Supreme Court of Canada
Rushton v. Industrial Development Bank,  S.C.R. 552
Norma Isobel Rushton (Defendant) Appellant;
Industrial Development Bank (Defendant) Respondent;
Mabel Esson (Plaintiff) and Gordon James Wallace, The Royal Bank of Canada and The Toronto-Dominion Bank (Defendants).
1972: November 10; 1973: January 31.
Present: Judson, Hall, Spence, Pigeon and Laskin JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Mortgages—Second mortgage given by two co-mortgagors on separately owned properties—Second mortgagee taking assignment of first mortgage on one property and completing foreclosure of subsequent interests—Part of said property later sold—Foreclosure action against other property—Sale demanded by subsequent encumbrancer—Whether second mortgagee may prove in the foreclosure and sale proceedings.
PR and NR, husband and wife, were the respective owners of two parcels of land. A mortgage given in 1972 by PR and NR to the Industrial Development Bank was a second mortgage on both the husband’s property and the wife’s property. In 1964, the first mortgagee on the husband’s property took foreclosure proceedings. The bank redeemed as ranking first in priority and proceeded to a final order of foreclosure in 1966 of all subsequent interests. In 1969 the bank sold part of the husband’s property comprised in the mortgage.
In 1968, the first mortgagee on the wife’s property began a foreclosure action against the wife’s property. A subsequent mortgagee requested a sale in accordance with the provisions and practice in that respect, and an order was made directing a sale instead of foreclosure. The bank then sought to prove as a creditor in the Master’s Office in these proceedings.
On appeal from the Master, the trial judge held that the bank, by proceeding as it did in respect of the husband’s lands, had lost its claim for the debt and hence could not prove in the foreclosure and sale proceedings in respect of the wife’s lands. This order was reversed by the Court of Appeal and from its judgment the wife appealed to this Court.
Held: (Judson and Pigeon JJ. dissenting): The appeal should be allowed.
Per Hall, Spence and Laskin JJ.: The proper course for the bank to have taken in the foreclosure proceedings in respect of the husband’s property was to have sought a sale in those proceedings rather than to have redeemed and then taken a final order of foreclosure, a step which was followed by sales of some of the property which it had taken as its own. A foreclosure sale, in judicial proceedings, would have resulted in an accounting of the proceeds, leaving the bank free to pursue the co-mortgagors for any balance owing.
By taking the course that it did in respect of the husband’s property and then seeking to prove for the mortgage debt in the foreclosure action in respect of the wife’s property, the bank was in an inconsistent position. It had made its election to forego the debt by disabling itself from restoring all the security given for that debt.
Per Judson and Pigeon JJ., dissenting: By selling part of the husband’s mortgaged property after the final order of foreclosure, the bank could not be said to have elected to accept the amount realized in settlement of its debt on its second mortgage. The bank took no proceedings under its mortgage. It was compelled to take over a prior mortgage to protect its own second mortgage. An extension of the principle in Gordon Grant & Co. v. F.L. Boos,  A.C. 781, with this situation had no authority behind it and some very strong authority against it. The bank could prove for its mortgage debt against the wife’s property, giving credit for what it had received.
[John Abell Engine & Machine Works Co. v. Porter (1909), 12 W.L.R. 470, not followed; Davidson v. Sharpe (1920), 60 S.C.R. 72; Hall v. Heward (1886), 32 Ch. D. 430; Gee v. Liddell,  2 Ch. 62; Re Burrell (1869), L.R. 7 Eq. 399; Gordon Grant & Co. v. Boos, supra; Beatty v. Bailey (1912), 26 O.L.R.
145; Geidlinger v. Kierans et al.,  1 O.R. 217; Isman v. Sinnott (1920), 61 S.C.R. 1, referred to.]
APPEAL from a judgment of the Court of Appeal for Ontario, reversing a judgment of Pennell J. Appeal allowed, Judson and Pigeon JJ. dissenting.
F.H. Wood, for the appellant.
W.D. Chambers and P.J. Evraire, for the respondent.
