Court File and Parties

COURT FILE NO.: CV-17-1970 DATE: 20170705 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: 2575105 Ontario Inc., Lowell Wintrup, Guy Salt, 2235209 Ontario Inc. in trust, and Connect 1 Corp, Applicants

AND:

Diversified Capital Inc. and Sedona Lifestyles (Rometown) Inc., Respondents

BEFORE: Ricchetti, J.

COUNSEL: S. Morris for Counsel, for the 2575105 Ontario Inc., Lowell Wintrup, Guy Salt, 2235209 Ontario Inc. in trust, and Connect 1 Corp (“Applicants”) D. Michaud and J. Peece for Diversified Captial Inc. (“Diversified”) S. Price for Sedona Lifestyles (Rometown) Inc. (“Sedona”)

HEARD: June 29, 2017

Endorsement

THE APPLICATION

[1] The Amended Application is dated May 18, 2017. This is an application for:

a) A temporary injunction preventing Diversified from proceeding with a Power of Sale of Lots 5, 9 and 13 on Plan 43M1967 in the City of Mississauga (the “Lots” collectively or “Lot” individually);

b) An order requiring Diversified to assign the first mortgage (defined herein as the Morrison First Mortgage) to 2575105 Ontario Inc.("105 Inc.") upon payment of $360,843.89; and

c) Vesting legal title to Lot 5 to Guy Salt, Lot 9 to Lowel Wintrup and Natalyia Kolydchak and Lot 14 to 2235209 Ontario Inc. in trust (the “Applicant Purchasers”) upon payment of the amount owing under the respective Agreements of Purchase and Sale ("APS") “with appropriate adjustments and deductions for credits to be decided on closing”.

[2] At the conclusion of the Applicant’s submission, this court advised counsel that it did not need to hear from the Respondents. The Application is dismissed. These are the reasons.

THE PARTIES

[3] Sedona Lifestyles (Rometown) Inc. (“Sedona”) is a real estate developer and owner of the Lots. Claudio Posocco is the president of Sedona (“Posocco”).

[4] On February 22, 2013, Guy Salt (“Salt”) entered into an APS for Lot 5.

[5] On February 15, 2013 Lowell Wintrup (“Wintrup”) entered into an APS for Lot 9.

[6] On February 15, 2013, 2235209 Ontario Inc. in trust (“209 Inc.”) entered into an APS for Lot 13. John Greco is the principal of 209 Inc.

[7] The Applicants Guy Salt, Lowel Wintrup, Natalyia Kolydchak and 2235209 Ontario Inc, in trust are hereafter collectively referred to as the “Applicant Purchasers”.

[8] Diversified Capital Inc. (“Diversified”) is a lender. Russ Giannotta is the manager of Diversified (“Giannotta”).

[9] Connect 1 Corp (“Connect”) registered a construction lien on the Lots. Wintrup is the principal of Connect 1.

[10] The Applicant 105 Inc. is an Ontario Corporation.

THE FACTS

[11] Sedona was the owner, developer and builder of a subdivision located in Mississauga. (the “Project”)

[12] Each of the APS with the Applicant Purchasers specifically provided that the APS were subordinate and postponed to any mortgages entered into by Sedona.

[13] In October 2013, Cameron Stephens Financial Corporation (“CSF”) provided construction financing. Sedona granted CSF a first mortgage. The CSF mortgage was a registered first mortgage in the amount of $10,908,000.

[14] In May 2015, Diversified provided Sedona additional financing for the Project and assumed the CSF first mortgage. This was Diversified’s first involvement in the Project.

[15] In August 2015 Morrison Financial Mortgage Corporation (“Morrison”) provided additional construction financing to Sedona in return for a registered first mortgage (“Morrison First Mortgage”). Diversified postponed its mortgage to the Morrison First Mortgage (“Diversified Second Mortgage”).

[16] The Diversified Second Mortgage expired on November 1, 2016 but was extended to November 30, 2016.

[17] The Morrison First Mortgage expired on November 1, 2016 but was extended to January 31, 2017.

[18] Both mortgages went into default after they were due. Both mortgages remained in default at all relevant times.

[19] While some of the Lots in the Project had closed and partial discharges had been delivered, Lots 5, 9 and 13 had not closed by February 2017.

[20] On March 3, 2017, Diversified agreed to purchase the Morrison First Mortgage. This was done to protect the Diversified Second Mortgage.

[21] On March 31, 2017 Diversified issued a Notice of Sale under the Morrison First Mortgage. There was approximately $360,000 outstanding on the Morrison First Mortgage.

