COURT OF APPEAL FOR ONTARIO DATE: 20231018 DOCKET: COA-22-CV-0475

Miller, Harvison Young and Favreau JJ.A.

BETWEEN

Kathryn Greenspan and JKSD Management Inc. Applicants (Appellants/ Respondents by Cross-Appeal)

and

Alan Van Clieaf, Joanne Van Clieaf, Ruth Weightman and Jaymor Securities Ltd. Respondents (Respondents/ Appellants by Cross-Appeal)

Counsel: Ian Klaiman, for the appellants and respondents by cross-appeal Stephen M. Turk, for the respondents and appellants by cross-appeal

Heard: July 21, 2023

On appeal from the judgment of Justice P. Tamara Sugunasiri of the Superior Court of Justice, dated February 2, 2023, with reasons reported at 2022 ONSC 6394, and supplementary reasons dated February 2, 2023.

Favreau J.A.:

A. Overview

[1] The appellants, Kathryn Greenspan and JKSD Management Inc. (“JKSD”), made two loans to Jaymor Securities Ltd. (“Jaymor”). The first loan was for $250,000 and was secured by a third mortgage on property owned by Jaymor, namely Units 9 and 10 at 104 West Beaver Creek Road in Richmond Hill (the “property”). The second loan was for $125,000 and was subject to an agreement that, if Jaymor did not pay the amount owed within thirty days of its due date, the debt would be secured by a fourth mortgage on the property. Jaymor defaulted on both loans. No fourth mortgage was registered on the property.

[2] The respondents, Alan Van Clieaf, Joanne Van Clieaf and Ruth Weightman, obtained a judgment for $1,152,373.72 against Jaymor. They subsequently registered a writ of seizure and execution against the property.

[3] The property was sold on March 12, 2021, for $1,560,000.00. The pay out for the first and second mortgages, tax arrears and the real estate commission leaves $548,437.08 to be paid to the appellants and the respondents. A dispute arose between these parties over how the funds are to be paid out. Specifically, the parties disagreed on the rate of interest that applies to the appellants’ third mortgage, whether the appellants have an equitable fourth mortgage over the property that takes precedence over the writ of execution, and, if so, the amount to be paid out to the appellants pursuant to the fourth mortgage. By agreement of the parties, in order to allow for the closing of the sale, the outstanding mortgages and writs were discharged and the amount of $548,437.08 was paid into the trust account of the appellants’ lawyer pending resolution of the dispute.

[4] On an application brought by the appellants, the application judge found that the rate of interest on the third mortgage was 20% per annum and that interest was payable up to the day before the property sale transaction closed. She also held that the appellants do not have an equitable fourth mortgage on the property.

[5] The appellants appeal the application judge’s order declaring that they do not have an equitable fourth mortgage and the finding that interest on the third mortgage only runs until the date the property was sold. The respondents cross-appeal the application judge’s determination that the rate of interest on the third mortgage is 20%. [1]

[6] Therefore, the issues on appeal are as follows:

a. Did the application judge err in finding that the appellants did not have a valid equitable fourth mortgage?

b. Did the application judge err in finding that the rate of interest on the third mortgage is 20%?

c. Did the application judge err in finding that interest on the third mortgage only runs to the date the property was sold?

[7] I would allow the appellants’ appeal on the issue of an equitable fourth mortgage but dismiss their appeal on the issue of the end date for interest payable on the third mortgage. I would also dismiss the cross-appeal. Each of these issues is addressed separately below. The relevant factual background is included in the sections dealing with each issue. I start with the two issues dealing with the third mortgage because they arise chronologically before the issues pertaining to the fourth mortgage, and provide some relevant factual context to the issue of the equitable fourth mortgage.

B. The Application judge did not err in determining the interest rate on the third mortgage

[8] The application judge made no error in deciding that the interest rate on the third mortgage was 20% per year.

(1) Terms of the third mortgage

[9] Ms. Greenspan and her husband, Jeffrey Greenspan, are involved in making investments through private loans. Ms. Greenspan is the sole officer and director of JKSD.

[10] Fabrizio Lucchese is the sole officer and director of Jaymor Securities Ltd. (“Jaymor”), which owned the property. [2] Mr. Lucchese is also the sole officer and director of Fabco Holdings Inc. (“Fabco”).

