2008 BCSC 201 CareVest Capital Inc. v. Chychrun

Before: The Honourable Mr. Justice Pitfield

Reasons for Judgment

Counsel for the Plaintiff:	B.W. Dixon A.S. Cofman
Counsel for the Defendants: Laura Kennelly-Mohr, Brent Kennelly-Mohr, Renee Cook, Janet Cook, Stephen Bulat, Jaime Dy, Bernardita Dy, Sunita Chand, Gangadharan Narayanan, Uma M. Seetharaman, Melanie Betz, Peter Betz, and Tracy Clayton	J.S. Mackoff S. Coblin
Date and Place of Hearing:	January 24, 25, 2008
	Vancouver, B.C.

[1] CareVest Capital Inc. ("CareVest"), applies pursuant to Rule 19(24)(a) to strike the claim of negligence set forth in a counterclaim filed by the defendants, Laura Kennelly-Mohr, Brent Kennelly-Mohr, Renee Cook, Janet Cook, Stephen Bulat, Jaime Dy, Bernardita Dy, Sunita Chand, Gangadharan Narayanan, Uma M. Seetharaman, Melanie Betz, Peter Betz, and Tracy Clayton. The counterclaim has been filed in the foreclosure action commenced by CareVest against the respondents on this application and the other named defendants, each of whom was party to a pre-build purchase contract in a residential townhouse development known as “Riverbend” located in Coquitlam, British Columbia.

[2] CareVest claims that the counterclaim does not disclose facts that establish sufficient proximity between the parties to impose a prima facie duty of care on CareVest. In the alternative, CareVest claims that policy considerations negate any prima facie duty of care that might be said to arise. As a consequence, CareVest claims no reasonable claim in negligence has been pleaded.

[3] The paragraphs which Carevest applies to strike are reproduced as Appendix "A".

[4] The general background to the financial difficulties associated with the Riverbend project which resulted in the foreclosure action is described in reasons for judgment pertaining to the application to appoint a receiver-manager: see CareVest Capital Inc. v. CB Development 2000 Ltd., 2007 BCSC 1146, [2007] B.C.J. No. 1698 (QL).

[5] In the foreclosure action, CareVest relies upon registered mortgage security to claim priority over any claim the defendants might have against the property. The defendants claim they have equitable unregistered charges which should be afforded priority to the CareVest claims. Regardless of the outcome in the foreclosure proceeding, the defendants allege they have suffered damages flowing from the involvement of CareVest in the project and its relationship with the developer.

[6] The defendants’ principal claim in the foreclosure action appears to be that while they entered into pre-build purchase contracts at a time when CareVest had agreed to provide a partial discharge of mortgage upon payment by a purchaser of the pre-build purchase contract price, CareVest caused the developer to repudiate the purchase contracts in March 2007, and to sell the units at current market value as a condition to further financing for the project and the grant of a partial discharge upon the closing of the sale of any unit. Some of the contract holders declined to purchase at current market value. Others, who are the defendants and some of whom are plaintiffs by counterclaim and the respondents on this application, entered into new agreements requiring the payment of the increased price. Those defendants seek recovery of the spread between the price they eventually paid and the pre-build purchase price.

[7] The substance of the counterclaim in negligence is that CareVest owed the respondents a duty of care to ensure that the prices at which the developer agreed, before or in the course of construction, to sell a unit was sufficient to provide funds that would ensure completion of construction and receipt of clear title on closing. They say CareVest failed to take reasonable steps to determine the prices that would be required for that purpose, or to take reasonable steps to monitor, review and revise prices from time to time as changes in the market reasonably required. Alternatively, the respondents allege that CareVest had a duty to warn them that the sale prices which CareVest had stipulated, or to which it had agreed, would be insufficient to complete construction in order to convey clear title upon closing.

[8] The duty is said to arise from the following term of the loan agreement between the developer and CareVest, as second mortgagee:

Partial discharges of the loan security will be available upon receipt of 100% of the net sale proceeds from each lot sale, subject to the Minimum Gross Sale Price Schedule attached as Schedule “B” and the required repayment of the First mortgagee, together with a discharge fee of $200 per legal title. Net sale proceeds are herein defined as the gross sale proceeds less GST, sales commissions, and reasonable legal costs.

[9] The test to be applied on an application of this kind is whether, assuming the pleaded facts to be true, there is a question fit to be tried, regardless of the complexity, or novelty of that question: Kripps v. Touche Ross & Co. (1992), 69 B.C.L.R. (2d) 62 (C.A.) at para. 10. The test does not mean that complicated questions of law are necessarily unsuited to resolution on a Rule 19(24) application: Kripps, at para. 8, and Cooper v. Hobart (2001), 206 D.L.R. 4^th 193 (S.C.C.). The court is obliged to consider whether the facts pleaded disclose a cause of action. In this instance that entails consideration of the question whether, in the circumstances, a mortgagee who has lent funds to a developer owes a duty of care to those who enter into purchase contracts with the developer. The question of whether such a duty exists appears not to have been judicially considered.