[22] On May 3, 2017, Diversified issued a Notice of Sale under the Diversified Second Mortgage. The amount outstanding under the Diversified Second Mortgage was approximately $4,865,000.

[23] After Diversified had issued the Notice of Sale under the Diversified Second Mortgage, on May 3, 2017, Wintrup and 209 Inc. tendered $360,848 being the amount owing under the Morrison First Mortgage and requested the Morrison First Mortgage be assigned to 105 Inc.

[24] The Applicants admit that the purpose of seeking the assignment of the Morrison First Mortgage to 105 Inc. was to have 105 Inc. complete the sale under the APS to the Applicant Purchasers. The Applicants believed that, by proceeding in this manner, the Applicant Purchasers would have title free and clear of the Diversified Second Mortgage. Clearly, 105 Inc. is an entity created by and for the Applicant Purchasers.

[25] Realizing what the Applicant Purchasers sought to do, on the morning of May 4, 2017, Diversified refused to accept Wintrup and 209 Inc.'s tender. 105 Inc.’s cheque was returned. Diversified denied that Wintrup or 209 Inc. had standing to seek an assignment of the Morrison First Mortgage. Later the same day, Diversified paid out the Morrison First Mortgage and added the amount paid to Diversified Second Mortgage. The Morrison First Mortgage was thereafter discharged. Diversified then advised the Applicants’ counsel that it would be issuing a Revised Notice of Sale and would not take any steps to sell the Lots until after the expiry of the revised notice period.

[26] Later the same day on May 4, 2017, the Applicants advised that Connect 1 was also represented by the same counsel as the Applicant purchasers.

[27] On May 8, 2017, Diversified issued a new Notice of Sale for the revised amount of its mortgage being the amount owing under the original Diversified Second Mortgage and the amount paid for the Morrison First Mortgage.

[28] This litigation ensued.

WHAT IS NOT AN ISSUE

[29] It is not an issue that:

a) The Morrison First Mortgage and Diversified Second Mortgage were valid registered mortgages granted by Sedona; both mortgages had matured prior to March 1, 2017; both mortgagees were entitled to issue Notices of Sale; both mortgagees were entitled to enforce their security against the Lots; and the amounts set out in both Notices of Sales were due and payable by Sedona;

b) Diversified had validly taken an assignment of the Morrison First Mortgage;

c) The APS for the Lots to the Applicant Purchasers had not closed. Wintrup’s Lot was completed but had not closed. Salt and 209’s Lots had not been completed; and

d) Diversified Second Mortgage contained a provision which permitted it to satisfy a prior encumbrance and add the amount paid to the monies secured under the Diversified Second Mortgage.

THE POSITION OF THE PARTIES

[30] At the core of the Applicants’ submission is that 105 Inc. was entitled to an assignment of the Morrison First Mortgage and the failure to obtain the assignment deprived the Applicant Purchasers ability to complete the APS for the Lots free and clear of the Diversified Second Mortgage.

[31] Diversified submits it was entitled to redeem the Morrison First Mortgage to protect the Diversified Second Mortgage from the improper attempt by the Applicants to circumvent its security.

THE ANALYSIS

105 Inc. was entitled to take an assignment of the Morrison First Mortgage on May 3, 2017

[32] As stated above, it is admitted by the Applicants that the purpose of the attempted redemption/assignment of the Morrison First Mortgage was to immediately thereafter complete the APS for the Lots to the Applicant Purchasers and provide title to the Applicant Purchasers free and clear of the Diversified Second Mortgage.

[33] This court is satisfied that, in the circumstances of this case, Diversified was entitled to reject the Wintrup and 209 Inc’s attempt to redeem the Morrison First Mortgage.

[34] There is no dispute that Wintrup and 209 Inc. were entitled to redeem the Morrison First Mortgage. Wintrup and 209 Inc. both had an interest in the Lots (at least 2 of the Lots) which interests were subsequent to Diversified’s interest in the Lots. Wintrup and 209 Inc. were entitled to protect their interest by redeeming the Morrison First Mortgage.

[35] Diversified submits that Wintrup and 209 Inc. could not “require” an assignment of the Morrison First Mortgage. I disagree. Section 2 (1) and (2) of the Mortgages Act provides that the right to require an assignment belongs to a mortgagor:

(1) Despite any stipulation to the contrary, where a mortgagor is entitled to redeem the mortgagor may require the mortgagee , instead of giving a certificate of payment or reconveying and on the terms on which the mortgagee would be bound to reconvey, to assign the mortgage debt and convey the mortgaged property to any third person as the mortgagor directs , and the mortgagee is bound to assign and convey accordingly.