The judgment of Judson and Pigeon JJ. was delivered by
JUDSON J. (dissenting)—The 1962 mortgage given by Paul Rushton and Norma Rushton to the Industrial Development Bank was a second mortgage on both the husband’s property and the wife’s property. In 1964, the first mortgagee of the husband’s property issued a writ for foreclosure and the bank was compelled to redeem in order to protect its security. The bank took an assignment of this first mortgage and, in accordance with the rules of practice, completed the foreclosure of all subsequent interests. The final order of foreclosure reads:
that the defendants, Paul Rushton and Norma Rushton, Gordon James Wallace, The Toronto-Dominion Bank and The Ontario Workmen’s Compensation Board do stand absolutely debarred and foreclosed of and from all right, title and equity of redemption of any and to the mortgage premises in the Writ of Summons herein.
In 1969 the bank sold part of the husband’s property comprised in the mortgage.
In 1968, the first mortgagee on the wife’s property began a foreclosure action against the wife’s property. A subsequent encumbrancer, as he was entitled to do, demanded a sale. The bank now seeks to prove as a creditor in the Master’s Office in these proceedings.
On appeal from the Master, Pennell J. held that the bank should not be allowed to prove because it disposed of some of the husband’s foreclosed property after the final order of foreclosure, having thereby lost its power to reconvey the husband’s property payment in full of the debt. The Court of Appeal reversed this order and held that on the facts of this case, the principle enunciated in Gordon Grant & Co. v. F.L. Boos did not apply. In my opinion they were correct in so doing.
In this case, by selling part of the husband’s mortgaged property after the final order of foreclosure, the bank cannot be said to have elected to accept the amount realized in settlement of its debt on its second mortgage. The bank took no proceedings under its mortgage. It was compelled to take over a prior mortgage to protect its own second mortgage. An extension of the principle in Grant v. Boos with this situation has no authority behind it and some very strong authority against it.
In Beatty v. Bailey, Beatty held a second mortgage on Bailey’s property. The first mortgage was in default and the mortgaged property was not worth what was owing on the first mortgage. The first mortgagee was in a position to foreclose. In order to facilitate a sale and save expense, Beatty released his interest. It was held that he was entitled to sue upon the covenant in his second mortgage. The ratio of the judgment of Chancellor Boyd is in the following terms:
The release of the land by the second chargee was only to facilitate either the foreclosure or the sale of the property by the first mortgagee—as it appeared then that the land was not of value to satisfy even the first mortgage. Had the land been foreclosed by the
first mortgagee, that change of the property would not have interfered with the right of the second mortgagee (who was not to blame) to sue upon the covenant. No doubt the rule is, that the mortgagee suing on a covenant in the mortgage must ordinarily be in a position to reconvey the land upon payment of what is due. But that does not necessarily apply to the case of a second mortgagee whose rights against the land have been extinguished by the act of the first mortgagee. The law is summarized in Coote thus, that the inability of the mortgagee to reconvey will not bar the right of action on the covenant if such inability arises from any default of the mortgagor: 7th ed., vol. 2, p. 982. The mortgagor’s duty was, here, to pay off the first mortgage, and so prevent the exercise of the power of sale by which the equity of redemption was extinguished. I think the principles of decision acted on In re Burrell, Burrell v. Smith L.R. 7 Eq., 399, 466, apply to this case and go to invalidate the judgment pronounced by the learned County Court Judge.
The judgment of Middleton J. is brief and to the point. It is in the following terms:
I entirely agree with my Lord the Chancellor, and only desire to add a few words out of respect to the learned Judge whose decision we are reversing.
The right of the mortgagor, when sued upon a covenant, to demand a reconveyance of the mortgaged property, discussed in Kinnaird v. Trollope (1888), 39 Ch.D. 636, and the cases there cited, and the equitable right to restrain such action when the mortgagee has put it out of his power to convey, cannot, it seems to me, be invoked where the inability to reconvey arises from the default of the mortgagor himself. Here the non‑payment of the first mortgage made the estate of the mortgagee absolute at law, and made the right of the plaintiff, as second mortgagee, liable to foreclosure in equity.
I do not think that the consent given by the plaintiff to the immediate exercise by the first mortgagee of his right to sell the lands operates to release the covenant. He has at most waived the taking of formal legal proceedings by the first mortgagee, which would
not be to the advantage of any one; and, moreover, in his waiver he has expressly reserved his rights against the mortgagor.
