Harold Gerstel et al. v. Chief Executive Officer of the Financial Services Regulatory Authority of Ontario, 2024 ONFST 13

FINANCIAL SERVICES TRIBUNAL

2024 ONFST 13 FST File Nos. M1036-2024, M1037-2024 and M0992-2023 Date: 2024/09/16

IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29, as amended (the “Act”) and, in particular, sections 16, 19, 21, 38, and 39 of the Act;

AND IN THE MATTER OF Harold Gerstel and Harold the Mortgage Closer Inc.;

AND IN THE MATTER OF Harold Gerstel, Harold the Mortgage Closer Inc. and Esther Gerstel Inc.

AND IN THE MATTER OF the Notices of Proposal dated June 22, 2023 and April 30, 2024 issued by the Director, Litigation and Enforcement by delegated authority from the Chief Executive Officer of the Financial Services Regulatory Authority of Ontario;

AND IN THE MATTER OF Requests for Hearing in accordance with subsections 39(2) and 39(5) of the Act;

B E T W E E N:

HAROLD GERSTEL, HAROLD THE MORTGAGE CLOSER INC. and ESTHER GERSTEL INC.

APPLICANTS

and

CHIEF EXECUTIVE OFFICER OF THE FINANCIAL SERVICES REGULATORY AUTHORITY OF ONTARIO

RESPONDENT

BEFORE:

Christopher Portner Member of the Tribunal and Chair of the Panel

APPEARANCES:

For the Applicants Harold Gerstel, Harold the Mortgage Closer Inc. and Esther Gerstel Inc. – Melvyn L. Solmon and Joanne Iskander Salmoon, legal counsel

For the Respondent – Troy Harrison and Michael Scott, legal counsel

DATE HEARD: September 4, 2024

REASONS FOR DECISION RELATING TO MOTIONS TO COMBINE PROEEDINGS

I. BACKGROUND

1By Notice of Proposal dated June 22, 2023 (“NOP1 ”), the Director, Litigation and Enforcement of the Financial Services Regulatory Authority of Ontario (“FSRA”), by delegated authority from the Chief Executive Officer of FSRA (the “CEO”), proposed to:

(a) Revoke the mortgage brokerage licence issued to Harold the Mortgage Closer Inc. (“HTMC”);

(b) Refuse to renew the mortgage broker licence issued to Harold Gerstel (“Gerstel”); and

(c) Impose two administrative penalties on Gerstel, the first, in the amount of $50,000, for failing to cooperate with the Respondent’s investigation, and the second, in the amount of $20,000, for providing false and misleading information to the Respondent.

2FSRA alleged in NOP1 that Gerstel failed to fully respond to a regulatory inquiry, failed to attend as required by a summons issued by FSRA and made false statements in his licence renewal applications.

3On July 7, 2023, Gerstel and HTMC (together, the “NOP1 Applicants”) issued a Request for Hearing before the Tribunal relating to NOP1.

4On April 30, 2024, FSRA issued a second Notice of Proposal (“NOP2”) with respect to the NOP1 Applicants and Esther Gerstel Inc. (“EGI”). Each of the NOP1 Applicants and EGI (together, the “NOP2 Applicants) filed separate Requests for Hearing with the Tribunal which resulted in the initiation of two separate proceedings before the Tribunal.

5FSRA alleged in NOP2 that, between 2016 and 2021, Gerstel referred six borrowers to EGI, a private lender, without taking them on as clients of HTMC. By carrying on business through Gerstel but not HTMC, EGI failed to carry on business solely through a mortgage broker or exempt person or entity. FSRA also alleged that Gerstel failed to cooperate with an investigation by the CEO by not attending to be interviewed as required by a summons issued by FSRA.

6To provide time for me to review the extensive written submissions of the parties relating to the issuance of NOP2, I delayed an earlier scheduled pre-hearing conference from May 30, 2024 to June 7, 2024.