[11] On October 27, 2017, Ms. Greenspan made a loan of $250,000 to Fabco. Mr. Lucchese, Fabco and Jaymor executed a promissory note on that date in favour of Ms. Greenspan. The loan was for six months and had a maturity date of April 27, 2018. The promissory note provided that Fabco agreed to repay $250,000 plus interest “at the fixed rate of Two Percent (2% or $5,000) per month commencing on October 27, 2017”. The promissory note also stated that Ms. Greenspan was to receive a placement fee of $12,500. The promissory note further provided that the primary security for the loan would be in the form of a third mortgage on the property. Finally, the promissory note stated that interest was to run at 20% per year if the loan was not repaid by the maturity date:

In the event that any payment required hereunder is not made by the Maturity Date, interest shall accrue on the unpaid amount at the rate of twenty percent (20%) per annum. If any payment hereunder is not made within thirty (30) days after the Maturity Date, the whole of the outstanding principal and all accrued interest thereon shall, at the option of the holder of this Note, become immediately due and payable.

[12] Ms. Greenspan’s daughter handled the transaction. She registered the mortgage in the land titles system, which included a copy of the promissory note. The registration document stated that the interest rate was 0.02%, instead of 2% as stated in the note. In addition, the registration refers to the date of the promissory note as October 26, 2017, rather than October 27, 2017.

[13] On April 27, 2018, Ms. Greenspan and Mr. Lucchese discussed extending the deadline for paying off the promissory note. Ms. Greenspan’s evidence was that, at that time, she wanted the loan to be assigned to JKSD. However, as found by the application judge, there was no assignment of the debt from Ms. Greenspan to JKSD.

[14] There were two documents extending the payment deadline on the promissory note, ultimately extending it to April 27, 2019. However, the documents purported to be between JKSD and Jaymor, rather than between Ms. Greenspan and Fabco.

[15] As found by the application judge, besides a few interest payments, Fabco, Jaymor and Mr. Lucchese did not repay the loan by any of the purported deadlines.

(2) The application judge’s decision

[16] On the application, the respondents argued that the rate of interest set out in the promissory note was unlawful because it was contrary to the Interest Act, R.S.C., 1985, c. I-15, or, alternatively, the 0.02% interest rate set out in the registration document applied.

[17] The application judge rejected both these positions.

[18] First, she found that, despite the multiple errors in the promissory note and the mortgage registration, Ms. Greenspan had made a loan of $250,000 which remained unpaid and which was secured by a third mortgage on the property. In the circumstances, the primary issue was the rate of interest payable on the loan.

[19] Second, she found that the 0.02% interest rate in the registration document was an error, and that the terms of the promissory note governed the rate of interest.

[20] Third, she found that, regardless of whether ss. 4 or 6 of the Interest Act applied, the applicable rate of interest was 2% per month from October 27, 2017 to April 27, 2018, and 20% per year thereafter, which was clearly stated in the promissory note:

Greenspan’s loan for $250,000 matured on April 27, 2018 and remains largely unpaid but for some interest payments. Pre-maturity interest is fixed at 2% or $5000/month. After six months, any amount that remains outstanding is subject to an annual interest rate of 20%. This is not contrary to section 4 or section 6 of the Interest Act, nor does it contradict the principles set out in Elcano. The annual rate is clear with no hidden interest. To the extent that Greenspan’s loan is in substance a true mortgage, the provision is also not contrary to Section 8 of the Interest Act because it does not penalize Fabco for failing to pay the debt upon maturity – in fact it reduces the annual interest rate from 24% to 20% if the loan remains unpaid after six months.

(3) Analysis

[21] The respondents make two principal arguments in support of their cross-appeal. As set out below, I find that there is no merit to these arguments. The respondents essentially seek to revisit findings of fact or mixed fact and law made by the court below, which is not the role of this court, unless the court below made a palpable and overriding error: see Housen v. Nikolaisen, 2002 SCC 33, 2 S.C.R. 235.

[22] First, the respondents argue that the application judge erred in finding that the 0.02% in the mortgage registration was not the applicable rate of interest. The application judge’s finding that this was a typographical error was a finding of fact to which this court owes deference. It was supported by Ms. Greenspan’s affidavit. Moreover, it accords with common sense given that the promissory note refers to 2% interest and there would be essentially no benefit to Ms. Greenspan in making a loan at a 0.02% interest rate.

