought out in the next sentence of the same section: “At least it will not do so unless it should appear that the debt, though joint in form, ought to be paid by one of the debtors only, or there should be some other supervening equity.”
In other words, the real test is not whether or not the debts to the first and second mortgagees are owed to them by the same person, but whether or not, in working out the equities among the persons interested, the two debts ought to be paid by the same person. It is clear from the illustration given by Story that if as between the two joint debtors the debt owing by them jointly to the first creditor should in fact be paid by the one who is indebted to the second creditor, then the doctrine of marshalling would apply.
Orde J. cited the reasons of Lord Eldon in Ex parte Kendall (1811), 17 Ves. 514, in support of the proposition that there must be a common debtor for the equitable doctrine of marshalling to apply. In that case, five men had been in a partnership and had incurred debts, one of the partners died, and the remaining four continued in partnership and also incurred debts, and then became bankrupt. In the bankruptcy proceedings, certain creditors, with claims against the four surviving partners only, sought to stay the payment of the dividend to those creditors who were creditors not only of the four surviving partners but also of the deceased partner, until payment had been recovered from the estate of the deceased partner. Lord Eldon, at p. 520, stated (and quoted by Orde J. at pp. 369-70):
Another question is, whether, if this was a bill, filed by creditors of the four, they would have a right to insist upon the benefit, sought by this petition. We have gone to this length: if A. has a right to go upon two funds, and B. upon one, having both the same debtor, A. shall take payment from that fund, to which he can resort exclusively; that by those means of distribution both may be paid. That course takes place, where both are creditors of the same person; and have demands against funds, the property of the same person. Here, it is true, there may be creditors, who have demands against the four, and others who have demands against the one: but it was never said, that, if I have a demand against A., and B., a creditor of A., shall compel me to go against A.; without more; as, if B. himself could insist, that A. ought to pay in the first instance; as in the ordinary case of drawer and acceptor, or principal and surety; to the intent, that all the obligations arising out of these complicated relations, may be satisfied: but, if I have a demand against both, the creditors of B. have no right to compel me to seek payment from A.; if not founded on some equity, giving B. the right for his own sake to compel me to seek payment from A. If therefore I had before me a case, in which it was clear, that the creditors of the five could go against the estate of Devaynes and the four, yet, if it was not also clear, that the latter could have turned those creditors against the other fund, it does not advance the claim, that without such
an arrangement they will get less. Unless they can establish, that it is just and equitable, that Devaynes’s estate should pay in the first instance, they have no equity to compel a man to go against that estate, who has resort to both funds.
Orde J., at p. 370, concluded from the above-quoted passage that:
It is clear from the qualification contained in the concluding sentence of the foregoing quotation from Lord Eldon’s judgment that the sweeping statement which he made earlier, “where both are creditors of the same person,” could not be intended to mean that in every case the debtor must in fact be personally liable to both creditors, but rather that, in working out the equities among those entitled, there must be but one person ultimately liable for the two debts, that is there must be one debtor and two creditors.
Orde J. then cited the leading decision on marshalling by Lord Eldon in Aldrich v. Cooper, supra, and concluded, at p. 371, that “[i]t would be inequitable to permit the securities to be marshalled if in the result one who was not under any obligation to pay both debts should suffer”.
In the present appeal, Mrs. and Mr. Allison held a joint debt in the form of two mortgages on their respective parcels of land that were cross-guaranteed much like the mortgage to Canada Permanent the McAsey brothers held in Ernst. Unlike in Ernst, however, where Jeremiah McAsey was assigned the debt of Frank McAsey to Ernst Bros. Co. because Jeremiah bought Frank’s lot, in the present appeal, Mrs. Allison never was assigned or otherwise obligated towards the debt owed by Mr. Allison to the appellant. Mrs. and Mr. Allison were common debtors to Tomas (as Ground J. found), but they were not common debtors with respect to the debt owed by Mr. Allison to the appellant. Mrs. Allison was not under any obligation to pay both debts, and therefore should not suffer, especially at the hands of an equitable doctrine. Unless the appellant can establish that it is just and equitable that Mrs. Allison should pay in the first instance, it has no equity to compel a person such as Tomas, who has resort to both funds, to go against Mrs. Allison’s parcel of land.
Counsel for the appellant referred the court to a number of decisions at the trial level where, as in Ernst, the court did find that in special circumstances, equity would prevail to apply the doctrine of marshalling where there was not but a single debtor. These cases are distinguishable from the present appeal for the same reasons Ernst was distinguished above. The trial decisions rely upon an exception to the general rule that there must be a single debtor for marshalling to apply that was applied in Ernst and is explained in Halsbury’s Laws of England, vol. 16, 4th ed. (1980), at p. 786, para. 877:
Generally, three conditions must be satisfied in order that the doctrine of marshalling may be applied as regards claims by creditors:
(1) The claim must be against a single debtor; if one creditor has a claim against C and D, and another creditor has a claim against D only, the latter creditor may not require the former to resort to C unless the liability is such that D could throw the primary liability on C, for example where C and D are principal and surety . . . Thus in Brown v. Canadian Imperial Bank of Commerce (1985), 50 O.R. (2d) 420, 37 R.P.R. 128 (H.C.J.), Southey J. found that marshalling did apply to a situation where there was no single common debtor but there were two debtors that were in effect common since they were in a surety-principal relationship, i.e., the debtor facing the claims of two creditors was in effect a creditor of the second debtor. Again in G. Ruso Construction Ltd. v. Laviola, a decision of Haines J. of the Supreme Court of Ontario, released May 6, 1976, and reported at (1979), 27 Chitty’s L.J. 136, the fact situation is very similar to the present appeal: a joint mortgage was held on two parcels of land owned by different people and there was a subsequent charge by an inferior creditor to one of the parcels. Haines J., in considering much of the case-law discussed here, concluded, at p. 139, that for marshalling to apply there must be a relationship or equities between the two debtors such that one debtor is entitled to require the other to be primarily liable to either of the creditors.
As indicated above, in this case Ground J. found that there was but one debtor in the circumstances of the cross- guarantees. But this merely made the two Allisons liable for the same debt to Tomas. There is nothing in the two guarantees that permits Mr. Allison to claim over against Mrs. Allison with respect to debts he incurred on the Meaford Project. In fact, he cannot claim over against Mrs. Allison on the Tomas mortgage because both are principals of the same debt as well as being guarantors.
With respect, I am unable to agree with the trial judge on his preliminary finding. In my opinion, he should have found that the doctrine of marshalling had no application to the facts of this case because the appellant’s claim was against a single creditor, namely, Mr. Allison. As noted, he did find that the doctrine did not apply because the appellant was not a secured creditor. In view of my finding on the primary point, I do not propose to deal with this issue.
For the reasons outlined above, I would dismiss the appeal with costs.