Legal Blog

Whoops

We keep seeing cases in which a line of credit is repaid, the financial institution neglects to close the line, and the borrower, seeing free candy in the candy shop, helps himself to money available under the line of credit. The latest case is Bank of Nova Scotia v. Jorgensen, a 2008 decision of the Ontario Superior Court of Justice. 

Help Yourself 

The bank gave the borrowers, husband and wife, a $90,000 line of credit, secured by their land, in March 1993. In November 1993, the borrowers obtained a $140,000 mortgage from the bank, part of which was used to repay the line of credit and the remainder of which was used to complete the house they were building on the land. The bank forgot to close the line. In 1995 and 1996, husband drew $90,000 on the line of credit. He used it for a variety of investments in stocks that went bad. However, he continued to service the line of credit.

In 1999, husband made an assignment into bankruptcy. Husband and wife attended at the bank in March 2000. At that time, wife signed an application to cover a $3,000 overdraft; this application referred to the existing $90,000 line of credit.

The bank mailed the line of credit statements to husband’s post office box. Wife never saw them.

A year and a half later, husband and wife sold the land and house, paid the bank’s existing first mortgage, and pocketed a profit of $150,000. The bank commenced an action against both husband and wife on the line of credit.

Findings 

Husband claimed that the bank had approved a new $90,000 line of credit without security. The judge did not buy that. He held that husband knew or ought to have known that he could not obtain an unsecured line of credit from the bank.

The judge found that wife was a stay-at-home mother, who left the financial affairs of the household entirely in the hands of husband. She trusted her husband implicitly. Accordingly, the judge held that wife knew nothing about husband’s use of the line of credit and thought that it had been completely discharged in 1994.

Against Wife 

The judge held that wife had never consented to the second advance of $90,000 on the original line of credit. Although the bank sent statements regarding the line of credit, those statements were useless because the bank sent them addressed only to husband and sent them to a postal station box and not their residence. The fact that wife signed the application for the $3,000 line of credit, which referenced the continued existence of the $90,000 line of credit, was meaningless. The original line of credit debt could not be revived without wife’s consent no matter how many times the second $90,000 appeared on subsequent documents.

Against Husband 

As a basic proposition, bankruptcy wipes out the debts of the bankrupt.

The bank argued that husband should return the money because the money was advanced as a result of a mistake. The judge correctly stated that a bankruptcy still extinguishes a normal debt. The reason for the normal debt is irrelevant.

The bank had agreed to renew its existing first mortgage on the house and husband had agreed to make the payments on the line of credit. Therefore, the bank argued that it had given new consideration for the debt. In effect, it had refrained from moving to sell the house of husband and wife for 18 months after the bankruptcy. The house had increased in value during that time, to the benefit of husband and wife. Further, the loan was life insured and, if either defendant had died, the loan would have been paid in full.

The judge held that there was no new consideration for the $90,000 indebtedness after husband’s bankruptcy. Although the bank had agreed to renew the first mortgage, it was, by inference, done to coerce husband into repaying the line of credit. The judge would not allow this.

Losses

The judge dismissed the bank’s action against both husband and wife. Although we can understand the decision regarding wife, we cannot understand the decision regarding husband. Actually, what we cannot understand was the fact that nowhere in the decision was there any mention of section 178(1)(e) of the Bankruptcy Act. The situation in this case is no different, in essence, from the situation in the Toronto-Dominion Bank v. Cushing case, referred to in our newsletter of August 2008. Husband clearly drew on the line of credit through false pretences and, accordingly, this was not a normal debt; it was a fraudulent debt. We asked the bank’s solicitor why there was no mention of that section in the reasons for decision, but we did not receive an answer.