[23] Second, the respondents argue that, if the 0.02% interest rate in the registration document does not apply, the application judge should have found that the interest rate in the promissory note was contrary to s. 4 of the Interest Act. I do not agree.

[24] Section 4 of the Interest Act provides as follows:

Except as to mortgages on real property or hypothecs on immovables, whenever any interest is, by the terms of any written or printed contract, whether under seal or not, made payable at a rate or percentage per day, week, month, or at any rate or percentage for any period less than a year, no interest exceeding the rate or percentage of five per cent per annum shall be chargeable, payable or recoverable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.

[25] In this case, the application judge declined to decide whether the loan at issue could be described as a mortgage on real property which would exclude the application of s. 4 of the Interest Act. Nevertheless, assuming s. 4 applied, she made a finding of fact, which was clearly supported by the terms of the promissory note, that the rate of interest on the loan as of April 27, 2018 was 20% per year, and thereby not contrary to s. 4. In addition, for the period from October 27, 2017 to April 27, 2018, she found that 2% interest per month was clear and would not have led to any uncertainty. These are findings of mixed fact and law to which this court owes deference.

[26] The respondents argue that the application judge’s decision is contrary to this court’s decision in Elcano Acceptance Ltd. v. Richmond, Richmond, Stambler & Mills (1991), 3 O.R. (3d) 123. I agree with the application judge that Elcano is distinguishable. In Elcano, the court found that a 2% per month rate of interest in a promissory note was unlawful because it was unclear. Given that it was not expressed as a yearly rate of interest, it was not clear whether it was compounded.

[27] There is no such uncertainty here. In this case, the 2% rate of interest per month was limited to a period of six months and there was no suggestion that it was compounded [3] or uncertain. The ongoing rate of interest thereafter was explicitly expressed in yearly terms. A stipulated rate of interest that applies for a specified period of time that is clear and ascertainable by calculation or formula complies with s. 4 of the Interest Act even if it is not explicitly expressed as an annual rate of interest: Solar Power Network Inc. v. ClearFlow Energy, 2018 ONCA 727, at para. 53, leave to appeal refused, [2018] S.C.C.A. No. 487; and V.K. Mason Construction Ltd. v. Bank of Nova Scotia, [1985] 1 S.C.R. 271, at p. 287.

[28] Accordingly, I would dismiss the cross-appeal.

C. The application judge did not err in finding that the interest should run until the date before the closing of the property sale transaction

[29] After the application judge released her decision, the parties could not agree on whether the interest payable on the third mortgage ran up to the date of the sale of the property or until the principal is paid in full. In supplementary reasons for decision, the application judge found that interest on the loan ran up to the date before the closing of the property sale transaction. In reaching this conclusion, she reasoned as follows:

I agree with the Van Clieaf Respondents. The parties preserved their rights that existed immediately before closing. If the parties had not disputed their respective rights to the sale proceeds, Greenspan would have been paid the amount that was outstanding on her third mortgage as at closing. When creditors disagree on the distribution of the proceeds of real property, it is common for money to be held pending resolution of the dispute. The rights that the parties preserve are typically those that existed at the time of closing when final payout numbers would otherwise have been provided by the creditors.

This case is no different. The parties’ respective claims to the proceeds are those they had at the time the property was sold and would have been paid had there been no dispute.

[30] The appellants submit that their rights and interests at the time of the agreement included the entitlement to interest up to the date when the outstanding loan will be paid out. The appellants argue that the application judge made an error in reaching the contrary conclusion because she did not take account of the terms of the agreement the parties reached regarding the payment into court of the proceeds of sale. Specifically, the appellants rely on the following term that specifies that the agreement was not to prejudice the parties’ respective positions:

The Funds will stand in lieu of the Parties’ respective rights and interests in the Properties immediately prior to closing, and nothing herein shall prejudice the Parties’ respective positions with respect to the Funds, including, without limitation, entitlement, quantum or priorities. [Emphasis added.]

[31] Unfortunately, neither the application judge nor the parties provided any authority that assists in deciding how this issue should be determined. However, based on general principles of contract interpretation, I agree with the application judge’s disposition on this issue.

[32] Reviewing courts approach questions of contractual interpretation by a court below with deference: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, at para. 53. I find no error in the application judge’s interpretation of the agreement. By expressly tying the preservation of rights to the point in time immediately prior to closing, the parties agreed to a date upon which to determine their respective rights and interests.