It is clear, to me at least, that the loss of the property was occasioned, not by the action of the plaintiff, but by the rights conferred upon the first mortgagee by his security, and by the default of the defendant himself. This brings the case within the principle enunciated in In re Burrell, Burrell v. Smith, L.R. 7 Eq. 399.
A recent illustration of the application of the principle in Beatty v. Bailey is to be found in Geidlinger et al. v. Kierans et al.
In my opinion this judgment has direct application to the case at bar. The bank became involved in a foreclosure action by the first mortgagee. The choice was to let go its security or pay for an assignment of the first mortgage. The bank had to take the property because of the prior rights of the first mortgagee and the default of the defendant, Paul Rushton, himself. How can it be said in those circumstances that the bank elected to take the property in satisfaction of its debt on its second mortgage when it was compelled to lay out a further $3,951.96 and take an assignment of the first mortgage to prevent its own foreclosure.
If there is any question of the bank’s having elected after foreclosure to take the husband’s property in satisfaction of the debt, the debt satisfied is $3,951.96, the amount of the first mortgage. Its rights under the second mortgage were untouched in these foreclosure proceedings. My authority for that proposition is Isman v. Sinnott, which affirmed, with a variation, the judgment of the Saskatchewan Court of Appeal. In that case the mortgagee held a first and a third mortgage on the same property. That was the position of the bank in the case before us, when it took (under compulsion) an assignment of the first mortgage to protect its second
mortgage. The intervening mortgage in the Isman case does not affect the problem. In the Isman case, the mortgagee instituted foreclosure proceedings in respect of the first mortgage, obtained a final order of foreclosure and subsequently sold the property. The mortgagor then sued for a declaration that both mortgages had been satisfied by the foreclosure sale and that he was entitled to a release of certain collateral security by the mortgagee. The Saskatchewan Court of Appeal was unanimous in rejecting this claim. It accepted the decisions in Re Burrell; John Abell Engine & Machine Works v. Porter, and Beatty v. Bailey, supra. I quote from the reasons of Haultain C.J.S.:
To adapt the language of Boyd, C., in Beatty v. Bailey supra, to the present case, the inability of the defendant qua third mortgage to reconvey does not bar the right of action on the convenant, if such inability arises from any default of the mortgagor Yandt. Yandt’s duty was to pay off the first mortgage and so prevent foreclosure. The right of the defendant as first mortgagee was quite independent of and paramount to his right as third mortgagee, and the result of his exercise of that right, in consequence of Yandt’s default, should not be available to Yandt as a defence to an action for an entirely distinct debt. For these reasons the third mortgage cannot be held to have been paid, and the plaintiff is therefore not entitled to have the Kamsack mortgage removed.
The judgment in this Court was to the same effect. The Court of Appeal had dismissed the action. This Court made a declaration that on payment of the amount due under the third mortgage, the collateral security would be released. It held that the first mortgage had been satisfied in full by the sale made after the foreclosure but that the mortgagee’s inability to reconvey did not prevent his recovering on the third mortgage.
I turn now to the position of the bank under the second mortgage on the wife’s property. This property is now under a foreclosure action and a judicial sale has been asked for. All that the bank is seeking to do at this stage is to prove its claim against Norma Rushton. In this case, the bank holds separate mortgages on the two properties. The fact that they are included in one instrument makes no difference. Each property is charged with the payment of $40,000 principal, plus interest. The covenant to pay is joint and several, as are all the other covenants. There is no apportionment between the two properties as to the extent of the charge in each property.
The bank has taken no proceedings against either husband or wife under its second mortgage. Its mortgage debt is still outstanding. It seeks to prove for this debt against the wife’s property. In my opinion it may do so, giving credit for what it has received. The Court of Appeal sent the reference back to the Master on wide open terms with a direction to proceed on the basis that the bank should be required to account for the proceeds of any realization against the husband’s property and that it was not precluded from completing such realization. I agree with this.
I would dismiss the appeal with costs.
