This was an appeal from a Master’s decision.
The facts were that there were husband and wife borrowers who granted a high ratio mortgage in 2007 to Servus. The parties separated in 2015. The Wife made the payments from April 2015 to January 2017.
In February 2016 the husband filed bankruptcy. Servus filed a proof of claim as a secured creditor only (not for an unsecured judgment). The husband was discharged on Nov. 30, 2016.
The mortgage was in default in January 2017. The Husband moved back into the property in March 2017. Foreclosure proceedings were commenced in May 2017 when the Husband said he would make no further payments and was abandoning the property.
Servus obtained an Order for Sale to Plaintiff and late sought judgment against the husband and wife.
The Master refused judgment against the Husband. She considered two principles being whether a promise to pay is not released by bankruptcy if payments were made during the bankruptcy or after the discharge versus the requirement of a debtor to direct his or her mind to the continuing personal covenant which may require fresh consideration to impose.
The Master held that the right to sue for deficiency would require proof of a mutual consideration to continue the liability and the proof that the debtor direct his mind to the continuation of persona liability in making the payments.
The Justice, on appeal, reviewed various provisions of the Bankruptcy and Insolvency Act. She particularly looked at a number of factors including;
a) Was the mortgage in default at the time of the bankruptcy;
b) If it was, should the lender have enforced the mortgage at the time of that default. Was the default nominal and was it cured during the bankruptcy;
c) Was the personal covenant reaffirmed simply by having the payments made. Did they reaffirm or acknowledge the debt owed? In this regard it doesn’t seem to matter who makes the payments as long as they are made;
d) Even with payments, was there a clear acknowledgement of the debt and continued obligation;
e) Whether the court must balance the goal of bankruptcy to give a borrower a fresh start versus the ability of a creditor to rely upon the payments as an affirmation of the debt without fresh or new consideration.
The Justice held that a lender should not be forced to foreclose just by the mere action of a bankruptcy. Accepting payments should indicate an implicit reaffirmation of the debt and personal liability by that conduct alone.
The Justice stated that fresh consideration or an express reaffirmation post discharge of bankruptcy would fail to adequately balance the rights of the creditors and debtors. She felt that favouring rehabilitation of the borrower over the significant injustice to the creditor was unfair.
She concluded that where a debtor files bankruptcy, maintains possession of the property, and continues to make payments under the contract, the debtor has affirmed the contract, including the covenant to pay.
So what does this mean for you?
If you have an insured mortgage and the borrower is still in possession of the property, and not in default under the mortgage, ensure that your proof of claim filed in the bankruptcy is only for the secured debt and not for any potential deficiency judgment.
You don’t have to foreclose simply because the borrower filed bankruptcy (but of course you can if it a provision of your mortgage that you can do so).
If the property is abandoned or not occupied by the borrower during bankruptcy or post-bankruptcy there may be a different result.
I would believe the same principles will apply to a corporate mortgage.
Please see attached the decision of Madam Justice J.E. Topolniski.
As always, if you have any questions or concerns, please do not hesitate to contact me.