Court File and Parties

COURT OF APPEAL FOR ONTARIO DATE: 20240119 DOCKET: COA-23-CV-0060

Harvison Young, Thorburn and Favreau JJ.A.

BETWEEN

Greenpath Capital Partners Inc. Applicant (Respondent)

and

1903130 Ontario Ltd., Filbitron Marketing Corporation 2018 Ltd., Diamantino Silva, Jacinta Silva, Tina Betti, Sergio Molella, Frank Greco, Amond Management Inc., G.A.P. Farms Inc., Pierina Pizzardi and Trilend Inc. Respondents (Appellants)

AND BETWEEN

1903130 Ontario Ltd., Filbitron Marketing Corporation 2018 Ltd., Diamantino Silva, Jacinta Silva, Tina Betti, Sergio Molella, Frank Greco, Amond Management Inc., G.A.P. Farms Inc., Pierina Pizzardi and Trilend Inc. Applicants (Appellants)

and

East Sovereign GP Inc. and Blake Andrew Wyatt Respondents (Respondents)

Counsel: Kevin Sherkin, for the appellants Bryan Rumble and Julien Bonniere, for the respondent Greenpath Capital Partners Inc. Wojtek Jaskiewicz, for the respondents East Sovereign GP Inc. and Blake Andrew Wyatt

Heard: September 18, 2023

On appeal from the order of Justice Marvin Kurz of the Superior Court of Justice, dated December 28, 2022, with reasons reported at 2022 ONSC 7316.

Harvison Young J.A.:

[1] The dispute at the heart of this appeal concerns the proceeds of a power of sale which was exercised with respect to certain property, namely 125, 126 and 128 East Street and 2286, 2296, and 2298 Sovereign Street in Oakville, Ontario (collectively referred to as the “properties”). The appellants, other than the broker Trilend Inc. (“Trilend”), are an investment syndicate (the “First Mortgagees”) who held a first mortgage over the properties, which was owned by the respondent East Sovereign GP Inc. (“East Sovereign”). This first mortgage secured a principal sum of $7,182,000 for a one-year term commencing March 1, 2020. The respondent Blake Andrew Wyatt is the principal of East Sovereign and the guarantor of the first mortgage.

[2] The respondent Greenpath Capital Partners Inc. (“Greenpath”) registered a second mortgage against the properties, securing a principal sum of $700,000 for the same one-year term as the first mortgage.

[3] The First Mortgagees appeal from the application judge’s order holding that they do not have priority over the Greenpath mortgage to collect certain disputed amounts ($283,508.64) from the proceeds of sale. They also appeal from the dismissal of their application to recover the disputed amounts from East Sovereign. The application judge held that the disputed amounts were not enforceable because they violate s. 8 of the Interest Act, R.S.C. 1985, c. I-15.

[4] At the conclusion of the hearing, we dismissed the appeal with reasons to follow. These are the reasons.

Background

[5] East Sovereign fell into arrears on payments under the first mortgage well before the maturity date. East Sovereign, Wyatt, the First Mortgagees, and Trilend (the broker) entered into a forbearance agreement (the “Forbearance Agreement”) dated January 1, 2021. Greenpath was not a party to the Forbearance Agreement.

[6] Under the Forbearance Agreement, East Sovereign and Wyatt agreed to pay the First Mortgagees a total of $179,550 in three installments between February 3 and March 1, 2021, and the First Mortgagees agreed to forbear from enforcing the first mortgage. The Forbearance Agreement included East Sovereign and Wyatt’s acknowledgment that, starting on January 9, 2021, the total indebtedness of $7,544,450, plus interest of $1,967.67 per day, was due and owing. East Sovereign also confirmed that it was validly indebted to the First Mortgagees for the payment in full of the mortgage debt without defence, counterclaim, offset, cross-complaint, claim or demand of any kind or nature whatsoever.

