APPEAL WATCH: SCC To Weigh In On Estoppel In Patrick Street

The Supreme Court of Canada (“SCC”) is set to address critical questions regarding mortgage obligations which create issues of estoppel in the appeal [41296] of Patrick Street Holdings Limited v 11368 NL Inc., 2024 NLCA 11 [Patrick Street].The case raises significant issues about the application of estoppel doctrines and stands to have wide-ranging implications for Canadian property and contract law.

Facts

Section 6 of the Conveyancing Act, RSNL 1990, c. C-34 (the “Act”), permits a mortgagee to exercise power of sale where notice is given to the mortgagor and any registered encumbrancers. Section 10 of the Act requires a mortgagee exercising a power of sale to prepare an accounting of the sale of a mortgaged property, including a copy of the appraisal, to the mortgagor. If the mortgagor is dissatisfied with the accounting provided by the mortgagee, section 11 of the Act enables the mortgagor to make an application to the court for whatever relief the judge sees as appropriate in the circumstances. 

The “Patrick Street Group” consisted of four related companies: Patrick Street, Madden’s Limited, P & P Holdings Limited, and PMC Holdings Limited. Paul Madden served as the sole director of all the companies within the Patrick Street Group (Patrick Street, para 4).

The Patrick Street Group had an ongoing business relationship with the “Clarke Group”, which consisted of four related companies: 11368 NL Inc., CBS Land Development Inc., Powder House Hill Investments Limited, and Harmony Homes Limited (Patrick Street, para 5). Bill Clarke was the sole director of 11368, which owned the Kenmount Terrace property (Patrick Street, paras 5, 6).

In July 2013, the Clarke Group gave Patrick Street, Madden’s Limited, P & P Holdings Limited and Paul Madden a $10,072,816.52 mortgage securing various properties that they owned in St. John’s and Conception Bay South, with the exception of Kenmount Terrace (Mortgage A) (Patrick Street, para 7). A year later, 11368 guaranteed Mortgage A but provided no security for its guarantee (Patrick Street, para 8). 

In April 2015, 11368 gave PMC Holdings Limited a $1,875,000.00 mortgage on its Kenmount Terrace property (Mortgage B) (Patrick Street, para 9). This mortgage was later assigned by PMC Holdings Limited to Patrick Street (Patrick Street, para 10).

In early 2016, both Mortgage A and Mortgage B were in default (Patrick Street, para 10). Two power of sale proceedings were commenced under the Act. The power of sale for Mortgage A did not proceed at all, and the power of sale on Mortgage B was interrupted when the parties reached an agreement (Patrick Street, para 11). As part of the agreement, 11368 gave Patrick Street, Madden’s Limited, P & P Holdings Limited, and Paul Madden a collateral mortgage on the Kenmount Terrace property in support of 11368’s guarantee of Mortgage A, of up to $4,000,000 (Mortgage C) (Patrick Street, para 11).

Shortly afterwards, Patrick Street reactivated the power of sale proceedings under Mortgage B securing the Kenmount Terrace property (Patrick Street, para 12). 11368 unsuccessfully attempted to stop the sale on two occasions, both resulting in orders to proceed (Patrick Street, para 12). A public auction was held in July 2016, where Patrick Street purchased the Kenmount Terrace property for more than the required 75% of its $15,000,000 appraised value as required by section 9 of the Act (Patrick Street, para 13).

After acquiring the Kenmount Terrace property, Patrick Street provided an accounting to all encumbrances and to 11368 as required by section 10 of the Act (Patrick Street, para 14). The accounting identified 22 charges on the Kenmount Terrace property, Patrick Street refused to pay certain encumbrances due its view that Mortgage C took priority and once paid there was insufficient funds to pay the other encumbrancers (Patrick Street, para 14). Two encumbrancers challenged Patrick Streets accounting in outlining the priority and amount due on the various charges (Patrick Street, para 14).

