Judgment creditors beware: The challenges of collecting from a beneficial landowner

In the case of 1842752 Ontario Inc. v. Fortress Wismer 3-2011 Ltd.[1] (the "Fortress Case"), the Ontario Court of Appeal held that a judgment creditor is not entitled to enforce a writ of seizure and sale against a registered owner that holds land in trust for a judgment debtor, nor to priority over arm's length construction financing.

Pace Developments (The Mark) Ltd. ("Pace Mark") was the registered owner of certain lands under the Land Titles Act[2] pursuant to an unregistered trust agreement. In the unregistered trust agreement, Fortress Wismer 3-2011 Ltd. ("Fortress Wismer") and two other corporate entities were named as the beneficial owners of the lands.

In 2016, Firm Capital Mortgage Fund Inc. ("Firm Capital") and MarshallZehr Group Inc. secured construction financing charges against the lands naming Pace Mark as the chargor.

In 2017, 1842752 Ontario Inc. (the "Judgment Creditor") obtained a judgment against Fortress Wismer in the amount $100,000.00 plus interest and costs. In 2018, the Judgment Creditor filed a writ of seizure and sale with the sheriff having jurisdiction over the lands, directing the sheriff to sell, among other things, the lands beneficially owned by Fortress Wismer. The Judgment Creditor provided Firm Capital with notice of its writ of seizure and sale and asserted that any subsequent advances secured by Firm Capital's charge would be subordinate to its writ.

The Judgment Creditor applied for declarations that (i) its writ of seizure and sale against Fortress Wismer applied against or should bind Pace Mark, the registered owner of the lands; (ii) its writ of seizure and sale could be executed against Pace Mark; and (iii) any advances made to Pace Mark from Firm Capital following the date that its writ of seizure was filed ranked subordinate to its interest.

The application judge held that the Judgment Creditor was not entitled to enforce a writ of seizure and sale against Pace Mark or enjoy priority over the arm's length construction financing from Firm Capital. While the application judge acknowledged that the Execution Act[3] authorized the sheriff to whom a writ of execution is delivered to seize and sell the lands of the execution debtor "including any lands whereof any other person is seized or possession in trust", the application judge noted that the Execution Act is a procedural statute that does not confer substantive rights but rather provides mechanisms for the collection of judgment debts. The application judge determined that the Judgment Creditor could have no higher right in the lands than Fortress Wismer, and, since Fortress Wismer had no right, as beneficial owner, to force a sale of the lands or interrupt ongoing construction financing, neither did the Judgment Creditor.

The Court of Appeal upheld the application judge's decision and added that, while the sheriff could conceivably sell Fortress Wismer's interest in the lands pursuant to the terms of any co-tenancy agreement and provided that there was an available market to do so, it would not make the Judgment Creditor's writ of seizure and sale binding on or enforceable against Pace Mark. The Court of Appeal went on to say that any proceeds of the sale would be paid out in accordance with the priority rules set out in the Creditors' Relief Act[4]. It was also noted that, while the Creditors Relief Act provides an execution creditor priority over a charge, it does not give an execution priority over subsequent advances made under a charge registered prior to the date that the execution was filed.

The Court of Appeal also stated that Section 93(4) of the Land Titles Act speaks to the priority of advances made under a previously registered charge following the registration of a transfer, charge or other instrument executed by the chargor or the chargor's successors. This Section did not apply to the Judgment Creditor, as the holder of a writ of seizure, and therefore, it did not have priority over any subsequent advances from Firm Capital. Moreover, the Land Titles Act[5] provides that, absent registration or entry in appropriate records, only the parties to an instrument are deemed to have notice of it. Since there was no such registration or entry in this case, the notice that the Judgment Creditor purported to give to Firm Capital was of no effect.

The appeal was dismissed, and the declarations sought by the Judgment Creditor were denied.

The Fortress Case highlights the many challenges that a judgment creditor ought to consider prior to bringing a claim against a beneficial landowner. In light of the foregoing, it is recommended that due diligence is conducted at the outset of any negotiations concerning a commercial matter in order to ensure that specific agreements are entered into with both the registered and beneficial landowner.