(2) The right of the mortgagor to require an assignment belongs to and is capable of being enforced by each encumbrancer or by the mortgagor, despite any intermediate encumbrance; but a requisition of an encumbrancer prevails over that of the mortgagor, and as between encumbrancers a requisition of a prior encumbrancer prevails over that of a subsequent encumbrancer.

(emphasis added)

[36] The Applicants submit that Wintrup and 209 Inc., as purchasers, are “mortgagors” as defined under the Mortgages Act. Mortgage and mortgagor are defined in the Mortgages Act as follows:

“mortgage” includes any charge on any property for securing money or money’s worth; “mortgage money” means money or money’s worth secured by a mortgage; “ mortgagor” includes any person deriving title under the original mortgagor or entitled to redeem a mortgage, according to the person’s estate, interest or right in the mortgaged property ; and “mortgagee” includes any person deriving title under the original mortgagee.

(emphasis added)

[37] The Applicants submit that the inclusive broad definition of “mortgagor” includes the Wintrup and 209 Inc. I agree.

[38] In my view, Wintrup and 209 Inc. have an interest in the Lots and they derived their interest in the Lots from Sedona. As such, Wintrup and 209 Inc. are “mortgagors” as defined in the Mortgages Act.

[39] Therefore, Wintrup and 209 Inc. were entitled to demand an assignment of the Morrison First Mortgage.

The redemption of the Morrison First Mortgage and subsequent sale of the Lots to the Purchasers Would NOT extinguish the Diversified Second Mortgage

[40] What the Applicants are asserting is that they were prevented from carrying out their plan to “cut out” and eliminate the Diversified Second Mortgage from their purchase of the Lots under the APS. Clearly, the purpose for which the Applicant Purchasers sought to carry out this “scheme” was not bona fide . On this basis alone, this court would not likely have enforced 105 Inc.’s demand for an assignment. However, let me go on to describe how the assignment, if granted, would have had no effect on the present situation.

[41] The APS of each of the Applicant Purchasers provide:

... this Agreement is subordinate to and postponed to any mortgages arranged by the Vendor and any advances thereunder from time to time...

[42] The Applicant Purchasers agreed by a specific contractual term that mortgages granted by Sedona had priority over their interests under the APS. As a result, I fail to see how any action, directly or indirectly, by the Applicant Purchasers in the completing the APS, would extinguish each purchaser’s contractual term that their interest was subordinate to the Diversified Second Mortgage - a mortgage granted by Sedona.

[43] I am satisfied that Diversified would nevertheless have been entitled, on these facts, to enforce the Diversified Second Mortgage against the Applicant Purchasers even if the assignment/redemption occurred.

[44] This conclusion is supported by the fact the Applicant Purchasers, in these circumstances, would not have been bona fide purchasers under the Morrison First Mortgage’s Notice of Sale knowing of existence of the Diversified Second Mortgage and the deliberate “scheme” to circumvent the Diversified Second Mortgage. This would raise serious questions regarding the validity of the Applicant Purchaser’s title to the Lots.

[45] As for Connect 1, the Applicants’ counsel’s advise that it also represented Connect 1, a lien claimant, made no difference as this advice was ambiguous as to Connect 1's role in the proposed redemption and, in any event, was made after Diversified had exercised its right to pay out the Morrison First Mortgage.

In any event, the Applicant’s redemption have NOT have defeated Diversified’s Immediate right to redeem the assigned Morrison First Mortgage

[46] There can be no dispute that a subsequent encumbrancer (like the Diversified Second Mortgage in this case) is entitled to redeem a prior mortgage (like the Morrison First Mortgage) at any time up until the time the Lots are sold under the Notice of Sale.

[47] As a result, even if 105 Inc. had redeemed the Morrison First Mortgage on May 3, 2017, Diversified would have been entitled to redeem the Morrison First Mortgage on May 4, 2017. The situation would be the same as exists today.

[48] The Applicants suggest that they could have immediately, upon receipt of the assignment of the Morrison First Mortgage on May 3, 2017, have completed the sale to the Applicant Purchasers before Diversified’s redemption on May 4, 2017. That would not have been possible.

[49] Either the law requires that 105 Inc. to provide reasonable notice of the assignment to parties entitled to redeem the Morrison First Mortgage OR 105 Inc. would have had to issue a new Notice of Sale. In either case, Diversified would have had the right to redeem the assigned Morrison First Mortgage before any sale could take place to the Applicant Purchasers. Again, the result would be no different than the current situation.

a) Reasonable Notice of the assignment to those entitled to redeem the assigned mortgage

[50] An assignee of a mortgage, taken during a power of sale, must give reasonable notice to the mortgagor (and, in my view, other persons entitled to redeem) of the assignment. This is necessary so that the parties entitled to redeem know who holds the mortgage and from whom they can redeem the assigned mortgage. See RE 2272045 Ontario Inc, 2011 ONSC 3051.

