Citation: First National Financial Corporation v. Fawson, 2008 NSSC 343
Date: 20081118
Docket: S.H. No. 273652
Registry: Halifax
Between:
First National Financial Corporation
Plaintiff
v.
Lynda Fawson
Defendant
__________________________________________________________________
D E C I S I O N
__________________________________________________________________
Judge: The Honourable Justice Gerald R P Moir
Heard: 14 August 2008 at Halifax
Counsel: Mr. Peter Rumscheidt for the plaintiff
Mr. Michael Tweel for the defendant
Moir, J:
[1] Introduction. First National Financial Corporation applies for a deficiency judgment following a sheriff’s sale to the plaintiff in February 2007 and a sale by the plaintiff to an arm’s length purchaser in April 2007. The mortgage debt was about $170,000 at the time of the sheriff’s sale. The plaintiff bid $130,000. The resale price was $133,000. The deficiency sought by First National is $54,718.88 plus judgment interest after September 18, 2007 and costs.
[2] The defendant, Ms. Fawson, says that First National rushed to make the resale, that it acted improperly, and the price is unreasonable. She also says that an expense claimed by First National, a real estate agent’s commission, is also unreasonable.
[3] Facts. Ms. Fawson was a shareholder in River John Oceanfront Resort Ltd., which rented out cottages at Waldegrave near River John in the north of Colchester County. She bought a home near the cottages and took title in her own name although it was used for company purposes.
[4] The purchase was financed by a high ratio, CMHC guaranteed, mortgage to First National for about $171,000. A second mortgage was registered about a year after the purchase.
[5] Owen Lynds and Thelma Lynds occupied the home. They were “managers”, their term, or “caretakers”, Ms. Fawson’s term, of the cottages. The company was required to pay various expenses associated with the mortgaged property.
[6] This suit was started for foreclosure and sale, and the originating notice was served on Ms. Fawson, in November 2006. The mortgage was five or six months in arrears. Ms. Fawson decided that, because her company was experiencing financial difficulties, the mortgaged property would have to be sold.
[7] Michael Dudka, proprietor of Delta GMAC Real Estate, was retained to solicit an offer from the Lyndses. Ms. Fawson and the Lyndses signed an agreement of purchase and sale for $175,750 in early February 2007. However, an order for foreclosure and sale had already been granted, and the sheriff’s auction was scheduled and advertised for February 13, 2007.
[8] A week before the sale, Mr. Tweel, for Ms. Fawson, delivered a copy of the agreement and a lender’s commitment to finance the purchase price, to Mr. Paul Goldberg, counsel for First National. Ms. Tweel requested the sale to be postponed. First National was concerned that subsequent encumbrances were not covered, and it declined the request.
[9] Some time after signing the agreement of purchase and sale, Mr. Lynds became aware of the sheriff’s sale. He attended and bid. A ten percent deposit is required, and that limited his bidding to $130,000. When First National bid that amount, Mr. Lynds stopped bidding.
[10] Mr. Lynds then consulted Ms. Susan McNutt, a real estate agent in the River John area. After inspecting the property and studying comparables, Ms. McNutt advised that it was worth about $135,000. She also said one might list at $150,000. When discovered, Mr. Lynds referred to various problems with the property and he said he did not feel comfortable going higher than the amount advised by Ms. McNutt.
[11] First National also took advice about the value of the property after the sheriff’s sale. It retained Mr. A. Paul Weatherby of Weatherby Appraisals Inc. in Truro. In early March, Mr. Weatherby gave his opinion of market value: $121,000, a drop of some $60,000 from the value against which First National lent two years earlier. In addition to the appraisal, First National hired real estate agent Alan Fleury of Prudential Woods Realty Ltd. in Truro to prepare a comparative market analysis. In his opinion, the property would sell for $120,000 to $128,000.
[12] First National listed the property with Mr. Fleury’s firm. The list price was $134,900. After the listing agreement was signed, First National advised Mr. Fleury about the Lyndses. Communications followed. Very quickly, negotiations led to an agreement of purchase and sale for $133,000.