[33] The surrounding circumstances also support the application judge’s interpretation. This was not a power of sale or foreclosure; rather the parties waited for the properties to be sold, after which the proceeds became available to satisfy the creditors. The parties disputed how the proceeds of sale should be distributed as amongst themselves, and discharged their registered interests from title so as not to hold up the sale. Although they agreed to discharge their mortgage as part of the bargain, the appellants claim they did not agree to forego interest on monies owed under the now discharged mortgage.

[34] However, as a matter of common sense, it would be reasonable to infer that the parties did not intend that interest would continue to accrue to the appellants’ benefit during the course of the litigation, including during any appeal period. The proceeds from the sale of the properties available to be paid out to the parties are finite. Paying out additional interest to the appellants because of the time taken up by litigation means that the respondents would get a smaller pay out, and possibly no pay out. This could not have been the parties’ intention unless it was expressly stated. I see no error in this aspect of the application judge’s decision.

D. The application judge erred in finding that JKSD did not have an equitable fourth mortgage

[35] The application judge erred in finding that JKSD did not have a valid equitable fourth mortgage. The application judge should have looked at the terms of the promissory note at the time it was made. From the note, it is clear that the parties agreed that the JKSD would have a mortgage on the property if Jaymor defaulted on the loan. The terms are not uncertain and the application judge should not have looked at subsequent events to find uncertainty.

(1) Terms of the agreement between JKSD and Jaymor

[36] In July 2019, Mr. Lucchese approached Ms. Greenspan’s daughter to ask whether her parents would agree to a further loan. In support of the request, Mr. Lucchese provided an appraisal to show that the property could support a fourth mortgage.

[37] On August 1, 2019, the parties executed a second promissory note. Ms. Greenspan, through JSKD, agreed to lend Jaymor $125,000. Jaymor was to repay the loan within thirty days, by September 1, 2019. In the event Jaymor did not repay the loan within that time and did not cure the defect within 30 days thereafter, Jaymor agreed that a fourth mortgage would be registered against the property. The relevant terms of the promissory note are as follows:

FOR VALUE RECEIVED, the undersigned, Jaymor Securities Ltd., (the “Borrower”), promises to pay to the order of JKSD Management Inc. […] the sum of ONE HUNDRED AND TWENTYFIVE THOUSAND AND NO/100 DOLLARS ($125,000.00), together with interest on the principal balance outstanding at the fixed rate of Two Percent (2% or $5,000) per month commencing on August 1, 2019; both principal and interest payable in lawful money of Canada as follows:

The entire principal balance ($125,000.00), together with all accrued interest thereon shall be due and payable in full in ONE MONTH from the date of advancing funds that is Sept 1, 2019 (“Maturity Date”) unless an extension has been agreed to in writing by the Lender prior to the maturity date.

Primary security shall be the personal guarantee of Fabrizio Lucchese, the guarantee of Fabio Holdings Inc. and in the event that the mortgage is not paid in full on maturity and the default is not cured within a full 30 days thereafter, then by registration of a fourth mortgage registered on 105 West Beaver Creek Road, Units 9 & 10, Richmond Hill Ontario, L4B 1C6. One Dollar ($1) consideration has been given to each of the Guarantors in relation to this mortgage.

In the event that any payment required hereunder is not made by the Maturity Date, interest shall accrue on the unpaid amount at the rate of twenty percent (20%) per annum. If any payment hereunder is not made within thirty (30) days after the Maturity Date, the whole of the outstanding principal and all accrued interest thereon shall, at the option of the holder of this Note, become immediately due and payable. (“Demand Date”). The Payor agrees to pay all costs of collection, including reasonable attorney’s fees, in the event any payment required hereunder is not made by the Demand Date. [Emphasis added.]

[38] Jaymor did not repay the loan within 30 days, and refused to do so when the mortgage went into default. No fourth mortgage was registered on the property before the respondents registered their writ of execution.

(2) The application judge’s decision

[39] On the application, the appellants sought a declaration that JKSD had an equitable fourth mortgage on the property, and that such a mortgage took precedence over the respondents’ writ of execution. The application judge declined to find that the appellants had established an equitable fourth mortgage. She gave several reasons for making this finding.