7On May 30, 2024, the Registrar issued a Notice of Pre-Hearing Conference to the NOP1 Applicants with respect to the pre-hearing conference on June 7, 2024. The Registrar also issued a separate Notice of Pre-Hearing Conference to the NOP2 Applicants to be held on June 7, 2024, immediately following the Pre-Hearing Conference relating to the NOP1 Applicants.

8In their written and oral submissions, the NOP1 Applicants argued, among other things, that FSRA is not permitted to amend or change a notice of proposal after a request for hearing in response is filed. Relying on Hi-Rise Capital Ltd. v. Ontario (CEO of FSRA)¹, the NOP 1Applicants also submitted that the Respondent is limited to the issues raised in NOP1 and that issuing NOP2 and then seeking to consolidate the proceedings was an attempt to do indirectly what the Respondent is not permitted to do directly. The NOP1 Applicants also stated their intention to bring a cross-motion to dismiss NOP2 as an abuse of process. The Respondent indicated its intention to bring motions to consolidate the proceedings relating to NOP1 and NOP2.

9When rescheduling the pre-hearing conference relating to NOP1, I advised the parties through the Registrar that I proposed to complete the scheduling of the procedural steps relating to NOP1 set out in my Pre-Hearing Conference Memorandum dated January 23, 2024 and schedule any motions contemplated by the parties.

10After reviewing the written submissions of the parties and hearing their oral submissions, it became obvious to me that my intention to proceed to the hearing relating to NOP1 (the “NOP1 Hearing”) was totally impracticable for three reasons.

11First, the NOP2 Applicants were emphatic in their refusal to consent to the consolidation of the proceedings relating to NOP1 and NOP2 citing, among other things, the allegations of additional contraventions by Gerstel referred to in paragraph [5] above as well as contraventions by EGI which raised separate and distinct issues relating to the NOP1 Applicants, which are licensees, and EGI, which is a non-licensee.

12Second, as noted above, the NOP2 Applicants intended to issue a cross-motion to strike NOP2 as an abuse of process.

13Third, all parties were engaged in judicial review proceedings before the Divisional Court initiated by the NOP1 Applicants. The judicial review entailed the preparation of written submissions to the Court which constrained the ability of the NOP1 Applicants to prepare the materials necessary for the NOP1 Hearing.

14In the circumstances, I reluctantly agreed to defer the scheduling of the NOP1 Hearing and scheduled a hearing on September 4, 2024 to hear the Respondent’s motion to consolidate and the cross-motion by the NOP2 Applicants, all of which inevitably delayed the disposition of the NOP1 proceeding which the Respondent had originally stated it wished to do so as expeditiously as possible, a position consistent with the mandate of the Tribunal.

15In its motions, the Respondent seeks to first combine the separate proceedings initiated by the NOP2 Applicants in relation to NOP2 (the “First Motion”) and, thereafter, combine the single proceeding relating to NOP2 with the proceeding relating to NOP1 (the “Second Motion”).

16In their cross-motion, the NOP2 Applicants seek orders from the Tribunal that, among other things, NOP1 and NOP2 be vacated as being unauthorized, without jurisdiction, otherwise invalid, unreasonable, in bad faith, an abuse of process and maliciously brought.

17Given that the cross-motion by the NOP2 Applicants seeks to vacate NOP 1 and NOP2, I heard the cross-motion first. Following the submissions of the parties, I dismissed the cross-motion with written Reasons to follow. I have issued separate and contemporaneous Reasons with respect to the cross-motion. Following the hearing of the cross-motion, I heard the two motions of the Respondent. I approved the First Motion and dismissed the Second Motion, with Reasons to follow in each case, These are those Reasons.

II. FIRST MOTION

A. Submissions of the Respondent

18NOP2 alleges that Gerstel engaged in a scheme whereby he dealt in mortgages on behalf of EGI outside his brokerage, HTMC. Through Gerstel, EGI carried on the business of mortgage lending while not licensed as a mortgage brokerage or otherwise exempt from the requirement to be licensed. HTMC is unsuitable to be licensed due to the conduct of Gerstel.