In Cook v. Patrick Street Holdings Ltd., 2017 CanLII 65376 [2017 Decision], the court determined the validity and priority of the 22 encumbrances, finding only 9 of which needed to receive distribution upon power of sale. The court found that (Patrick Street, paras 15-18):

• Patrick Street had accounted for $3,521,564.61 for three mortgages, even though the third mortgage was a consolidation of the first two — the court only allowed $2,237,180.95 as a result;
• The court rejected the $800,000 bonus on a mortgage given to Madden Limited;
• There was a mistaken $100,000 interest claimed for a mortgage which did not bear interest; and
• The court rejected Patrick Street’s claim to $4,000,000 under Mortgage C for the failure to complete analysis on the actual amount, if any, owed under it. 
• As a result, there was a surplus on the power of sale.

In Patrick Street Holdings Ltd. v. John Cook, J-3 Consulting & Excavating Ltd., and 11368 NL Inc., 2019 NLCA 69 [2019 Decision], the court made the following conclusions on Mortgage C (2019 Decision, paras 61-63):

• There was insufficient evidence to conclude that 11368 was liable to make a payment at the time of sale.
• The registered cost of the mortgage listing $4,000,000 as the value does not determine the amount actually owing under the mortgage.
• The application judge’s conclusion that the mortgage should be disallowed from the accounting is entitled to deference on appeal.

In Cook v. Patrick Street Holdings Ltd., 2020 NLSC 99, [2020 Decision] the court ordered Patrick Street to pay the surplus to 11368 minus the amount of interest owing to Deanna Cheeke due to her registered mortgage on a portion of the property (Patrick Street, para 22). On the question of the rate of interest, the court applied the contract rate of 18% (Patrick Street, para 24). Patrick Street appealed both the applicable interest rate and 11368’s entitlement to the surplus funds (Patrick Street, para 26).

Issues

The Court of Appeal addressed two issues (Patrick Street, para 27):

1. Did the applications judge err in concluding that the 18% interest rate was payable on the Cheeke Mortgage?
2. Did the applications judge err in concluding that 11368 was entitled to the surplus funds?

Decision

Applicable Interest Rate

The Court of Appeal unanimously held that the interest was payable in accordance with the terms of the Cheeke mortgage contract, which provided for 18% interest per annum until payment (Patrick Street, paras 28, 282, 666).

11368’s Entitlement to the Surplus Funds

In a 2-1 decision, the majority (Butler J.A., with O’Brien J.A. concurring) dismissed Patrick Street’s appeal, with L.R. Hoegg J.A. in dissent. The majority held that the doctrines of res judicata and abuse of process apply, barring Patrick Street from relitigating 11368’s entitlement to the surplus funds (Patrick Street, paras 30, 141)

The doctrine of res judicata has two forms: issue estoppel and cause of action estoppel. Issue estoppel refers to where the issue has been clearly decided in a previous proceeding, and cause of action estoppel refers to where the cause itself has already been adjudicated in a previous proceeding. 

The majority found that 11368’s entitlement to the surplus funds was subject to the doctrine of cause of action estoppel on several grounds:

Firstly, the criterion of finality was satisfied by the 2019 Decision affirming the 2017 Decision and not being appealed to the SCC (Patrick Street, para 37).Secondly, the parties to all three applications, 11368 and Patrick Street, were the same, and shared the financial stakes and central issue (Patrick Street, paras 39-40). The material facts of the proceedings also have remained the same and do not constitute a separate lawsuit, with no new information creating the appearance of a separate or distinct cause of action (Patrick Street, paras 53-55, 64). Finally, Patrick Street first raised the wording of Mortgage C during the same appeal that was rejected in the 2017 Decision and 2019 Decision; and with the court finding that Patrick Street could have raised this argument in earlier proceedings, the fourth criterion was fulfilled (Patrick Street, paras 53-55, 64).

The majority further concluded that issue estoppel applies on multiple grounds. Firstly, the substance of the matter had already been decided; the 2017 Decision already established the charge priorities and amounts owing on valid encumbrances, holding that collateral mortgages such as Mortgage C ranked the same as conventional mortgages (Patrick Street, paras 68, 79). The 2019 Decision affirmed the 2017 Decision and concluded that Patrick Street did not establish that $4,000,000 was owing under Mortgage C, and no error was made in disallowing Mortgage C (Patrick Street, paras 80-85). The 2020 Decision addressed the Cheeke encumbrance and otherwise concluded that Mortgage C was already dealt with under the 2017 Decision as affirmed in the 2019 Decision (Patrick Street, paras 89-92).