[40] First, she held that Jaymor’s refusal to register the mortgage after default demonstrated that there was no common intention between JKSD and Jaymor, and that JKSD had other means of enforcing the debt:

The circumstances of this case again do not square with the jurisprudence. Here, Jaymor refused to execute the fourth mortgage and at the time of maturity, had no intention of granting one. The appropriate remedy in that case is to sue for breach of contract and/or negligent misrepresentation rather than impose an equitable mortgage that interferes with the rights of pre-registered execution creditors. This is not a case where both parties intended to register a mortgage but the formalities could not be done or a mistake was made. Clearly Jaymor refused to register a mortgage and had no intention of doing so at the time any right JKSD might have had to request a mortgage, crystallized. Prior to that the only bargain JKSD had struck was the promise of a potential fourth mortgage on Jaymor’s property as secondary security for non-payment from the debtor or its guarantors. Further, apart from the fourth mortgage, JKSD has other remedies – a breach of contract claim against Jaymor and claims against Fab and Fabco as guarantors. The execution creditors have no other pocket to pursue. They took all necessary steps even within the pandemic restrictions, to solidify and register their interest. In my view, these considerations are also relevant to whether the court should grant JKSD an equitable remedy. [Emphasis added.]

[41] She further found that the terms of the promissory note were uncertain, such that it was not an enforceable agreement. In particular, she focused on the fact that JKSD and Jaymor entered into a subsequent promissory note that also provided for enforcement by way of a fourth mortgage and that there was a discrepancy between the stated percentage and amount of the interest rate:

I also agree with the Van Clieafs that contract principles requiring certainty of terms apply to equitable mortgages. In this case, JKSD purports to secure two different loans with the fourth mortgage. On September 23, 2019, JKSD loaned Jaymor an additional $30,000 with the same secondary security of a fourth mortgage. Once again, the primary security was the personal guarantees of Fab and Fabco who are not parties to the application. This leaves open the quantum of the fourth mortgage – is it $125,000 or $30,000? The fact that the $30,000 was paid shortly after the loan does not take away from the fact that the fourth mortgage lacks certainty of what amount it is intended to secure. I also accept Jaymor’s [sic] submissions that the rate of interest could not be ascertained on the face of the note underlying the fourth mortgage. It stated it was 2% or $5000/month. Two percent on $125,000 does not equate to $5000/month. Further JSKD’s affiant agreed that the parties had not completely settled on an interest rate for this loan and were still discussing it.

[42] Finally, she noted that “JKSD took few or no steps to give notice of its potential claim or pursue it”, ultimately concluding that “equity favours the innocent execution creditors”.

(3) General principles that apply to equitable mortgages

[43] Before turning to the analysis, it is helpful to discuss the general legal principles that apply to equitable mortgages.

[44] In Elias Markets Ltd., Re, (2006), 274 D.L.R. (4th) 166 (Ont. C.A.), at para. 63, this court stated that an equitable mortgage is distinct from a legal mortgage. The court further stated, at para. 65, that an equitable mortgage is meant to enforce “a common intention of the mortgagor and mortgagee to secure property for either a past debt or future advances, where that common intention is unenforceable under the strict demands of the common law”.

[45] In Emmott v. Edmonds, 2010 ONSC 4185, at para. 64, Brown J., as he then was, summarized the principles that apply to an equitable mortgage as follows, citing Elias Market Ltd., at paras. 65-66:

(i) An equitable mortgage is a contract which creates in equity a charge on the property, but does not pass the legal estate to the mortgagee;

(ii) The concept of an equitable mortgage seeks to enforce a common intention of the mortgagor and mortgagee to secure property for either a past debt or future advances, where that common intention is unenforceable under the strict demands of the law;

(iii) An equitable mortgage can be created in several ways, including by the fact that the mortgagor has not executed an instrument sufficient to transfer the legal estate. For example, the mortgagor may have signed a document in the form of a legal mortgage, but for some reason of want of formality the document is not sufficient to transfer the legal estate. Or, an equitable mortgage may result from an agreement in writing duly signed to execute a legal mortgage.

