32 Priority Of Secured Lender

CASE LAW

The first respondent granted a mortgage in favour of the petitioner to secure a loan. The mortgage was registered in the land title office. The second respondent filed a claim of builders lien against the title subsequent to the registration of the mortgage. After filing the mortgage, the petitioner obtained a post index search which revealed the registration of the claim of builders lien and, with the knowledge of the registration of the lien, made the first advance under the mortgage. The petitioner sought a declaration that the money advanced under the mortgage had priority over the claim of lien under ss. 32(1) and (2) of the Builders Lien Act because the initial advance of funds under the mortgage did not result in an “increase” in the liability of the mortgagor. In dismissing the petitioner’s claim, the court found that advances made after the registration of a claim of builders lien rank in priority after the lien, whether the advance is a first advance or a subsequent advance. In this case, the petitioner’s initial advance under the mortgage was an advance that resulted in an increase in the direct or contingent liability of the mortgagor under s. 32(2) and therefore it ranks in priority after the claim of lien (Fraser Valley Edelweiss Credit Union v. Van Weston, 2003 BCSC 511).

The appellant, a lien holder, appealed a decision of the trial court giving priority to an advance made to a receiver after the owner defaulted on its original mortgage obligations. The appellant’s lien was filed before the default. The receiver obtained court approval to borrow funds from the respondent bank after the default and for the purpose of completing the construction work. The Court of Appeal held that the combined effect of ss. 32(1) and (2) is to protect a secured lender’s priority regarding a debt incurred by a borrower pursuant to a registered mortgage before a lien is filed. Subsections (5) and (6) create an exception to this general scheme whereby advances made after a lien has been filed may obtain priority by means of a court order. The court held that it would be inconsistent with the plain meaning of the words and unnecessary to fulfill the remedial purposes of the Act to interpret the words “further advances” as applying to a new loan secured by an entirely new charge. Allowing the appeal in this case, the court held that the funds borrowed by the receiver had no link to the original mortgage and that its loan did not have priority over previously filed liens (Bank of Montreal v. Peri Formwork Systems Inc., 2012 BCCA 4). In subsequent proceedings, the respondent petitioned the Court of Appeal to settle the terms of its earlier order. Prior to the date of the court’s order, the receiver sold a number of strata lots in the owner’s development and paid the proceeds of those sales to the respondent and others, giving the receiver’s borrowing charge priority over the lien claims. In the subsequent application, the court held that, in overturning the decision of the trial court, the court had merely “restored” the priority of the lien claim over the receiver’s borrowing charge. The date of its order did not have the effect of rearranging the priorities established by the dates of the registration of charges against the owner’s property. The effect of the court’s order was to set aside the erroneous order of the trial court and effectively declare the priorities that had always existed. As such, the lien claim ranked in priority to the receiver’s borrowing charge and payments the receiver made to the respondent and others (Bank of Montreal v. Peri Formwork Systems Inc., 2012 BCCA 252, leave to appeal refused 2013 CanLII 2397 (SCC)).

The petitioner held two mortgages against lands subject to foreclosure proceedings. Claims of lien were registered against title to the lands behind the mortgages and after all principal amounts under the mortgages had been advanced. The property owners were attempting to develop and market leasehold interests in storage sheds accompanied by licences for the use of campground sites on Shuswap Lake. The owners defaulted on their mortgage obligations and applied for protection under the federal Companies’ Creditors Arrangement Act (the “CCAA”). In earlier proceedings, the court cancelled the claims of lien and ordered that security for the liens be held in trust. The petitioner advanced funds for the security as part of its ongoing Debtor in Possession financing. The refinancing and reorganization ultimately failed and the lands were sold. At issue in these foreclosure proceedings were the priorities of the petitioner, both with respect to the mortgages and the security fund, and the priorities of the lien claimants. The court held that the security order in the CCAA proceedings did not have the effect of making the security fund available solely for the benefit of the lien claimants in priority to the interests of the petitioner. By virtue of the express provisions in the security order, the full amount of the security fund ranked in priority to all other secured interests including liens, mortgages, and charges. Funds remaining after repayment of the security amount were then available first to the petitioner, as mortgagee, and then to the lien claimants. As the sale proceeds were insufficient to cover the amounts owing under the mortgages, the lien claimants’ interests in the security fund were extinguished (Mission Creek Mortgage Ltd. v. New Recreations Ltd., 2012 BCSC 1931, affirmed (sub nom. Mission Creek Mortgage Ltd. v. 0631783 British Columbia Ltd.), 2014 BCCA 112).