Legal Blog

Error

Mortgages securing a line of credit are now mainstream. Like all lending products, they have their own inherent problems. One of these problems is illustrated in National Trust v. Newmaster [2003] O.J. No. 3830 (SCJ).

Omission

The Bank loaned money secured by a mortgage. The mortgage security had two components: the traditional first mortgage component and a line of credit.

The debtor decided to sell her mortgaged property and purchase another property. She retained a lawyer to act on her behalf. The lawyer wrote to the Bank and requested a mortgage discharge statement. The Bank sent the statement; the transactions were completed; the lawyer undertook to the purchaser of the debtor’s property to discharge the mortgage; and the lawyer paid the Bank the amount that the Bank requested in its discharge statement.

Unfortunately, the Bank erred when it completed the statement. It included the fixed mortgage component of $24,460, but omitted the floating mortgage component of $9,140.

Discharge 

The Bank thought long and hard about whether it was going to supply a discharge of its mortgage to the lawyer, but ultimately decided to do so. The judge believed that this was the appropriate thing to do, because, as he stated, the solicitor was the agent of the Bank when he gave his undertaking to the purchaser to discharge the mortgage.

With the greatest of respect to the judge, and acknowledging that this was merely a peripheral remark that was irrelevant to his decision, the remark, we suggest, is wrong. The Bank never retained the lawyer to act as its agent. It was simply replying to a request for information. The lawyer did not act as the Bank’s agent when he gave his undertaking to ensure that the mortgage would be discharged. Rather, he relied on the Bank’s discharge statement to make that assurance.

The correct question to ask is whether the Bank represented to the lawyer that it would discharge the mortgage upon payment to the Bank of the discharge amount quoted in the statement and whether the lawyer reasonably relied on that representation to his detriment.

In this case, the facts were such that this question would have been answered in favour of the lawyer. The Bank was therefore bound to do what it said it would do.  

I’m Hurt

The debtor, having closed the transactions without having to pay the remaining debt to the Bank, then refused to repay that debt. The Bank sued and the debtor defended. She claimed that the Bank erred; she relied on that error to her detriment; and it would be unfair to require her to repay the Bank. In essence, she argued that she unwittingly suffered prejudice because of the bank’s error.

There was no doubt that the debtor received a windfall. Did she receive it innocently? Because this was a decision arising on the Bank’s motion for a summary judgement, the judge noted that the Bank had to accept the debtor’s contention that she did not know that mortgage statement was incorrect.

Was there prejudice? To show prejudice, the debtor had to demonstrate that she spent the money in some irretrievable way on expenses that she would not have incurred but for the windfall. She claimed that she had put the windfall into the equity of the new home and this was the irretrievable expense.

The judge assumed, because there was no evidence, that the Bank provided the mortgage statement after the agreements of purchase and sale were executed. Accordingly, the windfall did not change the debtor’s position at all. One way or another, she had to pony up sufficient funds to close her purchase. As it happened, the bank’s error just made the completion of the purchase easier.

The judge noted that “prejudice” does not mean having to repay the debt; it means some sort of additional hardship to the debtor. There was no additional hardship; her net wealth was the same regardless of the error. Indeed, it was $9,140 higher because of the error.

The judge awarded judgment in favour of the Bank. In addition, we suspect that the debtor will be ordered to pay the costs of the action, including the summary judgment motion, which will be close to the amount of the debt. A fitting end to a silly defence.

Danger

In this case, the debtor got what she deserved. Nothing! Assume, however, that the debtor really believed that she had repaid the Bank in full and that she suddenly had $9,000 more than she had budgeted. Although it is hard to believe, assume it anyway. Assume further that the debtor then spent $5,000 on a two-week cruise, an amount that she would never have spent had she known that she did not have that $9,000. Under these circumstances, the Bank would be hard pressed to justify payment of the $5,000. It could still justify the $4,000 because the debtor had not frittered away that amount while relying on the mistake.

Other Instances

The real fight is not usually with the debtor; it is with the lawyer.

We have a number of ongoing cases in which it is not obvious that the lawyer reasonably relied on the bank or, indeed, even that the bank erred.

In one case, somebody, we assume the debtor, obtained a screen print of the fixed portion of the loan. Someone else, presumably a bank employee, wrote on the copy the amount necessary to discharge a mortgage based on that screen print, but also noted that there was a floating portion of the loan. The lawyer relied on the “discharge statement”, undertook to discharge the mortgage, and paid the fixed portion only. Does the lawyer have a right to demand the discharge? Did the lawyer reasonably rely on that form of statement, which was totally out of the ordinary? Maybe not. We are certainly not going to cave, as was done in the case set out above. The bank will fight the lawyer and will not give the discharge voluntarily.

In another case, the lawyer requested a discharge statement for a mortgage securing a line of credit. The discharge statement informed the lawyer that the mortgage would not be discharged unless the line was closed. The lawyer paid the amount requested at a different branch convenient to him, but did not notify the branch when he paid the mortgage that the bank was to close the line. The debtor, who had sold the house as part of the transaction, realised that the line had not been closed and, again, fully drew on the line. The bank refused to supply the discharge. Did the lawyer follow the bank’s instructions on the mortgage discharge statement? We argue that he did not. There will be litigation.

Moral

The morals of the stories apply both to financial institutions and lawyers. Financial institutions should not give discharge statements on screen prints; lawyers should not rely on them. Banks should ensure that discharge statements are clear about the floating aspect of a mortgage and what it will take for the lawyer to obtain a discharge. Lawyers must ensure that the financial institutions close lines of credit after payment of the discharge amount.

If there are floating mortgages, be careful.