[46] Once the court is satisfied that a party has established the existence of an equitable mortgage, the equitable mortgage creates a charge in equity on the property which is enforceable as if it was a conventional mortgage under the equitable jurisdiction of the court: Elias Markets Ltd., at para. 66; Walter M. Traub, Falconbridge on Mortgages, 5th Ed. (Thomson Reuters Canada Ltd.) at ss. 5:1. By contrast, a writ of execution, such as the writ of seizure and sale in this case, is not a charge and it would not take precedence over an equitable mortgage. Rather, an execution creditor is subject to the same charges, liens and equities as to which the land was subject in the hands of the debtor: 1842752 Ontario Inc. v. Fortress Wismer 3-2011 Ltd., 2020 ONCA 250, at para. 37; Trang v. Nguyen, 2011 ONSC 7076, at paras. 25 and 27, aff’d 2012 ONCA 885, 114 O.R. (3d) 686; see also Jellett v. Wilkie (1896), 26 S.C.R. 282 and Anne Warner LaForest, Anger and Honsberger Law of Real Property, 3rd ed. (Thomson Reuters Canada Ltd.) at ss. 34:24.

[47] Given that an equitable mortgage derives from an agreement, see: Elias Markets Ltd., at para. 66, determining whether there is an equitable mortgage is a matter of contractual interpretation. The normal principles of contractual interpretation therefore apply. The court is to determine the intent of the parties, based on the words in the contract used in their ordinary and grammatical meaning, consistent with the surrounding circumstances reasonably known to the parties at the time the contract was formed: see Creston Moly Corp. v. Sattva Capital Corp., at para. 47. While the surrounding circumstances are relevant to interpreting the terms of a contract, they cannot be used to overwhelm the meaning of the words in the contract or to create what amounts to a new agreement: see Sattva, at para. 57.

[48] In Shewchuk v. Blackmont Capital Inc., 2016 ONCA 912, 404 D.L.R. (4th) 512, at para. 41, Strathy C.J.O. held that the surrounding circumstances or factual matrix do not include the parties’ conduct following the formation of the contract:

In my view, subsequent conduct must be distinguished from the factual matrix. In Sattva, the Supreme Court stated at para. 58 that the factual matrix “consist[s] only of objective evidence of the background facts at the time of the execution of the contract, that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting” (citation omitted and emphasis added). Thus, the scope of the factual matrix is temporarily limited to evidence of facts known to the contracting parties contemporaneously with the execution of the contract. It follows that subsequent conduct, or evidence of the behaviour of the parties after the execution of the contract, is not part of the factual matrix.

[49] The court explained in Shewchuk, at paras. 42-45, that relying on subsequent conduct as part of the factual matrix poses inherent risks with respect to the reliability of the evidence.

[50] For example, “the parties’ behaviour in performing their contract may change over time. Using their subsequent conduct as evidence of their intentions at the time of execution could permit the interpretation of the contract to fluctuate over time”: Shewchuk, at para. 43. In addition, the subsequent conduct itself may be ambiguous: see Shewchuk, at para. 44. Finally, “over-reliance on subsequent conduct may reward self-serving conduct whereby a party deliberately conducts itself in a way that would lend support to its preferred interpretation of the contract”: Shewchuk, at para. 45.

[51] In Shewchuk, at para. 46, this court further held that, given the risks inherent in relying on evidence of conduct following the formation of a contract, such evidence “should be admitted only if the contract remains ambiguous after considering its text and its factual matrix”. Accordingly, subsequent conduct may be relevant to resolving an ambiguity in an agreement. However, absent an ambiguity, subsequent conduct is not relevant to understanding the factual matrix or surrounding circumstances of the agreement.

(4) Analysis

[52] The application judge made several errors in her application of the law of equitable mortgages to the circumstances of this case.

[53] First, the application judge made an error of law in taking into consideration the conduct of JKSD and Jaymor subsequent to the formation of the promissory note without first determining whether there was an ambiguity in the note. As reviewed above, the application judge relied on the fact that Jaymor refused to register a fourth mortgage as evidence that the parties had not intended that a fourth mortgage be registered. However, these events took place after Jaymor and JKSD had entered into the promissory note. The terms of the promissory note itself make clear that the parties intended that a fourth mortgage would be registered on the property if Jaymor defaulted on the loan. There was no language in the promissory note suggesting that Jaymor retained discretion to decide whether or not the mortgage would be registered. This is illustrative of the caution expressed by this court in Shewchuk. The fact that Jaymor sought to resile from the agreement does not create ambiguity or uncertainty in the agreement. To accept that this conduct created ambiguity would give undue power to contracting parties to create ambiguity where none existed by refusing to follow through on their obligations in an agreement, or by acting in a self-serving manner after the formation of an agreement.

