Court File and Parties

COURT FILE NO.: CV-18-0001-0000 (Woodstock) DATE: 20190213 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Surendra Walia Plaintiff – and – 2155982 Ontario Inc. , Prem Chand Sharma, Agim Mollaj and Armoclan Engineering Ltd. Defendants

Counsel: Amandeep Sidhu, for the Plaintiff Mario Kalemi and Jeffrey Nguyen, for the Defendants, 2155982 Ontario Inc., Agim Mollaj and Armoclan Engineering Ltd.

HEARD: August 23, 2018

RULING ON MOTION

Hebner j.:

[1] This motion for summary judgment was brought by the plaintiff. The plaintiff is the mortgagee of a mortgage granted by 2155982 Ontario Inc. (“the mortgagor”), the owner of the property located at 2974 Line 34, Stratford, Ontario (“the Stratford property”). The plaintiff seeks judgment for possession of the Stratford property and, as against the mortgagor and the guarantors of the mortgage, judgment in the amount of $496,565.74 due as of January 4, 2018. The plaintiff also seeks prejudgment and post judgment interest at the rate of 21 percent from January 4, 2018, to the date of payment. In the alternative, the plaintiff seeks prejudgment and post judgment interest at the rate of 12 percent.

[2] The defendants state that the principal amount on the mortgage is $337,755 and that the rate of interest payable is 12 percent. The defendants request a declaration that the mortgage be discharged upon payment of this amount, and the administration fee, within 30 days.

[3] The principal issues on the motion are the enforceability, or otherwise, of the interest clause in the Mortgage Commitment and the enforceability, or otherwise, of the purported agreement to renew the mortgage.

Background Facts

[4] The mortgagor is owned by the defendants, Prem Chand Sharma (“Sharma”) and Agim Mollaj (“Mollaj”) each as to 50 percent. The mortgagor purchased the Stratford property on January 15, 2013, for $425,000. In addition to owning the Stratford property, the mortgagor is also the owner of property located at 69 Oxford Street, Drumbo, Ontario (“the Drumbo property”). The mortgagor purchased the Drumbo property on March 18, 2013, for $452,000. The intention of the mortgagor was to build and operate gas stations and eventually sell the gas stations at a profit. At the time the motion was argued, a gas station had been built on the Drumbo property. The Stratford property remained a vacant lot.

[5] The mortgagor initially borrowed the sum of $208,000 from the plaintiff on October 27, 2014. A mortgage commitment was signed by the plaintiff and both Sharma and Mollaj on behalf of the mortgagor (“the first mortgage commitment”). The first mortgage commitment was for a three month term and provided for interest at 12 percent. The plaintiff had the right to register a mortgage but elected not to do so.

[6] On December 24, 2014, the parties signed a new mortgage commitment (“the second mortgage commitment”) in respect of the Drumbo property securing the sum of $350,000. Sharma and Mollaj both signed the second mortgage commitment on behalf of the mortgagor and as guarantors. The plaintiff also signed. The terms were listed in the second mortgage commitment as follows:

• Lender: SURENDRA WALIA
• Borrower(s): 2155982 ONTARIO INC.
• New Principal: $141,500.00
• Advanced Principal: $208,500 (October 27, 2014)
• Total Registered Amount: $350,000.00
• Interest Rate: 12% PER ANNUM
• Term: 4 Months
• Guarantor: Prem Chand Sharma and Agim Mollaj

[7] Although the additional sum of $141,000 was to be advanced, the actual amount advanced was $129,255. The second mortgage commitment contained a list of conditions. They include:

1. To register second mortgage on the property 69 Oxford Street West, Drumbo, Ontario, in the sum of $350,000.00 and the borrower will pay monthly $3500.00 interest only and the term of the mortgage is for 4 months.
2. The Mortgage will become due and payable at the end of the term, failing which or in default of any payment interest rate of interest will be 21% per annum.
3. …
4. Upon default or if the mortgage is not paid in full by the due date a further administration fee of $4500.00 will be added to the principal balance (pursuant to Section 17 of the Mortgages Act) and interest will accrue at the rate of 21% from the date of default or due date until balance is paid in full.

[8] The mortgage was registered against the Drumbo property on December 24, 2014. It ranked behind a mortgage registered by BMO.

