Court of Queen's Bench of Alberta by ps94506


									                    Court of Queen’s Bench of Alberta
Citation: Johnson v. 957942 Alberta Ltd., 2010 ABQB 662

                                                                          Date: 20101018
                                                                           Docket: 0703 00352
                                                                           Registry: Edmonton


                          Benjamin Johnson and Lorraine Johnson

                                             - and -

                                     957942 Alberta Ltd.



                              Memorandum of Decision
                           L.A. Smart, Master in Chambers


[1]     Benjamin and Lorraine Johnson have brought an action seeking a declaration that in
substance their agreement with the Defendant constituted an equitable mortgage transaction and,
furthermore, it was unconscionable pursuant to the provisions of the Unconscionable
Transactions Act, R.S.A. 2000 c. U-2. The Johnsons received a demand for an unsecured loan of
$5,000 they had with CitiFinancial. After a number of unsuccessful attempts to obtained funds
from several banks and other financial institutions, they located “Alberta Lawsuit Loans” in the
Yellow Pages and contacted them. The Plaintiffs sought a mortgage but were told there was
insufficient equity to qualify. The Defendant suggested they could buy the property from the
Johnsons which they could then occupy as a tenant on a rent to own basis with an entitlement to
purchase the property back. The parties first met on December 6 or 7, 2004, a transfer of land
was signed on December 7, 2004, a Rental Agreement on December 8, 2004, and a Purchase
                                              Page: 2

Agreement on December 15, 2004. On February 23, 2005 the Johnsons converted their
homeowners insurance to a tenant’s policy.

[2]     Pursuant to the terms of the Purchase Agreement the purchase price of $70,000 (the
“forced sale for cash value” as determined by the Defendant) was to be paid by way of a cash
payment of $5,000 and assumption of two mortgages estimated to be an aggregate outstanding
balance of $65,000. The Mortgage balances were in fact approximately $58,000. No funds other
than the $5000 were advanced to the Johnsons on account of the purchase price.

[3]     The transfer of land was registered on January 11, 2005 at which time an officer of the
Defendant swore the Affidavit of Transferee stating that in his opinion the current value of the
land (akin to market value) was $85,000. The 2004 Tax Assessment disclosed a market value of
$99,000. Under the terms of the “agreement” $1120 was to be paid monthly inclusive of $45 per
month for insurance. The Johnsons paid $200 for an option to purchase the property not before
May 1, 2005 nor later than November 30, 2005 for the sum of $100,000. Should the Johnsons
default in making one of their payments the option would be forfeited.


[4]   The Plaintiffs rely on the Lydian Properties Inc. v. Chambers, 2009 ABCA 21 affirming
2007 ABQB 541. The Defendant says that the facts in this case are distinguishable from those in

[5]     As in Lydian the first consideration is the proper characterization of the transaction. I
needn’t review the authorities set out in Lydian. The principle that this Court will look to the
substance of the transaction, not simply its form, is clearly established as Alberta law. The Fair
Trading Act codifies that for some purposes. On its face the documents support a transaction for
the sale of a home, with a lease back and an option to buy. There is a purchase agreement,
however, there does not appear to have been a proper statement of adjustments or an accounting
for the purchase price. In fact the full purchase price was never advanced.

[6]     The Johnsons contacted Alberta Lawsuit Loans to obtain funds to repay the unsecured
loan of $5,000 to CitiFinancial. CitiFinancial had no ability to foreclosure their home, however
the Johnsons were attempting to obtain the funds by way of a mortgage transaction. Their fear of
the immediate consequences arising from failure to repay that loan was exaggerated but
nonetheless real to them. A demand had been made but no further steps taken. It would no doubt
have been some months before an action would be commenced (if at all noting the small amount
of the debt), judgment granted and still longer before execution on the judgment would take
place. Furthermore, during the course of that process it is conceivable that the Johnsons’
circumstances could change or some payment arrangement or compromise reached. Mr. Johnson
stated his belief was that on repayment of the $5,000 they would be entitled to return of title to
their property. Finally, he says they were given assurances that the Defendant was not interested
in taking their house, that their only wish was to save the house. They believed that the
documents being executed were to provide security for the loan.
                                               Page: 3

[7]      As in Lydian, there is conflicting evidence as to the discussions and explanations
provided by the Defendant, that is, that it was a sale as evidenced by the documentation prepared
and executed. Nonetheless when examining the circumstances in their totality, noting the
confusing manner in which the documentation was prepared and executed over a period of days,
and notwithstanding the “outward form” of the transaction, I am satisfied the substance of the
transaction was a loan. This conclusion includes the determination that the characterization of
this transaction as a loan is applicable for purposes of the Unconscionable Transactions Act and
the Criminal Code.