[54] Second, the application judge made an error of law in finding that the terms of the agreement were uncertain because a third promissory note stated that, in the event of default, a fourth mortgage would be registered on the property. Again, this occurred after JKSD and Jaymor entered into the second promissory note. Notably, Jaymor repaid the third promissory note, so there was never any conflict between enforcing the second and third promissory note. More importantly, the existence and terms of the third promissory note could not create ambiguity in the terms of the second promissory note if none existed at the time the parties entered into it.

[55] Third, the application judge made an error of law in finding that the terms of the promissory note were uncertain because of the description of the interest rate. In making this finding the application judge relied on the fact that the promissory note referred to a rate of interest of “2% or $5,000 per month”, noting that $5,000 per month is not 2% of $125,000. In relying on this erroneous description of the interest rate, the application judge failed to try to give effect to the intentions of the parties and to consider whether this was an essential term of the agreement, as required by Canada Square Corporation Ltd. et al. v. VS Services Ltd. et al. (1981), 34 O.R. (2d) 250, at paras. 27, 32-34. See also Cohen v. Woodcliffe Corporation, 2022 ONSC 5599, at paras. 134-36. While the interest rate forms part of the price of the contract and may therefore be characterized as an essential term of the agreement: see McKenzie v. Walsh, [1920] 61 S.C.R. 312, at p. 313, the erroneous reference to $5,000 on its own cannot be said to create any uncertainty or ambiguity. The wording used was “Two Percent (2% or $5,000) per month”. The use of “Two Percent” outside the parenthesis and repeated inside the parenthesis on its own strongly suggests that the parties intended that the interest rate was to be 2% and that the reference to $5,000 was an error in drafting based on the use of the first promissory note as a precedent. More importantly, given that the loan was meant to be for one month at a rate of interest of 2% for that month, after which the rate of interest was to be 20% per year in the event Jaymor defaulted on the loan, the erroneous reference to $5,000 per month in a parenthesis can hardly be characterized as an essential term of the agreement. Accordingly, the application judge failed to conduct the proper analysis to determine whether the reference to $5,000 was a true ambiguity in an essential term that would warrant invalidating the agreement.

[56] I am also satisfied that the application judge made an error in finding that there was evidence that JKSD and Jaymor had not yet agreed on a rate of interest for the fourth mortgage as part of her finding that there was an ambiguity. In doing so, she relied on evidence from Mr. Greenspan about discussions that occurred after the default. Again, these are events that occurred after the parties entered into the promissory note. More importantly, it is evident that the discussions were not about the original interest rate the parties had agreed to but, rather, about a potential discounted interest rate in the event that Jaymor made its payment to JKSD more promptly.

[57] Fourth, the application judge made an error of law in considering that the appellants had other means of enforcing their rights under the promissory note. If JKSD can establish that it has an equitable fourth mortgage on the property, the fact that it may be able to also sue Jaymor, Fabco, Mr. Lucchese and the other parties who signed the promissory note is irrelevant. An equitable mortgage gives JKSD direct access to recovery from the proceeds of sale from the property, whereas the ability to sue Jaymor, Fabco and Mr. Lucchese would create added expense and uncertainty over the ability to recover. The purpose of bargaining for a mortgage is to avoid this uncertainty.

[58] As pointed out by the appellants, the application judge effectively misapplied the equitable doctrine of marshalling. As held by this court in Green v. Bank of Montreal, the marshalling doctrine applies to regulate the rights of creditors among themselves. However, as the court held at para. 10,

[I]n so regulating their rights the court will never interfere with the paramount claim of the superior creditor (the one which has the choice of the two funds of the debtor from which to collect) to pursue his or her remedy against either fund, but provides that if he or she resorts to the fund which the inferior creditor can alone resort, then the inferior creditor shall not be prejudiced.