Finality is also established because the 2017 Decision was upheld by the 2019 Decision and was not appealed (Patrick Street, para 93).  Furthermore, 11368 and Patrick Street were the same parties to the previous applications and had the greatest financial interests (Patrick Street, para 94).

The underlying principles of finality and prevention of multiplicity of proceedings prevent Patrick Street from relitigating the previously adjudicated issue of whether 4,000,000 was payable under Mortgage C, an issue that was fundamental to the first two applications (Patrick Street, para 97). Although the 2020 Decision does not specifically reference res judicata, it was the applicant judge’s duty to consider the doctrine of abuse of process by relitigation, even in the absence of an estoppel pleading made by 11368, who only raised the argument in oral submissions (Patrick Street, para 110). The applicant judge effectively found abuse of process by relitigation when refusing Patrick’s Streets second attempt to argue what he identified as the same question addressed in his previous decision (Patrick Street, paras 111-117). Butler J.A. concluded that in the public interest of finality of litigation and ensuring justice is done, it was not appropriate to exercise discretion to avoid the consequences of estoppel (Patrick Street, para 136).

Dissent

Error in Disallowing Mortgage C

Hoegg J.A., writing in dissent, contended that Mortgage C was a valid mortgage and that its terms could be relied on to trigger payment of the mortgage to Patrick Street (Patrick Street, paras 564, 568). Hoegg J.A. articulated that the 2020 Decision failed to analyze what amount, if any, was owing on Mortgage C, by focusing on 11368 as guarantor to Mortgage A and ignored the fact that 11368 is also mortgagor of Mortgage C (Patrick Street, para 568). The removal of a valid mortgage (Mortgage C) from the proceeds of the sale was a misapprehension of the evidence which established that the $4,000,000 secured by Mortgage C was due and payable from the power of sale proceeds on the Kenmount Terrace property (Patrick Street, paras 564, 587-588).

There is no Issue Estoppel

Hoegg J.A. noted that “substantially the same” is not the same as “the same” (Patrick Street, para 597). The 2019 Decision dealt with the priority of Mortgage C in relation to the other encumbrances. In the present case, Patrick Street was not arguing the priority of entitlement, but instead that Mortgage C was a registered and valid mortgage entitled to be paid from the proceeds of the power of sale (Patrick Street, para 597).

11368 has not provided any analysis of the similarities and differences between the appeals or argue facts sufficient to show that the question in the 2020 Decision was absolutely adjudicated in the 2017 Decision or 2019 Decision. (Patrick Street, para 598).

Further, 11368 did not raise the argument of issue estoppel until on appeal. The doctrine of issue estoppel cannot be raised as a ground on appeal unless raised in the courts below; failing to do so is considered to waive estoppel. (Patrick Street, para 599-605). 

Analysis 

The decision in Patrick Street is a highly fact-driven decision which applies res judicata to a circumstance where the prior decisions decided on a similar issue before similar parties. The SCC will likely address the doctrine of estoppel as a whole when assessing res judicata, granting an opportunity to clarify the requirements for invoking the doctrine.

The majority was quick to apply res judicata due to the matter being the same or similar to the previous arguments advanced by Patrick Street in the previous decisions, despite the potential nuances in the argument as pointed out by Hoegg J.A. in the validity of Mortgage C. The majority clearly outlines the multiple opportunities for Patrick Street to properly advance the validity, priority, and amount of Mortgage C to effect the value and validity of the balance due.

The factual matrix is remarkable and complex and does not deviate from the applications, since the Kenmount Terrace property sale remains the focal point. The fact that other encumbrancers also participated in the proceedings does not manifestly change the issue to be addressed within those proceedings. Each encumbrancer not only had to address priority in relation to each other, but also validity and quantum in relation to their respective charges on title. Further, 11368 in addressing the Cheeke mortgage should not preclude the court from applying issue estoppel, despite potentially dissuading from cause of action estoppel by failing to raise res judicata at trial. Patrick Street should not be permitted to have a third bite at the cherry just because it has increased the substance of its argument.