[7] East Sovereign made a payment of $30,000 but failed to satisfy the entire amount of $179,500 that it was required to pay between February 3 and March 1, 2021 under the Forbearance Agreement. The First Mortgagees commenced power of sale proceedings by Notice of Sale dated March 25, 2021, and the sale of the properties ultimately closed on August 24, 2021 for $9,000,000.

[8] Under the Notice of Sale, the First Mortgagees claimed a total of $7,588,191.38 was owing according to the following breakdown [1]:

Principal Balance: $7,182,000.00 Interest for January and February 2021: $119,700.00 Less Partial Payment received February 3, 2021: -$30,000.00 Accrued Interest to March 25, 2021: $49,191.75 Prepayment Fee: $103,958.64 NSF Fees: $250.00 Default Fees: $179,550.00 Other Fees: $1,250.00 TOTAL: $7,588,191.38

[9] Following the sale of the properties, the First Mortgagees issued and served a discharge statement dated August 17, 2021 (the “Discharge Statement”) claiming $7,983,687.04 from the proceeds of sale according to the following breakdown:

Principal Balance: $7,544,450.00 Interest for January 9-31, 2021: $44,108.64 Interest for February – July 2021: $359,100.00 Interest for August 1-20, 2021: $39,353.40 Charge for Preparation of Statement of Claim: $2,000.00 Discharge Fee: $750.00 Appraisal Fee for two appraisals: $14,125.00 Management Fee from May 14 – August 20, 2021: $9,800.00 TOTAL: $7,983,687.04

[10] The Notice of Sale and Discharge Statement indicate different amounts, both for the principal balance and the Disputed Amounts. While the Notice of Sale set out the total amount due to the First Mortgagees as $7,588,191.38, the Discharge Statement claimed $7,983,687.04, which is $395,495.66 more than the amount set out in the Notice of Sale.

[11] On August 26, 2021, Greenpath’s counsel pointed out the inconsistency between the principal balance figure in the Discharge Statement and the Notice of Sale and requested that the First Mortgagees send a corrected Discharge Statement. On September 2, 2021, the First Mortgagees’ counsel responded:

[w]hile the totals in the notice of sale accord, it looks as if the counsel who issued the notice broke out the amounts different [sic] than perhaps I would.

[12] The First Mortgagees’ counsel went on to refer to the Forbearance Agreement, which he attached, containing East Sovereign’s “confirmation of $7,544,450 plus additional sums o/s [outstanding] In [sic] Feb of 2021”. Counsel added: “I can confirm that the amount o/s [outstanding] to our client was indeed accurate”.

[13] Greenpath responded on September 24, 2021, setting out its position as follows:

a. Greenpath was not a party to the Forbearance Agreement and as such the Agreement is not enforceable as against Greenpath; b. The Notice of Sale contained problematic items (the “Disputed Amounts”), specifically the pre-payment fee of $103,958.64 as well as the default fee in the amount of $179,550.00; c. The default fee was in violation of s. 8(1) of the Interest Act; and d. There should be sufficient surplus funds to pay the full amount ($762,436.42) set out in the discharge statement.

[14] The First Mortgagees paid out $522,278.81 to Greenpath around November 4, 2021. Before the application judge, Greenpath claimed that the First Mortgagees were not entitled to the Disputed Amounts and sought payment of the whole amount of $762,436.42 set out in Greenpath’s own discharge statement.

[15] As noted above, there were discrepancies in the First Mortgagees’ evidence. Not only did the $7,544,405 figure in both the Forbearance Agreement and the Discharge Statement lack particularized calculations for the individual line items, but the uncertainty surrounding its accuracy was exacerbated by the fact that neither the Forbearance Agreement nor the Discharge Statement made any reference to the Disputed Amounts claimed in the Notice of Sale.