[28] In my view, on the facts of this case, the applicant can rely on the Notice issued by Orenstein to sell the Property pursuant to power of sale. The Notice complies with s. 31(1) of the Act.

[34] To be effectual in law, express notice in writing of the assignment must be given to the debtor or, in this case, the mortgagor: s. 53(1) of the Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34. In my view, in order to comply with s. 31(1) of the Act, an assignee who wishes to rely on the assignor's prior notice of sale to sell the property under power of sale must give the mortgagor reasonable notice of the assignment in writing.

(emphasis added)

[51] In Emedi v. McMaster (1982), 25 R.P.R. 41 (Ont. H.C.J.) Trainor J. decided:

"an assignee of a mortgage cannot rely on power of sale proceedings commenced by the mortgagee prior to assignment where no notice of such assignment has been given, and where it fails to comply with Form 1 in that it fails to provide notice of the assignment. An interim injunction is to be issued restraining the assignee of the mortgage from proceeding under the power of sale ..."

(emphasis added)

[52] The rationale for requiring reasonable notice to the mortgagor described in 2272045 equally applies to all parties entitled to redeem the assigned mortgage. Otherwise, an undisclosed assignment of the mortgage would deprive the remaining mortgagees and encumbrances with knowledge of who and how to effectively redeem the assigned mortgage.

b) a New Notice of Sale was required by 105 Inc.

[53] The assignee of a mortgage cannot rely on the prior Notice of Sale because it fails to strictly comply with the notice requirements in the Mortgages Act including identifying the party who holds the mortgage and from whom the mortgage may be redeemed. See Lee v. Korea Exchange Bank of Canada (1999), 44 O.R. (3d) 366, [1999] O.J. No. 2296 (S.C.J.). Cullity J. held that a mortgagee's right to sell pursuant to a Notice of Sale was not a right that could be assigned:

[14] It is, I believe, clearly implicit in this language that, if the person exercising the power of sale is an assignee of the mortgage, this must be stated: see Emedi v. McMaster (1982), 25 R.P.R. 41 (Ont. H.C.). The reason is that it is imperative that the mortgagor have notice of the identity of the person exercising the power of sale: see Salciccia v. Reid (1978), 21 O.R. (2d) 10 (H.C.). This is the person with whom the mortgagor would have to deal, or against whom the mortgagor would have to act if the notice was defective, within 35 days if a sale was to be prevented. In consequence, the notice of sale exhibited to the statutory declaration of Canada Trustco's solicitor did not comply with s. 30(1) as it was not given by the person proposing to sell the property. It was not a notice of sale for the purposes of that provision.

[54] See also Alltricor Financial Management Inc. v. Nu-Port Homes Inc. [2003] O.J. No. 185 which followed Lee and enjoined an assignee of the mortgage from proceeding with the prior Notice of Sale.

c) Conclusion

[55] I do not have to resolve which line of authority is correct. In either case, Diversified would have had the opportunity to redeem the Morrison First Mortgage before 105 Inc. would be in a position to effect a sale under the assigned mortgage to the Applicant Purchasers. Applying either line of authority to this case would have resulted in the redemption by Diversified which took place on the next day, May 4, 2017. The parties would be in the same situation as they are today.

Diversified’s Notice of Sale under the Diversified Second Mortgage would NOT prohibit Diversified from redeeming the Morrison First Mortgage

[56] The Applicant’s counsel submits that Diversified could not redeem the Morrison First Mortgage because Diversified had issued a Notice of Sale under the Diversified Second Mortgage and was prohibited from any “further dealings” under the Diversified Second Mortgage. The Applicants rely on s. 42(1) of the Mortgages Act.

[57] Section 42(1) of the Mortgages Act provides:

Where, pursuant to any condition or proviso contained in a mortgage, there has been made or given a demand or notice either requiring payment of the money secured by the mortgage, or any part thereof, or declaring an intention to proceed under and exercise the power of sale therein contained, no further proceeding and no action either to enforce the mortgage, or with respect to any clause, covenant or provision therein contained, or to the mortgaged property or any part thereof, shall, until after the lapse of the time at or after which, according to such demand or notice, payment of the money is to be made or the power of sale is to be exercised or proceeded under, be commenced or taken until an order permitting the same has been obtained from a judge of the Superior Court of Justice.

