Upon default by the mortgagor, the Royal Bank of Canada (“RBC”) commenced a foreclosure Action and obtained a final Order of foreclosure. After the foreclosure Order was obtained, RBC discovered that the mortgage may have been obtained fraudulently by several parties colluding to inflate the price of the property which was in fact worth much less. RBC then commenced two suits:

1.         An Action against the mortgagor, alleging misrepresentation, breach of contract and negligence; and

2.         An Action against the lawyer who acted for RBC with regard to the mortgage and the real estate appraisers, alleging negligence and breach of contract.

The mortgagor, the lawyer who acted for RBC during the mortgage and the appraisers brought Applications for Summary Dismissal of the Actions, pursuant to Rules 7.2 and 7.3, which were heard together. The lawyer and the appraisers argued that once RBC obtained an Order of foreclosure, it no longer had a claim against them because the debt was extinguished pursuant to section 48 of the Law of Property Act, RSA 2000 c L-7 (“LPA”). Alternatively, they argued that the Action was a collateral attack on the Order for foreclosure. On a similar basis, the mortgagor sought to dismiss the claim against him by arguing that the claim was barred as a result of merger or res judicata. The mortgagor also argued that there was no evidence that he acted fraudulently and thus could not be held liable on the third party claim brought by the appraisers.

The Court held that, while section 48 of the LPA prohibits the ability to sue under the covenant to pay in contract, it does not bar a claim in tort. Therefore, the claims against the mortgagor, the lawyer and the appraisers could not be dismissed on that basis.

The Court further held that the doctrines of merger, res judicata and collateral attack were inapplicable. A claim under a mortgage against the property alone is different than a claim in tort, and thus merger does not apply. The issues and causes of action in a negligence action are different than those in a foreclosure action, and thus res judicata does not apply. The claims made by RBC did not vary, nullify or render the foreclosure Order nonsensical, and thus did not constitute collateral attacks.

Finally, the Court held that the evidence contradicted the assertion by the mortgagor that he was an innocent dupe, which presented a genuine issue for trial with respect to the degree of his participation in the alleged scheme. For these reasons, the Applications for Summary Dismissal were dismissed.