19The Tribunal has the authority to combine all or part of two or more proceedings pursuant to subsection 10(2) of the Financial Services Tribunal Act².

20Rule 15.05 of the Tribunal’s Rules of Practice and Procedure for Proceedings Before the Financial Services Tribunal (the “Rules) states that the Tribunal may, on a written motion by a party or on the Tribunal’s own motion, combine two or more proceedings or any part of them, or hear two or more proceedings at the same time, without the consent of all parties. In so doing, the Tribunal may consider any relevant circumstances, including the following:

(a) The commonality of issues of fact, law, or policy;

(b) The potential prejudice to a party;

(c) The potential impact on such factors as expense, delay in proceedings, or witnesses;

(d) The interest in reducing repetitious evidence;

(e) The potential for inconsistent results related to similar fact evidence; or

(f) Any other factor it considers relevant.

21Applying the facts of the proceedings to the circumstances described in paragraph [20] above shows that this is clearly an appropriate case for combining the NOP2 proceedings for the following reasons:

(a) A common factual basis underpins the alleged contraventions by Gerstel and EGI set out in NOP2. Gerstel and EGI were engaged in the same transactions and Gerstel represented EGI while negotiating the mortgages. The facts are simply inseparable.

(b) There will be no prejudice to the NOP 2 Applicants if the proceedings related to them are formally combined. These proceedings will not be significantly extended by virtue of being combined. All facts are common to both parties. Although separate legal issues arise due to the differing roles the parties played in the transactions, this is likely to only affect the legal submissions and not the evidence that is adduced. Although they may be represented by separate counsel, as a practical matter, their interests appear to be aligned.

(c) By formally consolidating the proceedings relating to NOP2, additional expense and delay and the impact on witnesses will be avoided. If the proceedings are not consolidated, there will be needless duplication of procedural steps (such as the negotiation of agreed documents and facts). The same witnesses will be called to testify in multiple hearings and the Tribunal will need to devote additional hearing days to the matter. A single hearing would save considerable time for witnesses, the NOP2 Applicants, FSRA and the Tribunal.

(d) If the proceedings relating to NOP2 are not consolidated, the Respondent will need to call the same evidence separately in both proceedings. This will detrimentally affect the NOP2 Applicants, the witnesses and the Tribunal.

(e) Given the common factual underpinnings of the proceedings arising from NOP2, the danger of inconsistent findings³ from separate hearings is significant. Formal consolidation of the proceedings will avoid this danger.

B. Submissions of the NOP2 Applicants

22By submitting separate Requests for Hearing, the NOP1 Applicants and EGI intentionally initiated two separate proceedings.

23Based on the factors enumerated in Rule 15.05 of the Rules, the Tribunal should consider the following:

(a) The only commonality between the two separate proceedings is NOP2 itself. The allegations that FSRA claims against the NOP1 Applicants, as licensees, are different from the allegations against EGI, a non-licensee. FSRA is alluding that since the allegations are based on the same mortgage transaction referred to in NOP2, the Tribunal should consolidate. However, while the allegations are based on the same transactions, they are based on different components that are unrelated. EGI is accused of carrying on business as a mortgage lender when it was not licensed nor allegedly operating solely through an exempt intermediary and Gerstel is accused of meeting with potential clients as a licensee and then referring them to EGI, i.e. brokering a mortgage outside his brokerage. Their defences would be different, the evidence called would be different, and this could potentially pose a conflict of interest.

(b) EGI plans to seek its own counsel and might have competing interests with the interests of the NOP1 Applicants. Each of the NOP2 Applicants will be its own applicant in its own proceeding. It would be unfair to expect two counsel and their clients to work together, which can cause a lot more confusion during the proceeding, unnecessary expenses, prolonging the proceeding due to parties’ availability and the volume of evidence required to be heard. The consolidation of the two proceedings would cause significant delays and additional and unnecessary expenses, thereby prejudicing the NOP2 Applicants.