[13] Evidence for Ms. Fawson. In her affidavit, and through affidavits of Mr. Michael Dudka, Ms. Fawson takes issue with the accuracy of the Weatherby appraisal. Ms. Fawson puts forward her reasons at para. 17 of her affidavit:
(a) I purchased the Property in April 2005 for $175,000 with a CHMC approved loan $171,653.12. This suggests that a reasonable market value at the time would not have been less that the mortgage amount plus 5% or approximately $180,235.00;
(b) The ResMor Mortgage Approval of February 2, 2007 was approved by CHMC at a loan amount of $180,583.12, which indicates that the market value in February 2007 was not less than $189,612 ($180,583.12 plus 5%);
(c) The First Lynds Agreement made in February 2007 had an accepted sale price of $175,750.00;
(d) There is nothing in the Weatherby Appraisal to indicate any significant problems at the Property or other factors that would account for a one month drop in value from the range of $175,750.00 to $189,000.00 to a range of $118,000.00 to $126,000.00 as set out in the Weatherby Appraisal;
(e) Owen Lynds now has listed the Property for sale at a price of $179,500.00 as described in the listing attached hereto as Exhibit “C”;
(f) I was advised by Michael Dudka and do verily believe that in July 2007 First National sold a much smaller cottage type property in the RJ Company cottage rental subdivision known as Lot R5, PID 20435624 to Nicolaas Bruinooge for a price of $131,000.00. It is my understanding based on conversations with Michael Dudka of Delta GMAC that it had obtained in February 2007 and agreement of purchase and sale from Nicolaas Bruinooge for this lot at a purchase price of $127,400.00 and it appears that First National after the subsequent foreclosure of mortgage it held on this lot entered into an agreement with Mr. Bruinooge for a higher sale price.
Ms. Fawson says she is familiar with the Cape Code property and she gives evidence suggesting it is much less valuable than the foreclosed property.
[14] Ms. Fawson points out that the Weatherby appraisal refers to ninety to 150 days for “reasonable exposure time”. She refers to the rapid sale to the Lyndses and the absence of advertising, viewings, or an open house.
[15] Mr. Dudka is a real estate agent and a shareholder in the company. He provides reasons for challenging the sale by First National that are similar to those given by Ms. Fawson, but he adds this about comparables: “Also, some of the comparison properties are located in communities [twenty] or more miles away from the property and is locations not near any services or businesses.”
[16] Principles for calculating deficiency. A deficiency is calculated in one of three circumstances in which the mortgagee has failed to realize enough to cover the amount secured by the mortgage. The mortgaged property may have been purchased at the sheriff’s sale by a person at arm’s length from the mortgagee. The mortgagee may have purchased the property and may not yet have resold it. Or, the mortgagee may have purchased the property and resold it. The calculation usually depends on which of these circumstances appear.
[17] Usually, in the first circumstance the deficiency is calculated by subtracting from the amount to which the mortgagee is entitled, the amount paid by the sheriff to the mortgagee. In the second circumstance, usually fair market value is established by appraisals and that is the amount to be subtracted, but the mortgagee is required to account for the difference when the resale amount is greater than the supposed market value. In the third circumstance, usually the amount released on resale is subtracted.
[18] A judge has a discretion, in each of the three circumstances, to depart from the usual calculation, but the discretion is restricted. In the third circumstance, a resale to an arm’s length purchaser, the mortgagee must obtain a reasonable price or departure from the usual calculation is justified.
[19] The jurisprudence in this province on the requirement for a reasonable resale price is thoroughly explained by Justice Bateman in Royal Bank of Canada v. Marjen Investments Ltd., [1998] N.S.J. 4 (CA) at para. 18 to para. 31. It serves no purpose to quote her entire reasons, but a brief précis highlighting the most important points for deciding this case may be helpful.
[20] Justice Bateman traced the jurisprudence through the changing text of Rule 47.10. The original 1972 text (para. 19) simply recognized the mortgagee’s right to a deficiency judgment, a right recognized in this province since our earliest Rules of two hundred and fifty years ago. In the context of that text, the Appeal Division (para. 20) recognized an equitable jurisdiction to refuse a deficiency judgment that is unjust and inequitable. The text was expanded upon by a 1984 amendment to Rule 47.10.
