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Note: To effect the sale of a 344 acre parcel of realty, Owners, Old Willoughby Realty and Bon Echo Developments Ltd., agreed to make improvements on the land. To do so, Owners borrowed US$1,700,000 from the Royal Bank of Canada. Lender required a mortgage on 236 acres of the property and an LC from an approved bank. A letter of credit was issued by the Bank of New York for the account of Howard Milstein, an independent investor, whom Owners undertook to indemnify, agreeing that, in the event that Lender drew on the LC, Owner would assign Applicant the mortgage held by Beneficiary.

Subsequently, Buyer declined to purchase the property, and Owners defaulted on the loan from Lender. Lender drew on the LC for the full amount of US$1,700,000 and assigned the mortgage to Applicant. Owners subsequently defaulted on the mortgage, and Applicant brought an action to recover past due payments and possession of the property. Both parties consented to summary judgment in favor of Applicant. Applicant then sought to sell the property, although Owners made attempts to redeem.

After unsuccessful attempts at sale, Applicant began foreclosure proceedings. Owners delivered a statement of defense and filed a request to redeem. Applicant moved to dismiss or strike all or part of Owners' statement of defense, for a determination of a question of law raised by the statement of defense, or, in the alternative, for summary judgment. The Ontario Superior Court of Justice, Cavarzan, J., granted judgment for Applicant on a determination of a question of law disposing of all of the action, and, in the alternative, granted summary judgment for Applicant.

The court ruled that Owners were precluded from raising any of the defences claimed in their statement of defense by res judicata. The court ruled that all of the defenses raised by Owners were or could have been raised in the previous action and were barred.

Owners also argued that Beneficiary's draw on the LC was untimely and "as a result the call was invalid and no provisions of the indemnity agreement were triggered." The court noted that Beneficiary did draw on the LC, and the mortgage was assigned to Applicant. The court stated that "[t]he validity of the mortgage, not the letter of credit, is what is in issue." The court concluded that "[e]ven if the improbable happened and [Issuer] honoured the [Beneficiary]'s call on the letter of credit after it had expired ... , this would not alter the outcome of this motion for judgment."

[JEB/ss]

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