[9] The mortgage matured on April 28, 2015. The mortgage was not paid. There is a renewal of mortgage agreement dated April 24, 2015. It reads in pertinent part as follows:

All terms and conditions will remain the same as signed by the parties in the original commitment dated December 23, 2014 ….

1. That the original term of the loan is four months, the Borrowers who are not in default are not able to return and wish to extend the mortgage until the gas station is sold.
2. The borrowers agree to pay 21% interest per annum, and will continue to pay $3500.00 monthly interest at 12% per annum and the balance, 9% per annum interest will be paid as a lump sum at the time of the sale the gas station.

[10] The renewal agreement was signed by Sharma only, purporting to bind the mortgagor.

[11] According to the affidavit of Mollaj, the mortgagor and Mollaj were not presented with the renewal agreement. According to Mollaj, he was not aware of the renewal agreement until over two years later.

[12] The mortgagor continued to operate the gas station and made regular monthly interest payments to the plaintiff at the rate of 12 percent per annum. According to Mollaj’s affidavit, the gas station operated at a loss. By early 2017, the mortgagor was unable to make the monthly payments. On September 18, 2017, BMO provided the mortgagor with its notice of intention to enforce its security.

[13] On September 26, 2017, the plaintiff filed a statement of claim to enforce the mortgage (“the first mortgage action”). The statement of claim bore court file number 111/17. In the first mortgage action, the plaintiff did not rely on the renewal agreement. The plaintiff relied solely on the mortgage commitment claiming a right to receive interest at 21 percent.

[14] On October 4, 2017, BMO filed a notice of application to enforce its mortgage.

[15] On October 24, 2017, the mortgagor received an offer to purchase the Drumbo property which would have been sufficient to pay out the BMO mortgage. The offer was conditional on the discharge of the plaintiff’s mortgage. The plaintiff signed minutes of settlement and agreed to transfer its mortgage to the Stratford property on October 25, 2017. The plaintiff delivered a payout statement claiming a total owing of $484,901.40. The payout statement calculated interest at 12 percent. Mollaj did not agree with the amount owing as, according to his affidavit, it failed to account for interest paid to the plaintiff totaling $84,300. On October 26, 2017, Sharma filed a notice of application seeking an order to compel Mollaj to sign the agreement of purchase and sale and the minutes of settlement. Negotiations took place and the issues were disposed of by way of a consent endorsement of Rady J. dated November 1, 2017. The consent endorsement disposed of both the BMO application and the Sharma application. The consent endorsement reads, in pertinent part, as follows:

The Surendra Walia Mortgage … shall be transferred to the Stratford Property …. I am advised by Mr. Fogel that counsel for Surendra Walia has consented to the transfer.

If Mr. Mollaj pays sufficient funds to discharge the Walia Mortgage then the Stratford property shall be transferred to Mr. Mollaj or as he directs, at his expense.

Mr. Mollaj is hereby authorized on behalf of 215 (the mortgagor) to file a defence against the Walia Mortgage Enforcement against bearing Court file 111/17 commenced in Woodstock.

[16] Accordingly, the plaintiff agreed to transfer its mortgage to the Stratford property. The mortgage was transferred on November 15, 2017. On payment of the amount owing under the mortgage, the property is to be transferred to Mollaj. The Drumbo property was sold by the mortgagor. As a result, the dispute became one between the plaintiff and Mollaj as to the amount owing on the mortgage.

[17] No further payments were made on the mortgage. The plaintiff commenced this action by statement of claim issued January 4, 2018. The defendant, Armoclan Engineering Ltd., was included as a defendant as it had registered a claim for lien against the property. The lien was never perfected and Armoclan agreed to remove the lien without costs, although I understand that the lien has not yet been removed. The plaintiff served its notice of sale on January 24, 2018.

The Issues

[18] The first issue before the court is the appropriate rate of interest payable by the mortgagor. Is it 12 percent or is it 21 percent? The Interest Act, R.S.C. 1985, c. I-15, s. 8(1) provides as follows:

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.

[19] The mortgage commitment, as outlined above, provides that the interest rate increases to 21 percent in the following events:

(a) on default; or (b) if the mortgage is not paid in full by the due date.

[20] Counsel for the parties agree that (a) offends section 8 of the Interest Act. The question is therefore whether the interest rate increases from 12 percent to 21 percent on April 24, 2015, when the mortgage matured.

