Legal Blog

Undue Influence No. 2

We have already discussed undue influence (see newsletter of April 2001) but we now have another Ontario Court of Appeal decision dealing with the topic. The latest discussion on undue influence emanates from the 2002 decision of the Court of Appeal in CIBC Mortgage Corporation v. Rowatt. We rather like explaining Court of Appeal decisions because by the time the decisions are rendered, the facts have been nicely distilled, unlike the situation going into trial.

As Usual 

Husband was a lawyer who was also a high-risk mortgagee during the heady real estate market of the late 1980s. He borrowed from the bank and put out the money in 2^nd – 4^th mortgages.

In May 1988, wife guaranteed husband’s debts at the bank to a maximum of $135,000 and provided a mortgage on the matrimonial home as security. Husband had transferred the matrimonial home to wife some years previous to protect it from husband’s creditors. Wife had independent legal advice for this transaction and knew the purpose of the bank’s funds.

In September 1988, husband explained to wife that the bank wanted to replace the original guarantee and mortgage with a new conventional mortgage for $203,000; husband, of course, was going to use the extra credit in his mortgage lending business. Wife agreed and executed the mortgage. Wife had no independent legal advice for this transaction.

The real estate market tanked and husband went bankrupt in 1990, owing the bank a fistful of money.

Bank’s Actions 

The bank first commenced an action against wife, relying on the original guarantee. This was the guarantee that husband had told wife would be replaced by the new conventional mortgage. Wife defended the action on that basis but ultimately settled the action and paid the bank between $12,000 and $50,000; the record was not clear regarding the exact amount.

In the meantime, wife had been making payments on the conventional mortgage and actually renewed it. Shortly after renewal, wife obtained further legal advice and stopped making payments. The bank then sued on the mortgage. Wife defended, alleging all sorts of nasty behaviour on the part of the bank.

At Trial 

The trial judge held that neither husband nor the bank exercised undue influence. The wife knew about the use of the funds and understood and agreed to the mortgage. The judge also held that the negligence of the bank for allegedly not following its own loan procedures was irrelevant as to whether husband owed the bank money. The trial judge awarded judgment to the bank. Wife appealed.

Undue Influence 

The Court of Appeal discussed the concept of undue influence at length. It agreed with the English House of Lords, the court in England that is, like the Supreme Court of Canada, the highest court of the land. It stated that if there is a situation in which the spouse or co-habitee guarantees a loan, there is a presumption that the transaction was procured by undue influence. Accordingly, in obtaining the guarantee, a lending institution must take reasonable steps to ensure that there is no misrepresentation or undue influence and that the spouse understands the correct nature of the transaction and freely consents to it. Financial institutions normally meet this obligation by way of insisting that the spouse obtain independent legal advice.

However, the Court noted that just because the financial institution does not insist on ILA does not mean that the spouse wins. A presumption is only an evidentiary concept. If evidence is presented at trial, the trial judge then has the job of determining, on the balance of probabilities, whether there is sufficient evidence to rebut the presumption. If the evidence shows that the spouse knew about the transaction and freely consented to it, presumption or no, the spouse loses.

In this case, the trial judge held that the spouse knew about and consented to the mortgage and that there was no undue influence. The Court, on that basis, dismissed that aspect of wife’s appeal.

Unconscionability 

Wife had also argued that the transaction was unconscionable. The trial judge did not comment on this argument. However, the Court of Appeal stated that the trial judge’s findings of fact that wife knew exactly what was happening, made it clear that the trial judge felt that there was no overbearing or unconscionable conduct by the bank that would vitiate the mortgage transaction.

Bank’s Negligence 

Wife argued that bank ought not to have loaned its money when it knew that husband was lending without ensuring adequate equity. We often see this type of defence raised (i.e. the bank did not follow its own procedures and therefore somehow the debtor owes nothing). The trial judge refused to admit some of the bank’s internal documents declaring that they were irrelevant to the issues. The Court agreed that wife’s liability “was not absolved as a result of any negligence in the handling of its own affairs by the bank.”

First Action 

The trial judge had found that husband did not misrepresent to wife when he stated that the conventional mortgage replaced the collateral mortgage and the guarantee. The judge found as a fact that the bank had agreed that this was the deal. For whatever reason, the trial judge did not find this to be important. Perhaps the trial judge felt that wife had waived the defence when she renewed the mortgage or settled the first action.

The Court of Appeal disagreed. As far as the Court was concerned, the bank had breached its agreement that the mortgage replaced the guarantee. The damages for that breach were the monies that wife had paid to settle the first action and the legal fees she incurred to defend herself in that action. Although it allowed the bank to collect on the conventional mortgage, it agreed with wife that she should be given a setoff against the money owed on that mortgage for her damages relating to the first action.

Upshot 

The appeal was partially successful. The bank obtained judgment on the mortgage but wife received a credit for everything she paid in the first action. As a result, the Court ordered that the parties should bear their own legal costs of the appeal.