[10] Both CareVest and the respondents rely upon the principles enunciated in Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.), principles that have been affirmed by the Supreme Court of Canada: see Cooper, supra, at para. 24.

[11] CareVest says that if harm resulting from the requirement that sales be made at not less than minimum prices was reasonably foreseeable, there must be a sufficient degree of proximity between the parties if a prima facie duty of care is to be found to exist, and the necessary degree of proximity is lacking. CareVest also says that there are broad policy reasons to refrain from concluding that it owed a duty of care to the respondents.

[12] The respondents say that because they are equitable charge holders, they fall within a relationship in which a duty of care has been recognized, namely the duty of a prior charge holder to deal with charged property reasonably so as not to inappropriately harm or cause damage to other charge holders or the owners of the equity of redemption. They say that recognition of the duty of care alleged in this case is part of, or a reasonable extension of, that duty.

[13] In Cooper, supra at para. 30, the Supreme Court of Canada described a two-stage process by which to determine whether a duty of care would arise. At the first stage, the court must address two questions: whether the harm that arose from the defendant’s act was reasonably foreseeable, and if so, whether there are policy reasons, notwithstanding the proximity resulting from foreseeability, why tort liability should not be recognized. At the second stage, the court must consider whether there are residual policy reasons outside the relationship of the parties that may negative the imposition of a duty of care.

[14] In its submission, CareVest appeared to acknowledge that the harm sustained by the respondents was reasonably foreseeable. In my opinion, that was a generous and unnecessary concession. The clause of the loan commitment upon which the respondents rely did not compel the developer to sell at a specified price dictated, or agreed to, by CareVest. It did no more than say that a partial discharge would not be provided unless a property was sold for not less than a minimum price. The developer was not obliged to sell at the specified minimum, but it could not sell for less. It was up to the developer to determine the price at which the units could be sold. Obtaining the maximum price that the market could provide over and above the minimum was the developer's responsibility and in its economic interest. Harm suffered by the respondents did not arise because of CareVest’s insistence upon the inclusion of the minimum sale price term, but because of the developer’s omission or failure to sell at increased prices in a market which the respondents say was characterized by increasing values and costs. It was the borrower who had the option to sell at the time and price it considered most propitious. That being the case, I cannot conclude that it was reasonably foreseeable that CareVest’s insistence upon the achievement of a minimum price would cause harm to the purchasers.

[15] Should I be in error in that regard, I would nonetheless conclude that there was insufficient proximity in the relationship between CareVest and the respondents to ground a duty of care. In Cooper, supra, at paras. 33 and 34, the court said the following:

[33] As this Court stated in Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, 146 D.L.R. (4th) 577, at para. 24, per La Forest J.:

The label "proximity", as it was used by Lord Wilberforce in Anns, supra, was clearly intended to connote that the circumstances of the relationship inhering between the plaintiff and the defendant are of such a nature that the defendant may be said to be under an obligation to be mindful of the plaintiff's legitimate interests in conducting his or her affairs. [Emphasis added.]

[34] Defining the relationship may involve looking at expectations, representations, reliance, and the property or other interests involved. Essentially, these are factors that allow us to evaluate the closeness of the relationship between the plaintiff and the defendant and to determine whether it is just and fair having regard to that relationship to impose a duty of care in law upon the defendant.

[16] Proximity has been recognized as sufficient to warrant a duty of care in a number of categories of relationships. With respect, the relationship between a mortgagee and others with interests, real or apprehended, in land has only warranted the imposition of an obligation that may amount to a duty of care when the mortgagee, or anyone acting on its behalf, proceeds to realize upon the mortgaged property. In such a case, the mortgagee is obliged to exercise reasonable care in an effort to ensure that the interest of a prior charge holder or the mortgagor is not harmed by an improvident sale at less than market value: see Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd., [1971] 1 Ch. 949 (C.A.). That obligation is not the substance of the respondents’ complaint in this case. The question is, therefore, whether the scope of the category should be expanded, or a new category created, in order to embrace the respondents’ complaint. In my opinion, it should not.

[17] CareVest and the developer are lender and borrower, respectively. In the ordinary course, no duty of care arises in the context a debtor-creditor relationship: see Baldwin v. Daubney (2006), 275 D.L.R. (4th) 762 (Ont. C.A.) The lender is entitled to take whatever precautions it considers necessary to secure its loan and ensure that the funds it lends will be repaid. A stipulation that the borrower shall not sell property that secures the loan at less than a minimum price exists for the benefit and protection of the lender. It is not a covenant demanded by, nor intended to benefit, anyone else. The lender assumes the risk that the minimums will not yield sufficient funds to repay the full amount of the debt.