Unconscionable Transaction

[8]    The Johnsons have raised the Unconscionable Transactions Act. Section 2 says:

       2       When, in respect of money lent, the court finds that, having regard to the
       risk and to all the circumstances, the cost of the loan is excessive and that the
       transaction is harsh and unconscionable, the court may

               (a) reopen the transaction, take an account between the creditor and
               the debtor and relieve the debtor from payment of any sum in
               excess of the sum adjudged by the court to be fairly due in respect
               of the principal and the cost of the loan;

               (b) notwithstanding any statement or settlement of account or any
               agreement purporting to close previous dealings and create a new
               obligation, reopen an account already taken and relieve the debtor
               from payment of any sum in excess of the sum adjudged by the
               court to be fairly due in respect of the principal and the costs of the

               (c) order the creditor to repay any such excess if it has been paid or
               allowed on account by the debtor;

               (d) set aside either wholly or in part or revise or alter any security
               given or agreement made in respect of money lent, and, if the
               creditor has parted with the security, order the creditor to
               indemnify the debtor.

[9]    The observations made in paragraphs 55 to 59 in Lydian are equally applicable to these
circumstances. They read as follows:
                                       Page: 4

[55] While the Act applies only to lending arrangements, section 4 is specific
that the Act does not derogate from the court’s common law or equitable powers.
If the arrangements are a loan, as I have concluded, the Act applies.

[56] However, if I am wrong in the characterization of the transaction as a loan
or lending arrangement, there remains the common law and equitable ability to
rescind a transaction on the basis of unconscionability. Where the transaction as a
whole is so divergent from community standards of commercial morality that it
should be rescinded (Harry v. Kreutziger (1978), 9 B.C. L.R. 166 (C.A.)), the
court has that power, whatever the nature of the transaction.

[57] As such, the following analysis of unconscionability applies whether or
not I am correct in characterizing the transactions as a loan.

[58]   The doctrine of unconscionability has as its material ingredients:

       (i)     an inequality in the position of the parties arising out of the
               ignorance, need or distress of the weaker and

       (ii)    proof of substantial unfairness of the bargain obtained by
               the stronger.

If such elements are proven, there is a presumption of fraud which must be
repelled by the stronger by proving that the bargain was fair, just and reasonable.
See Canadian Imperial Bank of Commerce v. Ohlson, [1997] A.J. No.1185
(Alta. C.A.), quoting from Morrison v. Coast Finance Ltd. (1965), 54 W.W.R,.
257 at p. 259 (B.C.C.A.). Morrison was subsequently approved in Norberg v.
Wynrib, [1992] 2 S.C.R. 226.

[59]   The Alberta Court of Appeal describes four essential elements of an
       unconscionable transaction as follows:

       1.      A grossly unfair and improvident transaction;

       2.      The victim’s lack of independent legal advice or other
               suitable advice;

       3.      Overwhelming imbalance in the bargaining power caused
               by the victim’s ignorance of business, illiteracy, ignorance
               of the language of the bargain, blindness, deafness, illness,
               senility, or similar disability; and

       4.      The other party’s knowingly taking advantage of this
                                             Page: 5

       See Cain v. Clarica Life Insurance Co. (2006), 384 A.R. 11 (C.A.).