The judgment of Hall, Spence and Laskin JJ. was delivered by
LASKIN J.—Paul Rushton and Norma Rushton are husband and wife who obtained a loan of $40,000 in June 1972, from the Industrial Development Bank and as security joined in one mortgage to the bank (hereinafter referred to as IDB) of their respective lands. The husband owned 18 lots which were subject to a first mortgage in favour of Lymbird Lumber Co. Ltd. and the wife owned a parcel of land which was subject to a first mortgage in favour of Mabel Esson. Their mortgage of their equitable interests to IDB made them jointly and severally liable for the one debt, for which their respec-
tive properties were charged, without apportionment, but subject to the right of IDB in its discretion to release any part or parts of the properties. The mortgagors had no right, however, to demand apportionment of the debt or the release of any part of the properties upon payment of some portion of the debt.
The Lymbird Lumber Co. Ltd. first mortgage, which was for $2,825, went into default and foreclosure proceedings were taken in 1964, resulting in a judgment against Paul Rushton and his wife who had joined to bar dower. In the ensuing proceedings it appeared that Paul Rushton had filed notice of intention to redeem and that, in addition to IDB’s second mortgage, the land was encumbered by two subsequent mortgages. The wife did not enter an appearance in the action nor file a notice of intention to redeem. IDB did, however, redeem as ranking first in priority, and, moreover, proceeded to a final order of foreclosure in 1966 when neither the subsequent encumbrancers nor Paul Rushton redeemed. In 1969, IDB sold 11 of the 18 lots for about $20,000 net (according to an affidavit of IDB’s solicitor), retaining 7 lots in its own right.
Prior to these sales, the Esson mortgage on Norma Rushton’s property fell into default and foreclosure proceedings were taken against her, resulting in a judgment in August, 1968, subject to her right to redeem. The consequential proceedings showed that the property was subject to two mortgages subsequent to IDB’s second mortgage and to the claim of a judgment creditor. One of the subsequent mortgagees requested a sale in accordance with the provisions and practice in that respect, and an order was made directing a sale instead of foreclosure. IDB filed a proof of claim on October 1, 1968, in the amount of $67,641.13, but later affidavits of proof of October 20, 1969, and October 29, 1969, in the mortgage reference reduced the
claim first to $55,655.48 and then to $53,161.97. When these affidavits were filed the 11 lots, above referred to, had already been sold.
Pennell J., before whom this case came on appeal from the Local Master’s report, was of the view that the reduced claim reflected credit for the proceeds from the sale of the 11 lots. However, the Local Master’s report fixed IDB’s claim as totalling $69,721.11, without compelling it to give any credit for the net proceeds of sale of the 11 lots or for the value of the remaining lots, and it also declared that IDB’s realization upon Paul Rushton’s property following the foreclosure did not amount to acceptance of the lands and the proceeds of sale as full satisfaction of the debt incurred by the spouses. This latter declaration is the issue in the appeal to this Court.
Pennell J. took a different view from that of the Local Master and held that IDB, by proceeding as it did in respect of the husband’s lands, had lost its claim for the debt and hence could not prove in the foreclosure and sale proceedings upon the Esson mortgage. The Ontario Court of Appeal reversed, holding that IDB was not precluded from realizing upon its security, especially when it had made no attempt to enforce the covenant for payment in the Rushton mortgage; and it directed a new reference in which the Local Master was to account for the proceeds of realization of any part of the security under that mortgage. There is nothing in the reasons or formal order of the Court of Appeal as to the 7 lots still held by IDB at that time.
It was submitted by counsel for IDB that the only issue in this appeal is whether there was an amount owing to IDB. That, however, is an oversimplified position which neither Pennell J.
nor the Court of Appeal accepted in the bare terms in which it was put. The issue, as I see it, is whether IDB is entitled to treat as two mortgages, in relation to foreclosure alone, without sale, what it had taken as one composite mortgage, under which there was no severance of the debt, or of the respective properties given to answer for the debt. Putting the matter another way, was the attempt of IDB to prove its claim in the Esson foreclosure action equivalent to a suit on the covenant in the Rushton mortgage or to a claim for a deficiency judgment for the balance of the debt secured by that mortgage, or was that a permissible pursuit of the debt against a part of the security?