[59] In this case, if JKSD can establish that it has an equitable mortgage, it is the superior creditor vis-à-vis the respondents. The application judge erred in relying on the fact that JKSD could pursue a civil action as a basis for denying its claim to an equitable mortgage. This was a misapplication of the marshalling doctrine which required the application judge to first determine whether JKSD had a right to an equitable mortgage based on the agreement between the parties at the time it was made and then to determine whether there was another source of funds from which JKSD could recover that would cause it no prejudice. Had she followed this reasoning, it would have been evident that the opportunity to sue Jaymor, Fabco and Mr. Lucchese would place JKSD in an inferior position as compared with the ability to recover directly from the proceeds of sale of the property.

[60] Finally, the application judge made a legal error in relying on the fact that JKSD had delayed in taking steps to enforce its right to an equitable fourth mortgage. In considering that delay weighed against JKSD’s claim, the application judge failed to consider whether it was appropriate to rely on the doctrine of laches to bar the appellants’ equitable claim. Delay on its own is not sufficient for the doctrine of laches to apply: M.(K.) v. M.(H.), [1992] 3 S.C.R. 6, at para. 98. In order for the doctrine of laches to apply, the application judge would have to be satisfied that, by delaying the institution of its application, JKSD acquiesced to the non-registration of a fourth mortgage after Jaymor defaulted on the loan or that the respondents relied on the delay to their detriment: M.(K.), at para. 98. See also Chippewas of Sarnia Band v. Canada (Attorney General) (2000), 51 O.R. (3d) 641, at para. 297, leave to appeal refused, [2001] S.C.C.A. No. 63; K.(K.) v. G.(K.W.), 2008 ONCA 489, 90 O.R. (3d) 481, at para. 41. In this case, there is no evidence that would support a finding favourable to the respondents on either branch of this test. There is no evidence that the appellants agreed to forego registration of a fourth mortgage. Further, they notified the respondents about their claim and commenced the application relatively soon after learning about the respondents’ writ of execution. There is no evidence that the respondents suffered any prejudice in reliance on JKSD’s conduct. Again, the application judge erred in failing to apply the correct legal principles to the issue of whether any delay on JKSD’s part should preclude the court from granting an equitable remedy, namely from finding that it was entitled to an equitable fourth mortgage.

[61] Given the application judge’s errors, I would not uphold her finding that JKSD was not entitled to an equitable fourth mortgage on the property. In my view, there is no question that JKSD is entitled to such a remedy in this case. The terms of the promissory note at the time it was entered into were clear: JKSD would be entitled to a fourth mortgage on the property in the event Jaymor defaulted on its loan. Jaymor defaulted on its loan. The minor error in stating the monthly rate of interest for the first month of the loan did not create any ambiguity on an essential term of the agreement. Notably, it would clearly not be appropriate for Jaymor to avoid its debt and registration of the mortgage by making such an argument. The respondents have no greater entitlement to seek to invalidate the terms of the agreement. The issue before the application judge was not competing equitable claims between the parties. Rather, it was whether JKSD was entitled to an equitable mortgage, which, if it was, would give it priority over the respondents’ writ of execution.

[62] Accordingly, I would grant an order in the form of a declaration that the appellants have an equitable fourth mortgage on the property.

E. Disposition

[63] I would allow the appeal and make the following order:

a. Paragraph 1 of the application judge’s judgment is to be substituted with an order declaring that JKSD holds an equitable fourth mortgage on the property in the amount of $125,000 plus interest.

b. The interest payable on the third and fourth mortgages is to run until the date before the property sale transaction closed.

c. The parties are to attempt to agree on revisions to paragraph 2 of the application judge’s judgment regarding the distribution of the funds held in trust in accordance with these reasons, failing which the issue is remitted back to the application judge or another judge of the Superior Court.

[64] I would dismiss the cross-appeal.

[65] As agreed between the parties, given that the appellants were substantially successful on the appeal and cross-appeal, they are entitled to $16,000 for the appeal and $30,000 for the costs below.

Released: October 18, 2023 “B.W.M.” “L. Favreau J.A.” “I agree. B.W. Miller J.A.” “I agree. A. Harvison Young J.A.”

Footnotes:

[1] Despite the fact that these reasons deal with the appeal and cross-appeal, for ease of reference I refer to Ms. Greenspan and JKSD as the “appellants” and to Mr. Van Clieaf, Ms. Van Clieaf and Ms. Weightman as the “respondents” throughout the decision.

[2] While Jaymor was named as a respondent on the application, it did not participate in the application or in this appeal.

[3] As noted by the application judge, the parties agreed that the interest was not compounded.