The bank sought judgment for possession and the amount outstanding under its loan. The loan monies were secured by a mortgage and refinanced a previous loan. The borrower claimed the loan and mortgage were unjust and unconscionable under the Contracts Review Act and the general law. The bank claimed it was subrogated to the rights of the previous lender and the borrower argued that the prior loan and mortgage were also unjust. The bank sought to join the prior lender as a defendant on the basis that if the prior loan and mortgage were unenforceable, the prior lender should make restitution for the monies paid to them.
The court noted that the categories of cases giving rise to an obligation to make restitution involve mistake, duress, illegality or failure of consideration. The bank relied on mistake. The prior lender argued good consideration and change of position as defences. However the bank argued that if the prior lender never had a valid and enforceable mortgage and loan, then the prior lender did not provide good consideration for the bank’s payment nor would the release and discharge by the prior lender amount to a change of position.
Alternatively the prior lender argued that the bank was a mere conduit and a claim could only be brought by the bank (as the party who paid its own money out) against the borrower (as the recipient of the funds), not by the bank (as agent for the borrower) against the prior lender. The bank argued that it was not a mere conduit or intermediary because there was a direct payment by the bank to the prior lender. The court found that whether or not monies were paid to the prior lender under a direction from the borrower and if so, whether the bank could be said to have done so as an agent required examination of the basis and purpose of the bank loan in a trial of the proceedings.
The court noted that claims in restitution and subrogation are novel in the context of possession proceedings and not appropriate to be determined without a full hearing. The court found that whether, and to what extent, subrogation would be available and restitution would be ordered would be determined by an enquiry into the unjustness not only of the bank’s contracts but also those of the prior lender.
The court said:
The focus in a determination of a claim in restitution is, initially, on whether one party received a benefit at the expense of another by reason of a vitiating factor. On one view, the borrower received the benefit of having her prior mortgage discharged to the detriment of the bank advancing funds to her under what is now alleged to be an unenforceable loan and mortgage. On the other, the benefit of the transaction was received by the prior lender because the funds loaned to borrower under the prior loan were returned. A determination as to which party received the benefit and at whose detriment requires an identification and analysis of the nature of the alleged failure of consideration or mistake. There is an arguable case by both parties to the claim which ought to be fully explored and determined at final hearing.
The court granted leave to join the prior lender.
Click here to read the full judgment