I test the matter under well-recognized principles of mortgage law, applicable in Ontario, under which there has always been close regard for the rights of the mortgagor. Where a mortgagee forecloses upon mortgaged land, taking title, and then sells the land as its own, it cannot sue for the balance owing on the mortgage unless it is in a position to return the land: see Davidson v. Sharp, at p. 82. The situation would be different if the mortgagee had exercised a power of sale under its mortgage or if it had sought a judicial sale in the foreclosure proceedings, thus obliging itself to give an accounting. Where, however, it proceeds to foreclosure only, a subsequent suit on the covenant for payment of the mortgage debt reopens the foreclosure and entitles the mortgagor to have the foreclosed property available to him as a condition of his liability. If it is not so available, the mortgagee is precluded from turning the matter into an accounting proceeding to enable it to sue for the debt when it cannot return the mortgaged land.
The principle is the same where a mortgage by the mortgagor secures the mortgagee for the one debt with two parcels of land owned by the mortgagor and where the mortgagee forecloses upon one parcel only. Since, apart from contract to that effect (and there is no such contract here), a mortgagee can resist redemption of part of the security unless the whole is redeemed, the mortgagor correlatively is entitled to have all his security available if he is sued for the mortgage debt: see Hall v. Heward. Hence, although the mortgagee may seek to foreclose upon the second parcel after having foreclosed upon the first, he must be in a position to return the first parcel as well as the second in proceeding with the second foreclosure.
No different principle commends itself to me simply because there are two co-mortgagors, each an owner of separate properties, both of which are subject to the one mortgage debt. Where redemption is in issue, a part owner of the equity is entitled and (apart from contract) may be compelled to redeem the whole, leaving the rights as between him and his co-owners to be worked out between them. The same situation, it seems to me, exists where a co‑mortgagor under a single mortgage for an undivided debt seeks to redeem his separately owned property which has been mortgaged along with other property owned by his fellow mortgagor; he is entitled to or may be compelled to redeem all if he would redeem any. The fact that the right of redemption arises in foreclosure proceedings should not make any difference to the obligation of the mortgagee to have the whole security available for redemption by a mortgagor.
The problem in the present case was tangentially considered by Warrington J. in Gee v. Liddell at p. 72 as follows:
Two persons mortgage in one deed their respective estates to secure an advance made to one of them, and the deed gives to each of them power to redeem, and it appears on the face of the deed that as between the two the estate of the person to whom the money is paid is to be primarily liable. Has not the person who joins in mortgaging his own estate by virtue of that deed itself an interest in the estate of the person to whom the money is advanced? In my opinion he has, and I think that the nature of his interest is a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which he has, as between himself and the principal debtor, to have that estate resorted to first for the payment of the debt. If it were not so, the result would be a startling one. The first mortgagee brings an action against his own mortgagor, and against the second mortgagee, whose mortgage includes what I may, though perhaps somewhat inaccurately, describe as a collateral security given by a person to whom the money under the second mortgage was not advanced. It may be that the second mortgagee is content to rely upon the collateral security and does not care to redeem the first mortgage, and it would be an extraordinary thing if the result were in his absence to destroy the right of indemnity which the owner of the collateral security has as against the property of the person to whom the money under the second mortgage was advanced. In my opinion, therefore, on principle a co-mortgagor must be held to have an interest in the property of his co-mortgagor, who by the mortgage deed is to be regarded as, and whose property is to be regarded as, primarily liable. The case, however, is not without authority, and the authority seems to me to be perfectly plain. It is a decision [Stokes v. Clendon] by the Master of the Rolls in the year 1790 and is reported in a note in 3 Swanston at p. 150 as follows: “The case was of a principal mortgagor, and another mortgagor of an estate as a collateral security. His Honor determined, that a bill of foreclosure against the principal only could not be sustained, without making the other mortgagor a party; because the other mortgagor has a right to redeem and be present at the account, to prevent the burthen ultimately falling on his own estate, or at least falling upon it to a larger amount than the first estate might be sufficient to satisfy: Ordered to stand over for want of parties.” So far as I can see, that decision has been treated in all the text-books as an authority expressing the practice of the Court. The only suggestion against it is that there are dicta—there does not appear to be any absolute decision—shewing that a mere surety by
convenant who has paid nothing is not a necessary party to a foreclosure proceeding. I accept that proposition, but in my opinion there is a material distinction between a mere surety by covenant and a person who has joined as co-mortgagor. In my judgment a person who has joined as co-mortgagor in such a deed as this has from the moment when the deed is executed an interest in the estate of the principal mortgagor.
