1 - The Contaminated Land Case

Summary

Facts

This case involves a plaintiff who took out a mortgage to purchase a land parcel for development. Despite the obstacle of the land being contaminated, the plaintiff went to great lengths to pay off his debts to the mortgage lender, including handing over his family's country home. Nonetheless, these efforts over many years did not meet the lender's expectation for interest and principal repayment and resulted in several lawsuits. The case was ultimately settled at JDR with both sides walking away from all their claims.

Lead-up

In January 2005, two friends, Edward and David, purchased a piece of industrial land that they perceived to have development potential. They made the purchase through a newly incorporated company, 270 Incorporated (270 Inc.), in which they were equal shareholders. Each agreed to finance half of the $750,000 purchase price. Edward financed his half with a vendor-takeback loan from the seller, who was his sister. David obtained and personally guaranteed a mortgage loan from a third party, Forte Banking Corporation (Forte Banking), which had previously provided David and his wife a mortgage for their country home.

A month later, David's counsel (who incorporated 270 Inc. for David and Edward) told David that the land had a caveat on behalf of Coal Creek Oil and Gas due to contaminated waste beneath the soil. David and Edward had a difficult time making mortgage payments and otherwise advancing their development project. Within several months of purchasing the land, Edward sold his 50 percent share in 270 Inc. to the sole shareholder of Forte Banking, and his sister transferred the mortgage to Forte Banking. It would eventually come to light that Edward and his sister engaged in a series of related party transactions for increasingly greater amounts that inflated the land's value and looked like a classic straw buyer mortgage fraud.

Even though Edward left the deal, David still felt there was development potential in the land and made further agreements with Forte Banking to help with the payments over several years. In early 2006, Forte Banking lent David additional funds securitized by a mortgage on David's private home in the city, and also received David's 50 percent shares in 270 Inc. as security for his debt.