(c) While the NOP2 Applicants agree that the Tribunal will need to devote additional hearing days to this matter, it will be much easier for the Tribunal to have the evidence for separate NOPs kept separate.

(d) The NOP2 Applicants are subject to different allegations and different evidence.

(e) There will not be inconsistent results if the matters are not consolidated. The allegations do not pin the NOP2 Applicants together thereby necessitating the need to consolidate both proceedings. Furthermore the facts related to the allegations against EGI take place at a different period of time.

(f) FRSA has intentionally delayed matters in the NOP1 proceeding to advantage FSRA, which has prejudiced the NOP1 Applicants.

24FSRA provided no evidence to support its allegations in NOP1 and NOP2 including the allegation that Gerstel received remuneration for referring mortgage transactions to EGI which Gerstel denies. In the absence of remuneration, EGI was not required to be licensed. Gerstel also denies that he has any financial interest in EGI and that signing authority with respect to EGI’s bank accounts does not represent a financial interest.

C. Analysis

25The separate proceedings initiated by the NOP2 Applicants involve the same six borrowers and the same alleged activities involving Gerstel and EGI in relation to the same borrowers.

26The allegations by FSRA in NOP2 raise the same factual and legal issues and the fact that both parties may require separate counsel will not affect the conduct of the eventual hearing in any materials respect.

27It is clear from paragraphs [2] and [5] above alone that there is significant commonality of issues of fact and law relating to the NOP2 Applicants. In addition, there would be no prejudice to the parties to combine the separate proceedings and there would be no consequences relating to expenses (other than the possible need to retain separate counsel which the parties may need to do in any event), delay in proceedings or witnesses.

28Although separate legal issues may arise as a result of the differing roles of the parties in the six borrowing transactions, this is likely to only affect the legal submissions and not the evidence called.

29The combination of the two proceedings will reduce or eliminate repetitious evidence and will eliminate inconsistent results arising from similar fact evidence. It will also reduce the burden on the parties, FSRA and the Tribunal and the expenses to be borne by them.

D. Order Relating to the First Motion

30For the foregoing reasons, the First Motion is approved and the separate proceedings initiated by the NOP1 Applicants and EGI will be combined under the Tribunal’s File Number M1036-2024.

III. THE SECOND MOTION

A. Submissions of the Respondent

31Applying the facts of the proceedings to the circumstances under Rule 15.05 of the Rules, the Respondent submits that combination of the proceedings relating to NOP1 and NOP2 is justified for the following reasons:

(a) Although NOP1 and NOP2 allege different contraventions of the regulatory scheme, there are certain common elements and the NOP1 Applicants and the NOP2 Applicants are inextricably linked together. The allegations arise from a single investigation and certain legal issues arise in both proceedings such as the suitability of Gerstel and HTMC to be licensed.

(b) The Respondent also submits that combining these proceedings will be the most efficient and fair approach. In particular, Gerstel and HTMC will only face one proceeding in relation to whether their licences should be refused and revoked, respectively. There will, however, be some prejudice to the parties. In particular, combining the proceedings will slow the resolution of the NOP1 proceeding. Therefore, if this motion is not granted, the Respondent will ask the Tribunal to proceed expeditiously to a hearing of NOP1.There will also be some prejudice to EGI given that it is not a party to both proceedings. The Respondent also note the strenuous objections of the NOP2 Applicants to consolidation.

(c) A combined proceeding will be more efficient than separate proceedings. A single larger hearing will avoid the duplication inherent in two smaller separate hearings. Legal arguments that are common to both hearings will only need to be made a single time. Some witnesses (such as FSRA’s investigators and licensing staff) will only be called once to testify once rather than twice. Combining the proceedings will bring some costs and will result in delay to the resolution of NOP1.