[21] The second issue before the court is whether the renewal agreement is enforceable and, if so, what is the effect on the Mollaj guarantee.

[22] The third issue before the court is the vacation of the Armoclan lien.

The Lien Issue

[23] Armoclan registered its construction lien on October 26, 2017. It did not perfect its lien by commencing an action within 90 days. Accordingly, it is expired (s. 36(2) of the Construction Act, R.S.O. 1990, c. C.30). The Construction Act, s. 45(1), provides that where a lien that attaches to the premises is not perfected within the time allotted for doing so, the court, upon receiving the proper material, shall declare that the lien has expired and order that the claim for lien be vacated. Accordingly, an order shall issue declaring that the Armoclan lien has expired and that the registration of the claim for lien shall be vacated.

The Interest Issue

[24] I shall firstly deal with the second mortgage commitment agreement dated December 23, 2014.

[25] The plaintiff relies on Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18. This was an appeal from the Alberta Court of Appeal dismissing the mortgagor’s appeal in respect of the interest rate in mortgage renewal agreements. In that case, the defendant borrower granted the plaintiff lender a mortgage against property with a principal of $27 million. When the mortgage matured, the parties entered into a renewal agreement providing for 25 percent interest for the last month before maturity. The parties entered into a second renewal agreement involving monthly payments of 7.5 percent interest and 25 percent interest rate upon default. The mortgage went into default and the lender demanded repayment of the loan and interest at the stated rate of 25 percent. The chambers judge found both the renewal agreements complied with s. 8 of the Interest Act. The Court of Appeal agreed. The borrower appealed. The Supreme Court allowed the appeal. Brown J., speaking for the majority, said at para. 3:

For the reasons that follow, I conclude that a rate increase triggered by the passage of time alone does not infringe s. 8. That said, a rate increase triggered by default does infringe s. 8, irrespective of whether the impugned term is cast as imposing a higher rate penalizing default or as allowing a lower rate by way of a reward for the absence of default. I would therefore allow the appeal.

[26] At para. 31, Brown J said:

In sum, the ordinary sense of the words that Parliament chose to include in s. 8, read together with s. 2 and considered in light of the Act’s objects, support the conclusion that section 8 applies both to discounts (incentives for performance) as well as penalties for non-performance whenever their effect is to increase the charge on the arrears beyond the rate of interest payable on principal money not in arrears. To that extent, I find myself in respectful disagreement with the majority of the Court of Appeal and the chambers judge.

[27] The plaintiff’s argument is that the interest rate of 21 percent is payable not because of default but because of the passage of time. Paragraph 2 of the second mortgage commitment reads “the mortgage will become due and payable at the end of the term, failing which or in default of any payment interest rate of interest will be 21 percent per annum.” The plaintiff argues that the 21 percent interest is due because the mortgage continued past the end of the term.

[28] The plaintiff then points to the Court of Appeal’s decision in Milani v. Banks, 1997 CarswellOnt 1022, as authority for the proposition that I ought to strike out those parts of the mortgage agreement that are illegal leaving the balance of the agreement enforceable. In that case, the defendants got into serious financial difficulties. They obtained a loan from the plaintiff for $32,000 for one month at an interest rate of 18 percent per annum plus a $3,000 fee. The defendants provided the plaintiff with security by way of a third mortgage on their home. They did not repay the loan when it was due and the plaintiff brought an action to enforce the loan. The trial judge found that the interest rate, and the fee of $3,000 which was part of the rate, was illegal under s. 347 of the Criminal Code as, with the fee, it amounted to an annual rate of 250 percent. Consequently, the trial judge found that the interest payable was not enforceable. The plaintiff’s appeal to the Court of Appeal was allowed.

[29] At para. 15, McKinley J.A. speaking for the court said:

In this case, the appellant takes the position that the only offensive part of the loan was a $3,000 charge for “fees”, and that if the agreement were left intact apart from that provision, the result would be a fair one in the circumstances. I am inclined to agree with that position for a number of reasons.