(emphasis added)

[58] Contrary to the submissions of the Applicants, s. 42(1) of the Mortgages Act does NOT prohibit all dealings under a mortgage which is under a Power of Sale. The operative words are that the mortgagee must, while the Notice of Sale is pending, take no “proceedings” and “no actions” to “enforce” the mortgage or any clause in the mortgage.

[59] In 490352 Ontario Inc. v. ASAAPV Financial Corp. 1985 CarswellOnt 359, [1985] O.J. No. 384 (S.C.J.), the court dealt with the purpose of s. 40 (now s. 42(1)) of the Mortgages Act:

...An assignment of mortgage after a notice of sale has been served but prior to the time specified for redemption in the notice of sale is not in my view a further "proceeding" or an "action" to enforce the mortgage within the meaning of s. 40 of the Act. That section is directed to allow persons entitled to redeem to have the time period specified in the notice of sale to redeem without proceedings being taken which might hinder or prejudice the right of redemption or increase the cost thereof. An assignment by the mortgagee is not such an action or proceeding. It does not affect the right of the mortgagor to redeem so long as the mortgagor is given notice of the assignment. There is no issue raised as to absence of notice in this case. In my view, the notice of sale was not vitiated by the assignments notwithstanding the fact that s. 40 has been in the case law given a broad interpretation.

(emphasis added)

[60] I am not persuaded that redeeming the Morrison First Mortgage is a “proceeding” or “action” to enforce the Diversified Second Mortgage or a clause in the mortgage. It is not “enforcing” the second mortgage, rather, it is “protecting” the second mortgage. The Applicant Purchasers were always fully aware that there were two mortgages on title to the Lots and both were in default. The Applicant Purchasers knew that they would have to properly deal with both mortgages.

Diversified did NOT make an election depriving it of the right to redeem the Morrison First Mortgage

[61] The Applicants submit that Diversified made an election to issue a Notice of Sale under the Diversified Second Mortgage and, therefore, could not redeem the Morrison First Mortgage.

[62] I disagree. There is nothing inconsistent with Diversified seeking to realize on its security but pending the realization, protect its security. Otherwise, any event, expected or not, such as a tax sale, sale by execution creditor or any other dealing with the security during the notice period, would leave the mortgagee with no recourse but to stand by and watch while its security was potentially being prejudiced by the actions of a third party. This makes no commercial sense.

Diversified was NOT prohibited from issuing a subsequent Revised Power of Sale

[63] The Applicants submit that, while Diversified’s first Notice of Sale under the Diversified Second Mortgage remained outstanding, Diversified was prohibited from issuing a new Notice of Sale. I disagree.

[64] The authorities are replete with situations where a mortgagee has issued a Notice of Sale and subsequently re-issued a proper Notice of Sale. See 1175945 Ontario Ltd. v. Michael Wade Construction Co. 2010 ONSC 3732 where the second Notice of Sale two days after the first Notice of Sale was found to be valid.

[65] The re-issuance of a new Notice of Sale did not prejudice the Applicant Purchasers since they knew there were two registered mortgages ahead of their interest in the Lots and as a result of the revised Notice of Sale had a longer period of time to redeem. Besides, even if the Applicants are right on this issue, the Applicant Purchasers took no steps to redeem the Diversified Second Mortgage for the amount in the May 3, 2017 Notice of Sale.

The attempt to redeem the Morrison First Mortgage was NOT done in good faith

[66] An assignee of a mortgage owes the same duty that the assignor mortgagee owed to subsequent encumbrancers; that is to obtain take reasonable precautions to obtain the true market value for the mortgaged premises. See Wilf Rieck Inc., v. Gordon J. Holdings Ltd., and Gordon J. Rottar, [1994] O.J. No. 2995:

13 Although the nature and extent of the duty upon a mortgagee has been expressed in a number of cases, I believe that this duty was clearly summed up by Mr. Justice Eberle in Wood v. Bank of Nova Scotia (1979), 10 R.P.R. 156 (Ont. H.C.) affd. (1980), 29 O.R. (2d) 35 (C.A.) where he said, at p. 177,

"While it seems quite clear that a mortgagee is not a trustee for sale for the benefit of the mortgagor, the mortgagee is responsible for taking reasonable care to see that a proper value for the property is obtained."

14 In the Wood case, Mr. Justice Eberle adopted the principles set out by the English Court of Appeal in Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] 2 All E.R. 633 where Salmon L.J. said, at p. 646

"I accordingly conclude, both on principle and authority, that a mortgagee in exercising his power of sale does owe a duty to take reasonable precaution to obtain the true market value of the mortgage property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty, the facts must be looked at broadly and he will not be judged to be default unless he is plainly on the wrong side of the line."