[10] The representative of the Defendant justifies the purchase price based on his analysis of
market and forced sale valuations of land. There was some evidence contradictory in nature
provided by way of a tax assessment and the representative’s value used for the affidavit of value
in the transfer of land. It certainly brings into question the fairness and reasonableness of the
transaction but more markedly so when taking into account the even greater option price.
Furthermore, the Defendant simply didn’t advance the full purchase price. Under the lease
agreement rent sufficient to cover all mortgage costs, taxes, and insurance would be paid. The
Johnsons were responsible for payment of all utilities and all maintenance costs as set out in
paragraph 12 of the lease:

       Maintenance Costs
       12.     Johnson shall be responsible for all maintenance costs including, but not
       limited to:

       (a)     replacing any light bulbs
       (b)     the costs of repairing plugged toilets, sinks and drains; and
       (c)     the costs of replacing or repairing all windows, screens and light fixtures
               damaged, broken removed or destroyed at any time during the tenancy;
       (d)     the costs of repairing any other damage to the premises or the property;
       (e)     the costs of any improvements or alterations to the premises;
       (f)     the costs of any structural repairs or replacements.
       provided that the foregoing costs were not incurred as a result of the negligence of
       or willful misconduct of The Company or The Company’s agents.

               If Johnson makes any improvements or alterations to the premises or the
       property the improvements or alterations or improvements shall enure to the
       benefit of The Company and shall remain on the premises after Johnson vacates.

 [11] The Johnsons received $5,000 in exchange for the transfer of their property at a price well
below market value with a right to repurchase it a mere five months later for $30,000 more. It is
inconceivable to me that anyone could characterize this transaction as “fair and reasonable”.
Clearly the first part of the test in Cain has been satisfied.

[12] As for the obtaining of independent legal advice, the evidence from the Defendant was
that the Johnsons were encouraged to obtain legal advice and, in particular, they were referred to
Ms. Cosgrove located in the same building as the Defendant. It appears that Ms. Cosgrove
commissioned the Defendant’s affidavit of value in the transfer of land and apparently dealt with
the $5,000 payment. The Johnsons did not seek out legal counsel nor did they ever receive any
kind of reporting from Ms. Cosgrove with respect to the advance and forwarding of funds to
Citibank. Although they were not prevented from doing so, the transactions were of such a nature
as to call for independent advice of some sort. In my view the second part of the test has been
                                              Page: 6

[13] The Johnsons are high school diploma graduates and have been involved in the purchase
of one property being the subject property when they used the services of the vendor’s lawyer.
Mr. Johnson does construction renovations and Mrs. Johnson has worked as a
secretary/receptionist. The representative of the Defendant clearly had considerable experience
with lending and had a sophisticated understanding of loan transactions and property valuations
including knowledge of techniques used by accredited appraisers when valuing distress
properties. The documents were executed over a period of 8 days on three different occasions.
The Johnsons perceived the need for urgency and were obviously fearful of the consequences of
there failure to pay when they received a demand letter. The reality was that their fears were
unwarranted and it was clearly unnecessary for them to give up ownership of their home,
continue to pay more towards their home than previously and pay $30,000 to buy their home
back. The third element of the test has been met.

[14] The Defendant’s being in the business of lending in distress situations would fully
understand that considerable time would be available to the Johnson’s to deal with the repayment
of the loan demanded upon. The cost of pursuing small loans discourages lenders from taking
formal collection steps without exploring other alternatives and arrangements. Many do not take
any formal steps and write off those amounts as a cost of doing business. Even after a judgment
was obtained, no proceedings could be taken against the house until 180 days after they were
served with a Notice of Intention to Sell under s.72 of the Civil Enforcement Act, R.S.A. 2000 c.
C-15. The most telling and disturbing aspect of this transaction is the fact that the Johnsons were
in no likelihood, never mind immediate risk, of losing their house until they entered into the
agreement with the Defendant. The “bargain” struck, in and of itself, is demonstrative evidence
that the Defendant took advantage of the Johnsons.

[15] Clearly, the provisions of the Unconscionable Transactions Act apply to this set of

Criminal Code Interest Rate

[16]     It is unnecessary to give an in depth analysis into the effective interest rate of this
transaction. The Johnson’s received $5000 for which they would have to repay $30,000 some
five to ten months later without having regard to any of the other payments to be made to the
Defendant as part of this transaction. Even the most mathematically challenged can see that it
contravenes the 60% per annum limit under s.347(1)(a) of the Criminal Code.


[17] There are grounds under both the Unconscionable Transactions Act and the Criminal
Code to interfere with this transaction. These are discussed at paragraphs 84 to 91 in Lydian as
                                       Page: 7

[84] Under the Unconscionable Transactions Act, I have wide powers to set
aside the transaction or “revise or alter any security given or agreement made in
respect of the money lent, and, if the creditor has parted with the security, order
the creditor to indemnify the debtor”.

