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Shoulda

Posted on February 1, 2011 | Posted in Collections

At times, people must move quickly or an opportunity will be lost. In lawsuits, this axiom is best illustrated when a claimant fails to commence an action on a timely basis so that the ability to do so is proscribed under the Limitations Act, 2002 (the “New Act”). The basic limitation period has been reduced from 6 to 2 years and many types of action that previously had no limitation period now do. These changes have resulted in a significant increase in actions being challenged. One such challenge occurred in Toronto Standard Condominium Corporation No. 73 v. 1 King West Inc., a 2010 decision of the Ontario Divisional Court.

Dispute 

A condominium corporation commenced an action against the developer, contractor, and, seemingly, everybody else associated with the construction of the condominium. 

The developer had mortgaged the unsold condo units by way of 2 mortgages to one mortgagee securing an aggregate principal of $46 million. Years after the condo commenced the action, it brought a motion seeking leave to add the mortgagee as a defendant. The condo alleged that the mortgages were fraudulent, assumedly because the mortgagee did not provide full value for the mortgages.

The developer and the mortgagee resisted the motion. A Master of the Superior Court of Justice decided that the request to amend the statement of claim to add the mortgagee was the equivalent of commencing a proceedings against the mortgagee and occurred too late; the limitation period had already passed. He awarded costs of $78,000 to the developer and the mortgagee. Apparently, the motion involved a significant number of documents; cross-examinations on affidavits; long memoranda of facts, law, and argument; and the time spent to argue the motion orally. The condo appealed.

Timing 

Under the New Act, a claimant has 2 years to commence an action or other proceeding from the time that it discovers or ought to have discovered its claim. A claim is defined as a claim to remedy an injury, loss, or damage that occurs as a result of an act or omission. A claim is discovered when the claimant first knows or reasonably ought to have known that:

a)   the injury has occurred;

b)   the injury was caused by an act or omission;

c)   the act or omission was by the person against whom the claim is made; and

d)   a proceedings would be an appropriate means to seek a remedy.

Discovery   

The discoverability concept is not new. Although the Limitations Act (the “Old Act”) stated that the limitation period would run from the date a cause of action arose and made no mention of the date that a cause of action was discovered, judge-made law stipulated that the claimant either had to know or reasonably ought to have known that there was a cause of action before the period began to run. The common law wanted to prevent a situation in which a claimant lost the right to sue before the claimant even knew that there was a right to sue.

However, the Old Act talked about causes of action and was limited to very specific causes of action; conversely, the New Act refers to claims. Under the Old Act, a claim under the Fraudulent Conveyances Act (the “FCA”) was not caught because, under it, a claimant makes no claim for damages; instead, the claimant requests that the impugned transaction be reversed. Under the New Act, however, a FCA claim is not special and is treated like any other claim, including a claim for payment of a debt or damages. Accordingly, a claimant has only 2 years to commence its action after it discovers or ought to have discovered that someone, who owes money to it, fraudulently conveyed a property to another person.

Facts 

The court then turned its attention to discoverability and the facts of the case. The condo sought on December 5, 2008 to amend its pleadings to join the mortgagee. Accordingly, the issue to be decided was whether the condo had or reasonably could have discovered its claim before December 5, 2006. If it had, it moved too slowly and was out of luck. If it hadn’t, then it could continue its claim against the mortgagee.

On July 28, 2006, the condo’s lawyers wrote to the developer informing it that if any of the unsold units were sold to or mortgaged in favour of a corporation related to any officer, director or shareholder of the developer, then the condo would treat the conveyance as fraudulent. The mortgagee and developer were owned by the same shareholder and were certainly related. The developer granted the impugned mortgages on December 23, 2005 and November 24, 2006 (i.e. one before and one after the warning letter).

The condo claimed that it did not know of the alleged fraudulent intent of the developer until the condo obtained the report of a forensic accountant, who indicated that he had problems determining whether the mortgagee had actually advanced the money that the mortgage secured. However, the condo’s assertion of the time of its discovery of sufficient knowledge was suspect because the expert delivered his report after the condo commenced its attempt to amend the statement of claim. The court held that the condo learned nothing new regarding the fraudulent intent of the developer between the date it sent its July 2006 letter and December 5, 2008.

The condo admitted that it could have learned of the mortgages at any time by a simple search of title. Accordingly, given that it had the means to discover its claim against the mortgagee, had no new knowledge up to December 5, 2008, and, most importantly, was alive to and worried about the developer conveying or mortgaging its interest in the unsold units, the court decided that the condo ought to have discovered the mortgages and ought to have commenced its action against the mortgagee before December 5, 2008. The court therefore refused to allow the condo to add the mortgagee to its action. The condo should have moved earlier to amend its claim and join the mortgagee.

Search 

When we first read this case, we were concerned. Does it mean that creditors now have 2 years from a fraudulent conveyance (including a mortgage) to attack it? If a loan is in good standing, most financial institutions would have no knowledge of the conveyance because there is no reason to search title. We feel that a judge would decide that a financial institution need not search title to discover a possible fraudulent conveyance until, at minimum, the loan becomes non-performing.

We go further. In the TSCC case, the condo obviously suspected foul play and, at that point, ought to have checked for possible mortgages and other conveyances. Conversely, unless there is some reason to assume that a debtor owns land and has conveyed it improperly, a creditor should not be required to search title, either initially or continually, to check for conveyances.

In case we are wrong in our contention, it would be prudent, once a loan becomes non-performing, to search title to the debtor’s lands lest a judge, who believes in spending money unnecessarily, says that you shoulda done it.

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