(emphasis added)

[67] The purpose of the attempted redemption was to complete the APS to the Applicant Purchasers and “cut out”/eliminate the Diversified Second Mortgage. There can be no doubt that Wintrup and 209 Inc. were acting in bad faith in their attempt to take an assignment of the Morrison First Mortgage to complete the sale to the Applicant Purchasers. The result, if it had been successful, would have been a clear and deliberate breach of 105 Inc.’s duty to all subsequent encumbrancers.

[68] I conclude that the Applicants were not acting in good faith in seeking to obtain the assignment of the Morrison First Mortgage.

105 Inc. would NOT be complying with its duty to obtain True Market Value Price

Would be a breach of 105 Inc's Duty

[69] I am not satisfied that the proposed sale price to the Applicant Purchasers would be in compliance with an assignee's duty. Having a sale to “tied” purchasers in advance of obtaining the assignment of the mortgage cannot possibly satisfy the duty to “take reasonable precautions to obtain the true market value of the mortgaged property on the date on which he decides to sell it”. See Oak Orchard Developments Ltd. v. Iseman, 1987 CarswellOnt 2138.

[70] In 1173928 Ontario Inc. v. 1463096 Ontario Inc. 2017 ONSC 588, the court found that the assignee of the mortgage who sought to transfer the property to itself was one factor which demonstrated that the assignee was not acting in good faith.

[71] The proposed action by the Applicant Purchasers was to deliberately and flagrantly breach the duty to subsequent encumbrancers to get true market value.

Proposed Sale Price was NOT reasonable

[72] The Applicants attempt to justify the proposed sale price to the Applicant Purchasers as reasonable.

[73] The Applicants erroneously focus on what the Applicant Purchasers are “ready willing and able to pay” rather than the true market value for the Lots.

[74] The Amended Application seeks the completion of the sale of the Lots to the Applicant Purchasers for the amounts owing under the Agreements of Purchase and Sale. The Applicant states that the vesting order be “upon payment of the amount owing in his agreement of purchase and sale” “with the appropriate adjustments and deductions for credits to be decided on closing”. The adjustments include giving the Applicants credit for their deposits, a reduction for real estate commission and legal costs and credits for unfinished works (an amount which cannot be reasonably ascertained on the record before me). This is not “true market value”.

[75] There is also a significant dispute regarding the cost to complete the outstanding work. Sedona has suggested a much lower cost to complete the outstanding work than what the Applicant Purchasers submit is a reasonable amount. This dispute cannot be resolved on the evidence before me, leaving the amount to be paid in serious question.

[76] The Applicants produced one valuation for Lot 9. No valuations were produced for the other Lots. There is some evidence that one other lot in the subdivision is listed for a much higher price than is suggested by the Applicants as “reasonable”.

[77] This court cannot determine on this record what the “true market value” is for the Lots. However, it is clear that the “true market value” for the Lots is NOT arrived at by completing the APS with the Applicant Purchasers with the proposed various.

[78] The Applicants’ counsel submits that “the term ‘reasonable’ does not mean fair market value.” This submission makes no sense. The assignee’s duty to other encumbrancers is to obtain true market value. 105 Inc., if it had received the assignment, could not deliberately engage in an apparent improvident sale to frustrate and prejudice subsequent encumbrancers. 105 Inc, having already decided to sell the Lots to the Applicant Purchasers, to non- arm’s length purchasers, give them credit for their deposits, deduct amounts for unfinished work for their estimates to complete, not include payment for outstanding “extras” and without going to the public market place for any period of time, would not in my view be commercially reasonable; would not represent true market value; and would have been a breach of 105 Inc’s duty to the subsequent encumbrancers.

[79] One clear omission of the proposed plan by 105 Inc. was the failure to consider whether or to what the Lots have increased in value since the APS given the market conditions. It is the current “true market value” that is relevant, not what the sale price was in 2013.

[80] Let me provide one example of the absurdity of this submission. The Applicants submit that Mr. Wintrup would pay $721,843 to complete the purchase of his Lot. The amount was arrived at by giving Mr. Wintrup credit for: the amount of Connect 1’s claim for lien; PLUS security for costs; PLUS credit for Wintrup’s deposits under the APS. This cannot possibly be the current true market value of the Wintrup lot to a bona fide, third party. The Applicants’ factum describes a methodology to justify a “reasonable price” but fails to address the “market value” – meaning what will a third party, arm’s length buyer, not under compulsion, pay for the Lots.

