There is an adage in the legal profession: hard cases make bad law (i.e. the sympathy factor seems to have induced judges to make bad decisions on the law simply to achieve a particular result). The problem is that the law set out in these decisions cannot be ignored and influence cases in which the sympathy factor is no longer present. Toronto-Dominion Bank v. Valentine Estate, a 2002 decision of the Ontario Court of Appeal, is one such case.
Husband wants a $75,000 line of credit from the bank. It is to be used to pay husband’s existing $30,000 liability to the bank and add a fresh $45,000 line. The bank wants a mortgage on the matrimonial home of husband and wife. Wife is not keen. She sees a lawyer and gets a matrimonial contract drawn and executed. In this contract, she agrees to co-operate to take out the $75,000 line of credit.
Husband and wife execute the line of credit agreement on July 3, 1990. Wife has ILA. At the same time, husband and wife take out mortgage insurance. The application states that the mortgage insurance terminates as soon as the bank demands payment of the money due under the line of credit agreement. The line of credit agreement states that husband and wife are to make monthly payments of interest only and that the bank can demand payment in full at any time.
In August 1990, husband and wife sign a new line of credit agreement to accord with the bank’s new standard form. It is unchanged, in essence, from the old agreement. Wife has no ILA.
Husband sucks up the money on the line like a sponge sucks up water. By January 1991, husband is in default. He has a meeting with the bank and agrees that he will bring the line into good standing by selling his truck. By March 5, 1991, husband has done nothing and the bank’s manager demands payment of the loan. By May 1991, the bank’s loans officer informs head office to cancel the insurance because of the demand on the loan.
On June 5, 1991, the bank commences power of sale proceedings. In early July, wife deposits $4,635.18 to the credit of the line and the bank reinstates it.
On August 31, 1991, husband dies unexpectedly. The bank’s manager helps wife apply for the insurance proceeds. Inexplicably, he does not know the terms of the insurance application and does not realise that the policy has been cancelled. The insurer, however, does and refuses to pay the claim.
Wife sues the bank. She claims that because of its negligence regarding the insurance, the mortgage should be discharged, and the debt retired.
The trial judge held against the bank in every respect. Given our understanding of the leanings of the trial judge, we are not surprised. She held wife was not personally liable under the line of credit agreement because:
- The bank was in a conflict of interest situation; part of the line was applied to repay a prior debt to the bank.
2. Wife’s lawyer had attempted to put curbs on husband’s use of the line after the agreement was executed. Since the bank did not accede to these curbs, wife was not liable for the credit on which only husband drew.
3. The bank should have had wife obtain ILA for the execution of the August 1990 line of credit agreement.
In addition, she held that both wife and husband’s estate should succeed on the insurance issue because the bank ought to have given them notice of the prospective loss of insurance before it actually demanded payment of the loan.
The Court of Appeal disagreed with the trial judge on each of the issues regarding wife’s liability only. It decided that:
1. Everyone knew that husband’s prior debt was being paid. It was part of the marriage contract. In any case, there was no conflict of interest. The bank was dealing with a joint application.
2. The wife’s lawyer had no right to put curbs on husband’s use of the line of credit after wife had executed the line agreement; it was too late.
3. The August 1990 agreement was almost identical to the July agreement for which wife had ILA. Wife was a teacher and was educated. There was no reason for ILA under the circumstances.
The Court of Appeal was bitterly divided regarding the insurance issues. We say “bitterly” because the minority judge wrote a scathing decision that vehemently opposed the majority view, almost to the point of belittlement.
The majority upheld the trial decision on two grounds.
They noted that the bank had mistakenly debited an extra $6,000 to the line in the early stages, rather than just the payment of monthly interest. Had the bank applied that extra money towards the monthly payments in the latter stages, husband would not have been in breach of his monthly payments in December 1990 or over his line limit in March 1991. Accordingly, the bank had no right to make the demand.
Unfortunately, the majority then went on to its second ground. They decided that the bank had a duty to give notice to the debtors that the insurance was terminated. The bank could have given this notice in the demand letter itself, in May 1991 when the loans officer informed head office, or in July when the bank decided to reinstate the line.
The minority took issue with each ground.
He did the math and concluded that, even without the error, the debtors would have been in breach of the monthly payments by January 1991. There was no reason why the bank had to give the three months notice it gave; it could have called the loan at any time after default, certainly by March. What bothered the judge the most was that wife’s lawyer on appeal neither raised nor argued this position. He stated: “Raised as the approach was by the court on its own motion and without satisfactory notice to counsel for the Bank, this disposition of the appeal gives rise to concerns of lack of procedural fairness in our court.”
The minority noted that in a negligence action, the plaintiff must prove that there was negligence and that damages arose from the negligence. He summarised the issue as follows: Did wife prove that “she and her husband were unaware that this insurance policy covered their joint lives to the extent of their outstanding loans that were not in default and had they known otherwise would they have ensured that their line of credit remained in good standing?” The minority certainly did not feel that wife had proved this. Indeed, he felt that wife had made it quite clear that she was not paying any of her own money towards this line.
The minority also stated “I would have found as a trial judge that if (wife) chose not to read the insurance policy that she asked for herself, she cannot be heard to complain.” Most of the cases we have read would agree.
This is a decision of the Court of Appeal, regardless of how bad it is. As a matter of prudence, all demands should indicate that if there is any life insurance tied to the product for which the demand is made, that insurance is gone and cannot be reinstated without a further application to the insurer.