Apr 3, 2014

Distribution of Surplus After Mortgage Sale to Judgment Creditor of One Co-ower

Arnold Bros. Transport Ltd. v. Murphy, 2013 MBQB 137 (CanLII)
Facts: Mr. and Mrs. Murphy owed a home in joint tenancy. The property was subject to a mortgage to a bank and a judgment in favour of the applicant Arnold Bros. Transport Ltd. against Mr. Murphy. The Murphys defaulted on their mortgage and the bank sold the home under power of sale. There was a surplus available after the balance owing under the mortgage and costs were paid which was being held in trust. This application was brought to determine the entitlement of the surplus funds.
Held: The funds should be applied firstly to satisfy the judgment of Arnold Bros. Transport Ltd. against Mr. Murphy and any remaining funds should be paid jointly to Mr. and Mrs. Murphy.
The position of Mrs. Murphy was that the judgment attached only the interest of Mr. Murphy in the property. Therefore the surplus should be divided in half with one half going to her and the other half applied in satisfaction of the judgment.
The court held that the distribution of surplus proceeds under a mortgage sale is governed by Section 136(3) of The Real Property Act which provides that the proceeds of a mortgage sale are to be applied firstly to the expenses of the sale, secondly, to the amount owing to the mortgagee, thirdly, in payment of any subsequent mortgages, encumbrances and liens in order of priority, and lastly to the owner or other person entitled thereto.
The third step of the distribution process, payment of encumbrances, took place before there was any division of the surplus among the owners in the fourth step. Therefore, encumbrances were to be paid out of the whole of the surplus proceeds, in order of priority, even if they were only registered against the interest of one joint owner.
The joint tenancy between Mr. and Mrs. Murphy had not been severed by conduct of the parties or any action of a creditor. Section 79 of The Real Property Act provides that a joint tenancy may be severed by registration of a transmission by a trustee in bankruptcy of one joint tenant or a court order, registration of an instrument signed or consented to by all joint tenants, or by serving a formal notice to sever on all joint owners who did not consent at least 30 days before registration of the instrument. Section 79 displaced the common law rules on severance of a joint tenancy by a course of conduct and, in the absence of a registration that met the requirements of Section 79, a joint tenancy would not be severed. In the alternative, there had been no conduct by the joint owners sufficient to sever the joint tenancy at common law. Mr. and Mrs. Murphy had separated and begun negotiations for a division of their property but had not reached a final agreement. Neither party had commenced proceedings for partition or sale or took any other formal steps to sever the joint tenancy.