[81] The Applicant’s submission that, if the court was not satisfied the purchase price was reasonable, the court should nevertheless permit the Applicant Purchasers to close on their Agreements of Purchase and Sale and let Diversified claim damages against Applicant Purchasers later. This submission makes no sense. It essentially disregards Diversified’s security interest; ignores the duty of 105 Inc./Applicant Purchasers’ duty to sell at true market value; and it imposes on Diversified the obligation to commence proceedings against the Applicant Purchasers to seek damages against them.

Connect 1

[82] I am not persuaded that Connect 1 or its lien are relevant to the issues to be decided today. There are separate Construction Lien proceedings not before this court. Connect 1's lien has not been proven. Connect 1's claim to priority over the Diversified Second Mortgage has not been proven.

[83] However, there are questions about Connect 1's involvement in this matter. Connect 1 has registered a Construction Lien on the Lots. Mr. Wintrup is the principal of Connect 1. Counsel represents both the Applicant Purchasers AND Connect 1 – whose interests would typically be inconsistent with each other given that a successful lien claimant might be entitled to sell the property.

[84] Whether Connect 1 to a valid claim for lien on Lot 9 or any of the Lots is a serious issue. Wintrup had sought an approximately $50,000 credit for the work he had done but Connect 1 registered a lien for almost $500,000.

[85] These issues raise question about Connect 1's claim.

ARE THE APPLICANTS ENTITLED TO AN INJUNCTION?

[86] There is no dispute as to the applicable test for granting an injunction.

[87] Where the mortgagee has acted in good faith, the court will generally not restrain the mortgagee’s notice of Sale. See Jack Hornstein and Adriana Hornstein v. Gardena Properties Inc., 2006 ONCA 577, [2006] O.J. No. 2757 (C.A.)

[88] In this case this court finds:

a) For the reasons set out above, there is no serious issue to be tried;

b) The Applicants will not suffer irreparable harm. The Applicant Purchasers want to close their APS. They cannot. However, they have remedies against Sedona. They might be entitled to advance a claim against Diversified for damages for refusing the redemption of the Morrison First Mortgage. There is nothing unique about these homes even though they were intended to be custom homes. The Applicants’ remedy is for damages which can be quantified; and

c) The balance of convenience favours Diversified. Diversified has a registered secured interest. The Applicants have an unproven claim for damages at law. Diversified’s security on the Lots, if enjoined, could potentially be negatively impacted by market conditions, carrying costs, damage to the vacant properties and so forth making damages to Diversified difficult to assess. Further, leaving the homes in “limbo” for several years until trial would likely result in a reduction of the value of the security. See Duffin v. Norina Holdings Inc. 2011 ONSC 6431 at para 29 as to the strong public policy in favour of the lender’s ability to enforce loans.

[89] I add one further point. An injunction is a discretionary remedy. In this case, given the “scheme” devised by the Applicant Purchasers to “cut out” the Diversified Second Mortgage and complete the sale of the Lots under the APS was not bona fides. The Applicants did not come to court with clean hands. As a result, in any event, I would not have exercised my discretion to grant the injunction.

[90] The application for an injunction is dismissed.

ARE THE APPLICANTS ENTITLED TO AN ORDER ASSIGNING THE MORRISON FIRST MORTGAGE?

[91] I decline to engage in an exercise of futility. Even if the Applicants are entitled to an assignment of the Morrison First Mortgage, the immediate next step is that Diversified will redeem the Morrison First Mortgage. The situation will revert back to where things are at this time.

[92] The application for an assignment of the Morrison First Mortgage is dismissed.

ARE THE APPLICANTS ENTITLED TO A VESTING ORDER?

[93] The Applicants seek a vesting order. The Applicants submit that they do not have to meet the criteria for a vesting order because it is the only remedy for Diversified’s failure to grant the assignment of the Morrison First Mortgage. A vesting order should only be issued where the court has determined a “valid claim of ownership”. See s. 100 of the Courts of Justice Act and St. Onge v. Willowbay, 2010 ONSC 3318. No such determination has be made in this case.

[94] In the alternative, the Applicants submit that they are entitled to a vesting order because the court would have ordered specific performance of the APS. First, it is not clear that the court would order specific performance in this case against Sedona. Secondly, the Applicants fail to deal with whether the entitlement to specific performance against Sedona would entitle them to a free and clear title as against Diversified. The Applicants do not just want a vesting order. They seek a vesting order free and clear of Diversified Second Mortgage and any other encumbrance.

