Sometimes, cases are remarkable because of the law that arises from them. Sometimes, they are remarkable because of their unusual facts. An example of the latter is set out in MCAP Service Corp. v. Toronto-Dominion Bank, a 2006 Superior Court of Justice decision.
A borrower entered into a line of credit agreement with the TD Bank. The line was for $187,500 and the borrower was to give a mortgage on his land for the same amount. TD opened the line and the borrower drew the full $187,500, but the borrower never signed a mortgage and, accordingly, TD never registered a mortgage. That was remarkable.
On June 3, 2003, the borrower repaid the balance owing on the TD line, but did not close the line. On June 18, 2003, the borrower entered into an agreement with MCAP to borrow $290,000, on the security of a first mortgage. MCAP advanced the money, but the borrower never signed the mortgage and, accordingly, MCAP never registered the mortgage. That was remarkable. To have two institutional mortgagees fail to receive their security, however, is not just remarkable, it is extraordinary.
Of course, after the borrower obtained $290,000 from MCAP, he drew on his line from TD for yet another $187,500. The borrower then defaulted under each agreement.
Under common law, an equitable mortgage arises when a borrower agrees to give a mortgage, receives the funds, but fails to give the mortgage (i.e. equity states that a borrower must do what he has promised). Accordingly, each of MCAP and TD had equitable mortgages and, therefore, had valid mortgages against the borrower’s land. The land, however, was not worth $377,500 and the two creditors were left to fight over priority.
Under section 93(4) of the Land Titles Act, an advance under a registered mortgage has priority to a subsequent mortgage unless the prior mortgagee had knowledge of the existence of the subsequent mortgage. Knowledge means actual knowledge, not knowledge that is deemed because of the registration of the subsequent mortgage.
Accordingly, had TD registered its mortgage, it would have had priority over the MCAP mortgage, regardless whether anything was owed under the TD line at the time of the creation of the MCAP mortgage, unless someone had notified TD of the existence of the MCAP mortgage. However, TD’s mortgage was not registered; it was merely an equitable mortgage.
The judge went back into the jurisprudence – way back – to an 1853 English decision. In that decision, the court stated that when determining the relative merits of two equitable interests, one had to consider the nature and conditions of the respective equitable interests; the circumstances and manner of the acquisition of these interests; and the conduct of each party. The court then had to apply broad principles of right and justice. Translation: a court can do whatever seems to be right under the circumstances.
The judge reviewed TD’s conduct. He stated that TD created the situation into which MCAP fell (i.e. TD created a situation in which any lender could create debt without knowledge of the existence of the TD line). Although MCAP’s conduct was not perfect, its failure to register did not create the priority problem between the two mortgagees. Accordingly, the judge granted priority, as between the two equitable mortgages, to MCAP.
We disagree with this decision. Had MCAP actually obtained and registered its mortgage, MCAP would have had priority based on being first to register and TD would rightly have been out of luck. MCAP did not obtain and register a mortgage. That means that MCAP did not search title. Accordingly, what difference would it have made had TD registered its mortgage or not? MCAP was never aware of the TD mortgage because MCAP was negligent. TD did not create any situation that hurt MCAP at all. MCAP did it all by itself.
All things being equal, a court should grant priority according to the dates and times of the creation of the equitable mortgages. Accordingly, we feel that the equities favoured TD. MCAP’s equitable mortgage was created after TD’s equitable mortgage and nothing TD did or did not do caused MCAP to advance funds to MCAP’s prejudice.