The decision below

[16] There were two applications before the application judge: (1) Greenpath sought “judicial determination” of the First Mortgagees’ entitlement to the Disputed Amounts; and (2) the First Mortgagees claimed the Disputed Amounts directly against East Sovereign and Wyatt under the Forbearance Agreement. In the first application, Greenpath argued that the Disputed Amounts form part of the Forbearance Agreement, not the first mortgage, and that they are an improper “fine, penalty or rate of interest” forbidden by s. 8(1) of the Interest Act. In response, the First Mortgagees argued that the Forbearance Agreement was incorporated into the first mortgage such that they had priority over Greenpath to collect the Disputed Amounts. In the second application, the First Mortgagees asserted that the Forbearance Agreement was binding on East Sovereign and Wyatt as the agreement to forbear from enforcing the first mortgage was consideration, which takes the Forbearance Agreement outside the scope of s. 8(1) of the Interest Act. In their notice of application, the First Mortgagees set out the principal amount of $7,182,000.00 but still claimed the prepayment fee of $103,958.64 and the default fee of $179,550.00.

[17] The application judge first found that there was a gap in the First Mortgagees’ evidence in that they had failed to provide particulars of the calculation of the $7,544,405 figure in both the Forbearance Agreement and the Discharge Statement. He noted that the affidavit evidence sworn by Bryce Coates, the president of Trilend, deposed that the Notice of Sale “wrongly broke out the amounts” without indicating how they should have been or were actually calculated.

[18] Based on the record before him, the application judge was not able to determine why the sums in the Forbearance Agreement and the Discharge Statement differed from those in the Notice of Sale. The First Mortgagees did not explicitly deny that the Disputed Amounts were included in the higher principal balance claimed in the Forbearance Agreement and Discharge Statement. The other parties to the two applications accepted that the Disputed Amounts were contained in the Forbearance Agreement and Discharge Statement and that the First Mortgagees included them in the totals under both documents.

[19] The application judge also rejected the appellants’ argument that clause 19 of the Set of Standard Charge Terms, number 200033 (the “Standard Charge Terms”) allowed for the mortgagor and a first mortgagee to increase the principal debt of any mortgage at any time, to the prejudice of the interests of subsequent mortgagees. He found that the Forbearance Agreement did not form part of the first mortgage and did not carry the First Mortgagees’ priority to the second mortgage. As a result, the First Mortgagees were not entitled to claim the Disputed Amounts out of the proceeds of sale in priority to Greenpath’s second mortgage.

[20] In addition, the application judge found that the Disputed Amounts constituted a prohibited penalty pursuant to s. 8(1) of the Interest Act and could not be claimed against East Sovereign or charged in priority to Greenpath as second mortgagee.

Issues on appeal

[21] The appellants raise two main issues on this appeal: (1) whether the application judge erred in finding that the Disputed Amounts were not owing pursuant to the terms of the first mortgage; and (2) whether the application judge erred in finding that the Disputed Amounts constituted a prohibited penalty pursuant to s. 8 of the Interest Act.

[22] I will address these arguments in turn.

(1) Did the application judge err in finding that the appellants had no priority over Greenpath with respect to the Disputed Amounts?

[23] The appellants submit that the application judge erred in finding that the Disputed Amounts of approximately $283,508 did not properly arise under the first mortgage. They argue that the Forbearance Agreement provides the First Mortgagees with priority with respect to amounts otherwise owing under the first mortgage, and that Greenpath registered its second mortgage despite knowing that the first mortgage prohibited subsequent registration. They also argue that a portion of the Disputed Amounts constituted the broker’s amounts payable to Trilend.

[24] I see no merit to this argument.

