Collateral Mortgage Defaults

A recent decision highlights the importance of clarifying rights and obligations in connection with collateral mortgages, especially involving family members.
In 1999, Maria appointed her three children under a power of attorney for property. One of them, a daughter named Renata, arranged for Maria to obtain a new first mortgage with MCAP as mortgagee (“Maria’s Mortgage”). Renata guaranteed Maria’s Mortgage, and also made payments under it. At the same time, she also refinanced the home she shared with her husband, under a separate mortgage arrangement. Its terms stipulated that default under one mortgage constituted default under the other.  
From that point, a series of irregularities prompted confusion, and resulted in litigation between the parties.  Specifically, Renata and her husband sold their home and had the mortgage discharged. Surprisingly, she received the balance of the sale proceeds from MCAP by cheque, contrary to her assumption that the remaining proceeds would be applied against Maria’s Mortgage balance. Indeed, Renata contacted MCAP to advise them of the error, but its representative told her that she and her husband could keep the funds and continue to make the monthly payments on Maria’s Mortgage.
However, Maria’s lawyer later caught the error and contacted MCAP to inquire as to why Maria’s Mortgage had not been discharged (along with Renata’s) when Renata’s home was sold. MCAP agreed to the discharge in of July 2008; nonetheless, Renata continued to make monthly payments on it. A year later, in August 2009, MCAP advised Renata that Maria’s Mortgage had been discharged in error and that there was still an outstanding balance due.
Renata filed for bankruptcy a month later. MCAP sued both Maria and Renata, and in 2010 moved for summary judgment. MCAP claimed that there was default under Maria’s Mortgage, and that Maria as mortgagor was liable for the full amount outstanding. It claimed that Maria benefited from the advance by MCAP toward Maria’s Mortgage, since she had paid off another, different $50,000 mortgage to another bank by using those funds.
In contrast, Maria argued that Maria’s Mortgage was collateral to the one held by Renata, that she entered into it merely to help her daughter, and that she was merely an “accommodating surety”. In fact, having discharged it in 2008, MCAP clearly viewed her mortgage as a collateral one to Renata’s. As such, the discharge of Renata’s mortgage should have discharged Maria’s Mortgage simultaneously.
The court considered these arguments, agreeing that the two mortgages were collateral to each other, and that default under one constituted default under the other. However, neither mortgage provided that payment or discharge of one mortgage constituted payment or discharge of the other.  Therefore, when Renata’s mortgage debt was paid off in full, this did not serve to discharge Maria’s Mortgage. That mortgage clearly listed Maria as mortgagor, and its terms stipulated that the mortgage guarantor agreed to be liable along with the borrower as principal debtor, not as a surety. Therefore, even if Maria was a guarantor rather than mortgagor, the legal effect was the same.
The court also disagreed that Maria was an “accommodating surety”. She had benefited from the funds advanced by MCAP, and there were no terms in the documents to suggest she was a collateral borrower. In addition, there was no contractual obligation on MCAP to apply the proceeds of the sale of Renata’s home to the outstanding liability under Maria’s Mortgage. There was also nothing unconscionable about MCAP accepting monthly mortgage payments from Renata and her husband even after Maria’s Mortgage was discharged. These payments ultimately benefited Maria, by reducing the principal amount outstanding.  The mortgage was repeatedly renewed by Renata, who had the authority to do so under power of attorney she had been granted by Maria.  Judgment in favour of MCAP was ordered. See MCAP Service Corporation v. Bak and Pasche, 2011 (ONSC).