(d) Given the different factual and legal issues arising in the proceedings, there is less likely to be an issue than with respect to the First Motion. In addition, the second hearing panel will have the benefit of any factual findings made by the first hearing panel in assessing the suitability of Gerstel and HTMC to be licensed.

32The Respondent recognizes that the NOP2 Applicants are strongly opposed to the combination of proceedings relating to NOP1 and NOP2. If combination is not approved by the Tribunal, the Respondent is content to proceed with both proceedings separately.

B. Submissions of the NOP2 Applicants

33The NOP2 Applicants submit that Motion One should be dismissed for the following reasons:

(a) The two notices of proposals allege different contraventions of the regulatory scheme. The fact that the allegations arise from a single investigation does not support the argument that the two proceedings should be consolidated. In fact, considering that different contraventions were alleged in two different notices of proposal should indicate to the Tribunal that the proceedings should be separate.

(b) The Respondent is trying to do indirectly, what it could not do directly. This is prejudicial to the NOP1 Applicants and EGI who do not consent to the consolidation which would affect the timeframe to adjudicate the NOP1 and NOP2 proceedings, increase costs and be unfair. The Respondent has ignored that the steps in NOP1 are almost complete. The NOP1 Applicants are waiting for the Respondent to exchange its written submissions and to choose a date for the NOP1 Hearing. Meanwhile, the NOP2 proceeding does not have the issues identified and it has not identified the evidence required or the witnesses who will be called. The consolidation of the two proceedings would cause significant delays, additional and unnecessary expenses and thereby prejudice the NOP1 Applicants. There will also be prejudice to EGI given that it is not a party to both proceedings.

(c) As noted above, the NOP1 proceeding is essentially complete but is now being unnecessarily delayed by FSRA. On the other hand, NOP2 has only just been initiated and will involve different witnesses and documents and different timeframes. The consolidation would entail a larger hearing and require a longer time to hear the evidence.

(d) Consolidation would cancel all of the work completed by the NOP1 Applicants to date and would require a review and production of further evidence, causing additional expenses to be incurred. Given the difference in the allegations between NOP1 and NOP2, the evidence will not be repetitive.

(e) FSRA’s allegations deal in generalities with no supporting evidence.

(f) FSRA’s position is procedurally unfair and its conduct is an abuse of process.

C. Analysis

34It is clear from the circumstances relating to NOP1 and NOP2 that there is very little commonality of fact and law and the allegations by FSRA in the two notices of proposal are substantially different other than the allegations relating to Gerstel’s failure to comply with two separate summons.

35The fact that both NOP1 and NOP2 are the result of the same investigation as submitted by the Respondent is not material and the conduct of separate proceedings by the Tribunal will be no less fair.

36EGI would suffer prejudice if the two proceedings are combined and would incur additional expense if compelled to participate in both proceedings.

37Combining the two proceedings would delay for a considerable period of time the NOP1 Hearing which has already been subjected to extensive delays resulting from several factors including the NOP1 Applicants’ application to the Divisional Court for judicial review.

38It would be contrary to the public interest to further delay the NOP1 Hearing.

39Although there may be some repetitive evidence it would not be significant given the different allegations in NOP1 and NOP2 and there is little risk of inconsistent results.

40The Respondent is content to have the Second Motion dismissed and proceed with two separate proceedings.

D. Order Relating to the First Motion

41For the foregoing reasons, the Second Motion is dismissed.

Footnotes

1. 12020 ONFST 1.
2. 22017, SO 2017, c 34, Sch 17.
3. 3In the context of re-litigation of a prior decision, the Supreme Court of Canada warned of the danger of inconsistent decisions: inconsistency “in and of itself, will undermine the credibility of the entire judicial process, thereby diminishing its authority, its credibility and its aim of finality” (Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63 at para 51).