[25] First, I see no error in the application judge’s conclusion that the First Mortgagees could not claim priority with respect to the Disputed Amounts because Greenpath was not a party to the Forbearance Agreement and the Disputed Amounts did not properly arise from the first mortgage. In reaching this conclusion, the application judge relied on the wording of the Standard Charge Terms of the first mortgage, and he found that the relevant provision, clause 19, did not allow for increases in the principal balance or any other parts of the first mortgage, other than the rate of interest. On this basis, the applicant judge found that the Forbearance Agreement was not “subsumed” into the first mortgage and that it was a separate agreement that was not enforceable against Greenpath. That conclusion is well supported by the language of the Standard Charge Terms and the record, and I see no basis for interfering with the application judge’s conclusion on this issue.

[26] Second, the application judge also properly rejected the argument that the $103,958.64 prepayment fee was a 3% lender fee to the broker, Trilend, which was already included in the first mortgage commitment. He did so because there was no evidence on this in the record before him, noting that “a factum is not evidence”. The same is true on this appeal. There is no evidence that the Forbearance Agreement was a renewal of the first mortgage, nor that the alleged renewal fee was an actual cost incurred by the First Mortgagees. These findings were amply grounded in the record before the application judge, and I see no palpable and overriding error that could justify the intervention of this court.

[27] In any event, as discussed in the section below, even if the Disputed Amounts properly fell under the first mortgage, they were an unlawful penalty contrary to s. 8 of the Interest Act and were thereby unenforceable against Greenpath as the second mortgagee, East Sovereign as the owner and mortgagor of the properties, and Wyatt as the guarantor of the first mortgage.

(2) Did the application judge err in finding that the Disputed Amounts constituted a prohibited penalty pursuant to s. 8 of the Interest Act?

[28] It is useful to set out s. 8(1) of the Interest Act:

8 (1) No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

[29] This provision serves a protective purpose: P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331, 126 O.R. (3d) 108, at para. 50, citing Reliant Capital Ltd. v. Silverdale Development Corp., 2006 BCCA 226, 270 D.L.R. (4th) 717, leave to appeal refused, [2006] S.C.C.A. No. 265. As held by the British Columbia Court of Appeal in Reliant Capital, at para. 53, Parliament intended for mortgages on real estate to be treated differently than other loans:

Parliament has singled out mortgages on real estate for special treatment, or at least treatment that differs from loans that are not secured on real property. I infer that at least one legislative purpose was to protect the owners of real estate from interest or other charges that would make it impossible for owners to redeem, or to protect their equity. If an owner were already in default of payment under the interest rate charged on monies not in arrears, a still higher rate, or greater charge on the arrears would render foreclosure all but inevitable.

[30] This passage was endorsed by the Supreme Court in Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18, [2016] 1 S.C.R. 273, at paras. 20-21.

[31] In P.A.R.C.E.L., at paras. 53-56, Cronk J.A., writing for the court, outlined the criteria to be applied in determining whether an amount constitutes a violation of s. 8. The criteria may be summarized as follows:

1. The covenant in question must impose a “fine”, “penalty” or “rate of interest”. If it does not, then s. 8(1) is not engaged.
2. The “fine”, “penalty” or “rate of interest” must relate to “any arrears of principal or interest secured by mortgage on real property” (emphasis omitted), whether the arrears arose on default occurring before or after maturity of the relevant debt instrument.
3. The covenant must have the prohibited effect of “increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears”.
4. The arrears of principal or interest must be “secured by mortgage on real property”.

[32] The application judge found that the Disputed Amounts could not be recovered by the First Mortgagee from the proceeds of sale for two reasons.

[33] First, in considering the default fee, the application judge dismissed the First Mortgagees’ arguments that the parties contracted out of s. 8(1) and that s. 8(1) was consumer protection legislation that did not apply to the facts of the case. The wording of s. 8(1) was not narrow enough to exclude property holders like East Sovereign, and it was not open to the parties to contract out of this statutory public policy protection. East Sovereign was entitled to the protection of s. 8(1).