Of some assistance on underlying principle is the following statement in Fisher and Lightwood’s Law of Mortgage, 8th ed. (1969), at p. 333:
If two properties are mortgaged, and the mortgagor afterwards mortgages the equity of redemption of one of them to a second mortgagee, and sells that of the other to a third person, the original mortgagee in foreclosing must bring forward both the second mortgagee and the purchaser; for he cannot foreclose either of the properties alone, each being equally liable to the debt. It is also incumbent on the mortgagee, where the equity of redemption has been sold in lots, to proceed against all the purchasers. The rule is the same where the mortgagee holds securities upon distinct properties,…
If the situation is as is described by Warrington J. in Gee v. Liddell in relation to property mortgaged as collateral security for a principal mortgage of other property, then it is a fortiori in relation to a mortgagor proper who has put his property under a single mortgage with that of a co-mortgagor for a single debt owing by both of them. That mortgagor is entitled to have the benefit of the entire security if called upon to pay the debt so as to be able to adjust accounts as between himself and his co-mortgagor. Thus it is that a mortgagee who forecloses on some of the property held as security cannot seek his money out of the other without being
able and ready to offer all the secured property to a mortgagor from whom the debt is sought.
There has been recognition of the mortgagee’s right to proceed on the covenant despite previous foreclosure where he is unable to return the mortgaged security without fault of his own, as, for example, where it is a leasehold and the leasehold term has expired or where the freehold owner has properly retaken possession: see Re Burrell. Self-induced incapacity to return the mortgaged security, which is the case here, is another matter.
There is, finally, the point whether the mortgagee’s position is any different where it has not itself taken foreclosure proceedings in respect of either the husband’s property or the wife’s property but has come into the respective foreclosure actions as a subsequent encumbrancer with a claim in each action against a different co-mortgagor. The spouses’ joint and several liability for the mortgage debt did not affect the unity of the mortgage as securing one debt. The proper course for IDB to have taken in the Lymbird Lumber Co. Ltd. foreclosure proceedings was to have sought a sale in those proceedings rather than to have redeemed and then taken a final order of foreclosure, a step which was followed by sales of some of the property which it had taken as its own. A foreclosure sale, in judicial proceedings, would have resulted in an accounting of the proceeds, leaving IDB free to pursue the co-mortgagors for any balance owing.
By taking the course that it did in respect of the husband’s property and then seeking to prove for the mortgage debt in the Esson foreclosure action, IDB was in an inconsistent position. It had made its election to forego the debt by disabling itself from restoring all the security given for that debt.
The judgment of Mathers J. of the Manitoba Queen’s Bench in John Abell Engine & Machine Works Co. v. Porter appears to be opposed to the conclusion to which I would come. It arose on a stated case which, so far as material, showed that a mortgagor had charged two separate parcels of land in favour of the plaintiff, one of which had been previously mortgaged to another. That other brought foreclosure proceedings in which the plaintiff appeared and in which it itself took a final foreclosure order after paying off the first mortgagee. It then sold the foreclosed land, and later sought to have the second parcel sold under its charge to satisfy the debt. Mathers J. held that the plaintiff’s remedies against that parcel remained open notwithstanding the foreclosure and subsequent sale of the other parcel. I would not follow this decision because it is, in my opinion, at variance with my appreciation of underlying principle in this branch of the law.
I would allow this appeal, with costs here and in the Court of Appeal and restore the judgment of Pennell J.
Appeal allowed with costs, JUDSON and PIGEON JJ. dissenting.
Solicitors for the appellant: Mendelson, Beatty & Wood, Toronto.
Solicitors for the respondent: Harries, Houser, Brown & McCallum, Toronto.
  2 O.R. 413, 18 D.L.R. (3d) 129 (sub nom. Esson v. Rushton et al.).
  A.C. 781.
 (1912), 26 O.L.R. 145, 3 D.L.R. 831.
  1 O.R. 217, 60 D.L.R. (2d) 32.
 (1920), 61 S.C.R. 1.
  3 W.W.R. 719, 49 D.L.R. 238.
 (1869), L.R. 7 Eq. 399.
 (1909), 12 W.L.R. 470.
 (1920), 60 S.C.R. 72.
 (1886), 32 Ch.D. 430.
  2 Ch. 62.
 (1869), L.R. 7 Eq. 399.
 (1909), 12 W.L.R. 470.