Under the Law of Property Act,1 a mortgagee
is limited to recovery of the property unless the mortgage is high
ratio, insured by CMHC, or granted by a corporation. If one of
these latter circumstances exist, then the mortgagee is entitled to
both recovery of the property and a judgment against the mortgagor
for the deficiency in the event that the amount owed under the
mortgage exceeds the value of the property. The mortgagee can then
take steps to collect on the deficiency judgment in order to make
Unfortunately for mortgagees, the deficiency judgment is an
unsecured debt, and if the mortgagor makes an assignment into
bankruptcy, the mortgagee ends up lumped in with all of the other
unsecured creditors ranking at the bottom of the distribution list
of the bankrupt mortgagor's estate. If bankruptcy occurs,
should the mortgagee give up? Is bankruptcy the end of the
mortgagee's rights to collect? As with most things, timing (in
this case, the timing of the bankruptcy) is everything.
In CIBC Mortgage Corp. v.
Stenerson,2 the Donalds granted a mortgage
to CIBC which was insured by CMHC. Subsequently, the Donalds
transferred the property to the Stenersons and by operation of the
Land Titles Act, the Stenersons became liable for payment
of the mortgage. In March 1996, Cherie Stenerson assigned herself
into bankruptcy. For seven months after the assignment, she
continued to make the mortgage payments. In November 1996, the
mortgage went into default, and in December 1996, Ms. Stenerson was
discharged from bankruptcy. Foreclosure proceedings were started by
CIBC in February 1997. Because the amount owed under the mortgage
exceeded the value of the property, CIBC was granted a deficiency
judgment against Mr. Stenerson. The issue before the Court was
whether CIBC was also entitled to a deficiency judgment against Ms.
Stenerson given her bankruptcy.
The Court held that yes, CIBC was entitled to its deficiency
judgment because Ms. Stenerson had affirmed the contractual
relationship with CIBC by making the required mortgage payments
during the bankruptcy.
The mortgagee's right to a deficiency judgment is therefore
dependent upon the timing of the date of bankruptcy and the date
that payments are made. If the default under the mortgage occurs
before the date of bankruptcy and no further payments are made
under the mortgage, then the mortgagee will be limited to recovery
of the property and a declaration of the deficiency. The mortgagee
will then be able to register a proof of claim in the bankruptcy
for the amount of the deficiency, but will rank alongside the other
unsecured creditors. However, if even one payment is made under the
mortgage after the date of bankruptcy, the mortgage is affirmed and
the mortgagee will be entitled to claim for both the property and
any deficiency judgment against the bankrupt mortgagor. Bankruptcy
is not always the end to the rights of creditors!
1 R.S.A. 2000, c. L-7
2 1998 CarswellAlta 388 (Alta. Q.B.)
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