[21] Later the Court of Appeal made it clear that a deficiency after resale is only granted when the judge is satisfied the resale price was “reasonable” (para. 22). The court at that time stated that the 1984 version of Rule 47.10(2) codified case law. Rule 47.10(2)(b) permitted calculation on a resale price “if the Court is satisfied that the price obtained was reasonable”.
[22] The appeal court in 1996 rejected “the suggestion that the mortgagee must obtain fair market value for the property” (para. 25) and “the proposition that the mortgagee had an obligation ... to vigorously market the property for resale” (para. 26).
[23] Justice Bateman then commented (para. 28) on appraisals. She said their primary value is for the second circumstance. On the third, the circumstance of the present application, she said:
Where the property has been resold, an appraisal report provides the Court with a hypothetical value to which to compare the price actually realized. If there is little difference, the inquiry into the reasonableness of the resale price is simplified. Where, however, there is a significant difference in the two values, the Court will more closely scrutinize the circumstances surrounding the resale.
[24] Rule 47.10 was changed again in 1995 as a result of decisions for a revised mortgage practice made through a collaboration between the bench and the bar, which was led by Justice Nathanson and Justice MacAdam. The new 47.10(1) recognized both the right to a deficient judgment and the equitable discretion to refuse it. The new 47.10(2) reads:
Where a plaintiff or a party related in interest is the purchaser at a sale pursuant to Rule 47.08, and it appears that the price paid was less than the fair market value of the property at the time of sale, the court, in determining the amount of the deficiency, may deem the sale price to have been the fair market value of the property at the time of the sale.
The 1995 Rule 47.10(2) refers to value, and it does not expressly refer to reasonable price.
[25] Marjen was concerned with whether the new Rule 47.10 brought about a change in the principles for granting a deficiency judgment after resale. In a previous case, Justice Hood expressed the view that the new Rule 47.10 altered the discretion, and the chambers judge in Marjen, Justice Nathanson himself, held that the calculation was to be based on value, not a reasonable resale price. Justice Bateman disagreed with these views.
[26] At para. 31, Justice Bateman said:
Where the property has not been resold, the best evidence of value is generally established through appraisals. When the property has been resold, however, and, particularly, when subjected to vigorous marketing efforts as in Offman, supra, the Court should generally not depart from the selling price. Appraisal reports are a best guess, albeit by a person experienced in the real estate field. It is the market that actually determines the value of the property.
She concluded, at para. 51:
As Hallett, J.A. said in England, supra, a mortgagee is under no obligation to attend the Sheriff’s sale, let alone bid on the property. Where there is insufficient bidding on the property to produce a realistic sale price both the mortgagor and mortgagee stand to gain if the mortgagee bids in the property. Inevitably, the mortgagee will attempt to resell the property at an increased price, which, if achieved, will reduce the deficiency. If on resale the property attracts less than the appraised “market value”, provided the mortgagee has made adequate efforts, in the circumstances, to achieve a reasonable price there is no reason to lay the loss at the doorstep of the mortgagee. The resale price is the best representation of the value of the property.
[27] In my opinion, a mortgagee who purchases the mortgaged property at the sheriff’s sale, sells it to an arm’s length purchaser, and demonstrates that the sale price is reasonable is entitled to a deficiency judgment based upon the resale price. Opinions about market value are relevant only to assessing, along with all other evidence, whether the sale was reasonable.
[28] I am grateful to Mr. Tweel for providing me with references to further authorities, which I have studied. Some are more applicable to the first and second circumstances in which a deficiency judgment is granted. The other, Royal Trust Corp. v. Offman, [1994] N.S.J. 30 (CA) is commented upon in Marjen.
[29] Reasonable Resale. In my assessment, First National acted reasonably when it sold the mortgaged property to the Lyndses.
[30] Sometimes, a foreclosing mortgagee is criticized for accepting a ready offer. The price was too low; waiting would have brought a better offer. Sometimes, the mortgagee is criticized for refusing an offer, incurring the expense of waiting for a better offer, and not getting one.
[31] While the mortgagee must demonstrate reasonableness, the court must assess that from the mortgagee’s vantage at the time decisions were made. The decision to accept a ready offer is assessed in light of the expenses of a longer and more vigorous marketing effort. Those expenses include keeping a vacant property to insurable standards, which can be astonishingly expensive. Such a decision must also be assessed in light of the risk that a better offer is not going to be made.