[95] The Applicants fail to deal with the impact of the vesting order on the Diversified Second Mortgage and the Connect 1 lien. It is also unclear whether there are other lien creditors or execution creditors of Sedona which would also be “cut out”. This is not just a hypothetical concern. No execution search on Sedona has been produced. On the Lot 9 parcel register, there is a construction lien registered on April 24, 2017 by 1226213 Ontario Inc. It is not clear if 1226213 Ontario Inc. has notice of this application or how they would be affected if a vesting order was granted.

[96] The Applicants submit that Sedona frustrated the closings on the Lots (at least Wintrup’s Lot) entitling them to a vesting order – in effect granting specific performance of the APS. Whether Sedona frustrated the closings may or may not be true. It is certainly not proven on the record before me. However, if this is established, this fact may entitle the Applicant Purchasers to specific performance of the APS or damages AS AGAINST SEDONA. It does not justify a vesting order which eliminates registered encumbrances on title and, in particular, a registered valid mortgage in default.

[97] The Applicants also suggest that equity favours granting the vesting order because:

a) Diversified has a personal guarantee of Posocco. What the value, if any, of this guarantee is not clear from the record. The fact that Posocco, through another company, has another ongoing development does not necessarily mean that Diversified can recover its losses from Sedona from that other development;

b) The Applicant’s counsel submits that Sedona failed, refused or neglected to close Wintrup’s APS. I am not persuaded that this is relevant to the mortgage issues to be decided in this Application. Even if Sedona improperly failed to close Wintrup’s APS, this gives Wintrup a cause of action against Sedona. It does not affect Diversified’s mortgage rights;

c) The Applicants’ counsel submits that the Applicant Purchaser’s loss will be more significant to them than a loss to Diversified. The respective actual losses cannot be ascertained at this time. Further, it is no basis in law to say “I will lose more, therefore, the court should find in my favour”;

d) Diversified was not a prudent lender because it should have exercised more diligence when advancing monies to Sedona. Whether Diversified was or was not a prudent lender when it advanced the money is not relevant given that the Applicants have not challenged the advance, the validity and the outstanding default of the Morrison First Mortgage and the Diversified Second Mortgage; and

e) The Applicant Purchasers are innocent whereas Diversified is “less than arm’s length from Sedona. I will deal with this issue below.

[98] The first four issues have no merit and do not constitute a basis in law to disregard Diversified’s Second Mortgage right.

[99] Let me deal with the Applicant’s “less than arm’s length” submission. The Applicant’s counsel points to a number of “connections” between Sedona and Mr. Giannotta, the principle of Diversified. There are difficulties with this submission:

a) Even the Applicant’s counsel does not submit that Sedona and Diversified are one and the same or that there is/was collusion or a joint interest between Sedona and Diversified on this Project or earlier projects. At best, Applicant’s counsel points to several suspicious facts. As stated above, there is no dispute that Diversified loaned monies, took a mortgage and the mortgage is due and in default. For example, the fact that Sedona and Diversified were involved in prior projects as owner and lender respectively is not evidence that they were/are acting in concert or jointly in this Project;

b) the transcripts clearly show that the Applicants had no evidence to support a claim that there was a “joint venture” or collusion between Sedona and Diversified on this Project or with respect to Diversified’s actions to enforce its mortgage. At best, there was speculation and bald assertions by the Applicants;

c) Applicant’s counsel submits that Sedona’s principal acted to protect his personal guarantee on the Diversified’s Second Mortgage. If Sedona’s acts were lawful and proper, then the Applicants have no recourse. If Sedona or its principal’s actions were unlawful, then the Applicants may have a claim against Sedona and its principal. There is still no connection between this allegation and depriving Diversified of its mortgage rights; and

d) What very little documentary evidence there is connecting Giannotta to the Project, appears to be more informational (not directions) about the Project and appears at a time when Diversified’s mortgage was in default. It would be very surprising that a mortgagee whose mortgagee is in default would not take a greater interest and have greater knowledge of the Project. There was no evidence showing any control by Diversified over the Project or that Diversified affected the Applicant’s rights under the APS.

[100] I see no reason why this court should ignore well established principles of law setting out the basis for a vesting order.

[101] The Application for a vesting order is dismissed.

CONCLUSION

[102] The Application is hereby dismissed.

COSTS

[103] Any party seeking costs shall serve and file written submission on entitlement and quantum within two weeks of the release of these reasons. Written submissions shall be limited to 5 pages, with attached Costs Outline, offers and any authorities.

[104] Any responding party shall have one week thereafter to serve and file responding submissions. Written submissions shall be limited to 5 pages with any authorities relied on attached.

[105] There shall be no reply submissions without leave.

Ricchetti J. Date: July 5, 2017