[85] Under the equitable doctrine of unconscionable transactions, the court has
the power to order that an unconscionable transaction be set aside. See Lloyd’s
Bank Ltd. v. Bundy, [1974] 3 All E.R. 757 (C.A.), and Black v. Wilcox (1976),
12 O.R. 759 (C.A.). Canadian Courts have also endorsed remedial flexibility
when dealing with unconscionable transactions. See Dusik v. Newton (1985), 62
B.C.L.R. 1 (C.A.).

[86] Under the Criminal Code, I have what has been described as a spectrum of
powers. According to Transport North American Express Inc. v. New Solutions
Financial Corp., [2004] 1 S.C.R. 249, one end of the spectrum is to declare the
contract void ab initio. Severance is at the other end of the spectrum. The
traditional view is that an offending loan agreement is unenforceable, including
the obligation to repay the principal. That could result in a windfall to the
borrower, but may be justified in order to deter usurious loan sharking practices.
That was the result in C.A.P.S. International v. Kotello (2002), 164 Man. R. (2d)
202 (Q.B.).

[87] The other end is exemplified by Milani v. Banks (1997), 145 D.L.R. (4th)
55 (Ont. C.A.) where an effective rate of 250% resulted from the inclusion of
various penalties and extra fees. Those penalties were severed, reducing the rate to
a “reasonable 18%”. A similar result was ordered in Pacific National
Developments Ltd. v. Standard Trust Co. (1991), 53 B.C.L.R. (2d) 158 (S.C.).

[88] The middle ground is found in cases such as Terracan Capital Corp. v.
Pine Projects Ltd. (1991), 60 B.C.L.R. (2d) 384 (S.C.) and Affordable Payday
Loans v. Harrison, 2002 ABPC 104 where the interest was severed, but the
debtor was required to repay the principal.

[89] The traditional “blue pencil” approach to severance, which was the subject
of discussion in the Transport North decision, is to “cure the illegality while
remaining otherwise as close as possible to the intentions of the parties expressed
in the agreement” (at paragraph 29). However, the Court endorsed a flexible
approach and stated at paragraph 40:

       Thus, the appropriate approach is to vest the greatest possible
       amount of remedial discretion in judges in courts of first instance.
       The spectrum of available remedies runs from a court holding
       contracts in violation of s. 347 void ab initio, in the most egregious
                                             Page: 8

              and abusive cases, according to the criteria identified in Thomson,
              supra, to notional severance.

       [90] Thomson (William E. Thomson Associates Inc. v. Carpenter (1989), 61
       D.L.R. (4th) 1 (Ont. C.A.)) sets out four factors to consider in determining whether
       severance is appropriate:

              1.      Would the purpose and policy of s. 347 be subverted by

              2.      Did the parties enter into the agreement for an illegal
                      purpose, or with an evil intention?

              3.      What was the relative bargaining position of the parties?

              4.      Would the borrower be unjustly enriched by a refusal to
                      hold the contract valid?

       [91] In considering remedies here, I intend to take a “blue pencil” approach,
       and to fashion remedies as encouraged by the Unconscionable Transactions Act.
       Severance would not, in my view, subvert the purpose and policy of s. 347. No
       illegal purposes or evil intentions are involved. While Ms. Chambers was at a
       disadvantage and clearly in a poor bargaining position, her position and the
       circumstances of this case are not such that she should gain some sort of windfall
       or unjust enrichment at the expense of Lydian. On the other hand, Lydian should
       not profit form its unconscionable conduct.


[18] The “blue pencil” approach is appropriate here. The Defendant is to reconvey the property
to the Johnsons on repayment of the loan, interest and reasonable costs of the Defendants. At the
application there was still some uncertainty around the precise amount advanced, appropriateness
                                              Page: 9

of certain costs and charges and an agreeable interest rate. It is my understanding that Counsel
will endeavour to reach an agreement as to the amounts failing which they will bring further
application with additional evidence as required.

Heard on the 14th day of December, 2009.

Dated at the City of Edmonton, Alberta this 18th day of October, 2010.

                                                        L.A. Smart


Murray Engelking
Engelking Wood
       for the Plaintiffs

Barry Massing
MacPherson Leslie & Tyerman LLP
       for the Defendant

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