[32] There is a sequel to the facts of this case that shows what might have happened had First National not solicited a ready offer from the Lyndses. The Lyndses put the property up for sale. The asking price was in the range of the mortgage debt. Professionals marketed it. Shortly before Mr. Lynds was discovered in April of 2008, he and his wife had taken their home off the market. No one had made an offer.
[33] First National had a business decision to make. Had it not chosen to solicit a ready offer from the Lyndses, had it chosen to do as Ms. Fawson says would be reasonable, the deficiency could have been much greater.
[34] The assessment of the reasonableness of a price does not split hairs with the business decision made by the mortgagee.
[35] First National acted reasonably because:
· the public auction indicated that likely there was little interest in a sale at levels approaching the mortgage debt, supported though it was by an appraisal required by CMHC.
· the mortgagee took advice from a professional real estate appraiser.
· it also took advice from an experienced realtor.
· it obtained a price better than the appraised value and in line with the advice of the realtor.
· it thereby avoided the expense of maintaining a vacant property over what might have been months or years, and it avoided the risk that further marketing may not produce a better price.
[36] In my opinion, it would have been unreasonable for First National to have listed the property for much more than it did. The lack of interest at public auction beyond $130,000, the advice of the appraiser and the realtor, and the apparent limit to the Lyndses’ interest supported a list price well below the mortgage debt.
[37] Also, it was reasonable to support a quickly negotiated agreement with the Lyndses. Their apparent price had apparently dropped since the last minute agreement of purchase and sale with Ms. Fawson. Judgment had to be exercised about whether to solicit an offer from the Lyndses in their apparent range or to seek new and unknown interests.
[38] Ms. Fawson’s Concerns. Here are my reasons for concluding that the concerns raised by Ms. Fawson, and summarized in paragraphs 17(a) to (f) of her affidavit, do not lead to a finding in her favour:
(a) The focus is on reasonable sale price, not market value. Marjen, and authorities to which it refers, explains the limited value of appraisals and includes a statement about the frequency with which financing appraisals appear to be overstated.
(b) Same comment as with (a).
(c) Since the first Lyndses’ agreement was known to First National, it is relevant to assessing the reasonableness of the price obtained by First National. (Of course, it is also relevant evidence of market value.) However, the fact is that the Lyndses ceased to be willing to pay so much for the house after they took advice from a realtor.
(d) There is nothing to indicate that the expert accepted that the house ever had a value in the range of the mortgage debt. Also, and again, the focus is on reasonable price and not opinions of market value. The significance of the Weatherby appraisal is to show market value, but also to show the reasonableness of the course adopted by First National leading to the sale price.
(e) As discussed before, the Lyndses took the property off the market without getting any offers.
(f) It is difficult for a person who is not an expert, a judge included, to draw inferences about market value from comparables. We rely on experts for that. Also and again, the focus is on reasonableness, not opinions about market value.
[39] I do not agree with Mr. Dudka’s criticism of Mr. Weatherby’s comparables. The identification and assessment of a comparable is within Mr. Weatherby’s expertise. Also, I prefer Mr. Weatherby’s assessment of the state of the property, and its impact on value, to that of Mr. Dudka.
[40] The Commission. For Ms. Fawson, Mr. Tweel submits that the $7,581 real estate commission is not a reasonable expense. I agree.
[41] The Lyndses’ strong interest in the property was known to First National before the sheriff’s sale, their continuing interest was apparent at the sale where Mr. Lynds bid close to $130,000, and Mr. Lynds was in communication with First Nationals’s counsel before and after the sale. The decision to solicit a ready offer is inconsistent with a decision to retain the services of a realtor with a full-blown commission.
[42] The explanation given on behalf of First National is that it understood that retaining a realtor was a CMHC requirement. I cannot see any justification for such a requirement in these circumstances. I do not see where the mortgage instrument provides for this and, even if it did, I would disallow the expense on equitable grounds.
[43] Conclusion. The plaintiff will have judgment against the defendant for $47,137 with interest after August 13, 2007 at five percent. As success is divided, the parties will bear their own costs of the application.
J.