[34] Second, as in P.A.R.C.E.L., the First Mortgagees did not discharge their onus of establishing the basis for the calculation of the $7,544,405 amount that was contained in both the Forbearance Agreement and the Discharge Statement. The application judge also noted that the Notice of Sale made specific reference to the Disputed Amounts. Moreover, though the evidence established, as noted above, that the Notice of Sale “wrongly broke out the amounts,” the First Mortgagees did not provide a breakdown of how they should have been, or in fact were, broken out.

[35] In P.A.R.C.E.L., at para. 96, this court made it clear that the onus is on the mortgagee claiming the amounts following default to prove that they “reflect real costs legitimately incurred by the [mortgagee] for the recovery of the debt, in the form of actual administrative costs or otherwise”. There, the creditor respondents were claiming certain late payment charges and default fees. With respect to the charges for these fees, Cronk J.A. stated the following at paras. 95-96:

The respondents point to no evidence on the record before this court demonstrating that they incurred any actual losses as a result of late or missed payments under the Mortgage, apart from the amount of the non-payment itself. This is not a case where it is alleged that payments made by or on behalf of Parcel under the Mortgage were returned “NSF” or otherwise rejected for payment, giving rise to administrative costs for the respondents.

In the absence of evidence that the charges in question reflect real costs legitimately incurred by the respondents for the recovery of the debt, in the form of actual administrative costs or otherwise, the only reason for the charges was to impose an additional penalty or fine, apart from the interest otherwise payable under the Mortgage, thereby increasing the burden on the appellants beyond the rate of interest agreed upon in the Mortgage. The courts have not hesitated to disallow similar charges on the basis that they offend s. 8 of the Interest Act. [Footnotes omitted.]

[36] In light of this well-established onus, the application judge dealt with the prepayment and default fees separately.

[37] Citing We Care Funding Limited Partnership v. LDI Lakeside Developments Inc. et al, 2021 ONSC 7466, the application judge found that given the absence of any evidence that the prepayment fee was an actual expenditure on the part of the First Mortgagees, or any requirement that the First Mortgagees pay the fee to Trilend, the prepayment fee represented an increase in the interest rate pertaining to monies in default, in excess of the interest rate payable upon monies not in default, contrary to s. 8 of the Interest Act: at para. 67.

[38] Likewise, the application judge found that the First Mortgagees’ arguments with respect to the default fee were neither borne out of the evidence nor supported in law. Though the First Mortgagees argued that the fee corresponded to three months’ interest in accordance with s. 17 of the Mortgages Act, R.S.O. 1990, c. M.40, the application judge found there was no evidence that the fee was calculated in accordance with s. 17, nor that the amount in the Forbearance Agreement included an amount arising from s. 17. The application judge also referred to the finding in We Care that, once a mortgagee undertakes enforcement proceedings, it can no longer collect a three-month interest bonus as doing so would constitute a penalty and therefore offend the Interest Act: at para. 71. I would also note that the First Mortgagees have not adduced any evidence to support their argument that the default fees should be treated as anything other than what they were labelled as, i.e., default fees.

[39] The bottom line is that the absence of any evidence to support the appellants’ position that these were valid costs incurred is fatal, as the only reasonable inference is that they, in effect, increased the interest owing on the entire principal amount, even that which was not in arrears. I see no error on the part of the application judge in his analysis and conclusion that the disputed fees effectively constituted prohibited interest charges under s. 8 of the Interest Act.

Conclusion and Costs

[40] The appeal is dismissed. Costs of the appeal are payable in the amount of $10,000 by the First Mortgagees to the respondent Greenpath.

Released: January 19, 2024 “A.H.Y.” “A. Harvison Young J.A.” “I agree. Thorburn J.A.” “I agree. L. Favreau J.A.”

Footnote:

[1] The line items in this table, as well as the table in para. 9, do not correctly add up to the totals indicated in each table. These errors are not material to the questions of law before us, nor were they addressed by the parties. The conclusions drawn in these reasons pertaining to the discrepancy between the principal balances and the Disputed Amounts are not impacted by these errors.