[18] CareVest has no contractual relationship with any of the respondents. The respondents do not plead that the developer asked CareVest to take any steps to protect the interests of purchasers. While the respondents plead reliance upon the mortgagee’s arrangement with the developer regarding minimum selling prices, the nature of the reliance is not readily apparent. There is no allegation of misrepresentation to any respondent. There is no pleading that any respondent relied upon any appraisal that had been prepared by CareVest or for its account. The fact that the respondents would place any reliance on the mortgagee’s stipulation regarding minimum selling price was itself unreasonable.

[19] In my opinion it is ironic that the respondents claim that the mortgagee had a duty to ensure that the minimum price it demanded would always be equal to market value and sufficient to ensure completion of the project and the discharge of all development and construction costs. The logical result of that claim, given the respondents’ pleadings regarding market forces, is that the minimum should have been increased and, so too, the price charged to the respondents. The increased price the respondents suggest they should have been required to pay is the very amount of damages they seek to recover as a consequence of the alleged negligence.

[20] There is a policy reason why any proximity between the mortgagee and the respondents should be regarded as too remote to create a duty of care. In the face of such a duty, a lender would be obliged to monitor and assess market factors and construction budgets and progress in order to protect purchasers in addition to protecting its own interests as a creditor wanting to ensure repayment of any loan it was prepared to make. In my opinion, the imposition of such a duty would adversely affect the orderly operation of lending and credit markets.

[21] For similar reasons, I conclude that CareVest had no duty to warn the respondents of any risks associated with the project. The communication of risk was the responsibility of the developer, and the assessment of the risk was the responsibility of the purchasers.

[22] In the result, the plaintiff’s application to strike paragraphs 25 through 33 of the counterclaim and paragraph (g) of the prayer for relief claiming damages for negligence is granted.

[23] The plaintiff is entitled to costs in the cause.

"The Honourable Mr. Justice Pitfield"

APPENDIX "A"

Paragraphs 25-33 of the Respondents' Counterclaim

25. At all material times the Plaintiff knew, or ought to have known, that the Riverbend Development was being built within a market of significantly rising land values and construction costs.

26. Pursuant to the collective terms of the Commitment Letters, and in the ordinary course of the lender/borrower relationship, the Plaintiff set the minimum pre-sale purchase prices for each strata lot. In the course of setting these prices the Plaintiff reviewed the entire project to ensure that the prices set would provide sufficient funds to complete construction and discharge all obligations to the Plaintiff.

27. The Plaintiff knew, or ought to have known, that the Developer intended to sell each strata lot at or near the prices set and the Plaintiff determined that such prices would be sufficient to allow the Developer to discharge the mortgage and transfer clear title to each strata lot to the Pre-sale Purchasers upon closing.

28. The Plaintiff knew, or ought to have known, that upon entering into an Agreement of Purchase and Sale with the Developer, each Pre-sale Purchaser would acquire a Purchaser’s Equity in the land.

29. The Plaintiff knew, or ought to have known, that each Pre-sale Purchaser, in purchasing at these prices, would rely upon that price as being sufficient to complete the development with sufficient proceeds to clear title upon closing.

30. As such, the Plaintiff had a duty of care to the Defendants, each of whom had acquired Purchasers’ Equities in the lands against which the Lender’s mortgage is registered.

31. The breaches hereafter referred to all occurred prior to the Defendants entering into Agreements of Purchase and Sale, and acquiring their Purchasers’ Equities. In breach of its duty of care, the Plaintiff:

(a) Knew, or ought to have known, that the prices it set were insufficient to complete construction of the strata lots and to clear title on closing;

(b) Failed to take reasonable steps to determine what prices were required in order to complete the construction and provide sufficient funds to clear title upon closing; and

(c) Failed to take reasonable steps to monitor, review and revise the prices from time to time as the exigencies of the market reasonably required.

32. Further, or in the alternative, the Plaintiff failed to warn or caution the Defendants at the first reasonable opportunity, that the prices which it set, and at which the Pre-sale Purchasers had purchased, would be insufficient to complete construction and to convey clear title upon closing.

33. As a result of the negligence of the Plaintiff, the Defendants have suffered damages, loss, and expense, including (but not limited to):

(a) Delay in the purchase of real estate within the rising real estate market, or loss of an opportunity in relation thereto;

(b) Delay in the purchase of a fully constructed residence within a market of rising construction costs, or loss of an opportunity in relation thereto.

Citation:	*CareVest Capital Inc. v. Chychrun,*
	2008 BCSC 201