[30] McKinley J.A. pointed out that the borrowers needed funds to prevent the sale of their home by existing mortgagees. The parties had no personal interaction – they conducted their business through the borrowers’ accountant. The trial judge found that none of the parties intended to enter into an illegal transaction. The risks inherent in advancing funds on a one month mortgage needed to be taken into account. The rate of interest, excluding the $3,000 fee, was only 18 percent per annum, not an excessive rate in 1990. The second mortgage on the same property was earning 17 percent per annum. The lender had to borrow money from her bank to make the loan. At para. 17, McKinley J.A. said:

I consider this case to be one strongly favouring the position of the appellant. She is clearly not entitled to the $3,000 fee, but I would strike only that provision, and leave the loan otherwise intact as a $32,000 loan with interest at 18 percent per annum for a 30-day term.

[31] In the case at hand, the plaintiff suggests that this court ought to strike out the words “or in default of any payment” such that para. 2 of the second mortgage commitment reads:

The mortgage will become due and payable at the end of the term, failing which or in default of any payment interest rate of interest will be 21% per annum.

[32] In that event the plaintiff asserts that the second mortgage commitment agreement will not violate s. 8 of the Interest Act. The interest on the mortgage prior to April 24, 2015, when the mortgage was due and payable, would be 12 percent. Thereafter, the interest would be 21 percent.

[33] The plaintiff’s argument begs two questions. Firstly, if the mortgage commitment were amended in the manner suggested by the plaintiff, would it then be in compliance with s. 8 of the Interest Act? If so, should the Court strike the offending words so as to amend the mortgage commitment?

[34] It seems to me that the answer lies in the wording of s. 8(1) of the Interest Act. The section applies when there is a higher interest rate payable on “any arrears of principal or interest secured by a mortgage on real property… that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears”. Does the term “arrears” in the case of a mortgage in default apply only to missed monthly payments or does it also apply to the entire mortgage amount if not paid when due?

[35] The term “arrears” means “the state of being behind or late, particularly in the fulfilment of a duty, promise, obligation, or the like” (dictionary.com). When a mortgage becomes due, if the entirety of the debt is not paid on the due date, then the entire debt is “behind or late”. The entire debt is then “in arrears”. It seems to me that, when the term “arrears” is interpreted in that fashion, then the mortgage commitment cannot be amended in the manner suggested by the plaintiff such that interest at the rate of 21 percent is payable.

[36] This is not a case where the increased rate of interest occurs due to the passage of time. In Krayzel, the first mortgage renewal increased the rate of interest after six months. In that case, the interest was increased due to the passage of time. The trigger was the passage of six months. In this case, the trigger is nonpayment of either a monthly payment or of the principal on the due date. In my view, when the trigger for the increased rate of interest is either a missed monthly payment or a failure to pay the entire loan amount on the due date, s. 8 of the Interest Act applies.

[37] As for the second question, although it is not necessary to address it, I point out that the facts in this case are very different than the facts in Milani. This was not a one month mortgage with inherent risk. There is no evidence that the lender borrowed money in order to advance the funds. There was a personal interaction in this case. There was not a first mortgage earning interest at a rate close to 21 percent. The equities do not favour the plaintiff in this case as the equities favoured the plaintiff in the Milani case.

[38] For these reasons, in my view, the interest at 21 percent in the second mortgage commitment is in violation of s. 8 of the Interest Act.

The Renewal Agreement

[39] The renewal agreement was signed by the plaintiff and by Sharma purporting to bind the mortgagor corporation. The renewal agreement was not signed by Mollaj and Mollaj said he knew nothing about it.

[40] The plaintiff relies on the indoor management rule. The plaintiff says that he was entitled to assume that the internal corporation’s rules had been followed. The plaintiff relies on the case of Royal British Bank v. Turquand, 119 ER 886.

[41] The indoor management rule was intended to facilitate business that could not otherwise be carried on if a person dealing with the apparent agents of the company were required to obtain evidence that all internal regulations have been duly observed: see McNight Construction Co. v. Vansickler, (1915), 51 S.C.R. 374. I agree with counsel for the defendants in his submission that the indoor management rule was not intended to protect parties who knew or ought to have known that the person signing on behalf of the Corporation did not have the authority to do so. The question then becomes did the plaintiff know, or ought the plaintiff to have known, that Mollaj’s signature was required on the mortgage renewal?

[42] Certainly, Sharma knew that Mollaj’s signature was required to borrow funds. He acknowledged as such on his examination for discovery. He said “I don’t take any money without his signature.”

[43] On discovery, information was obtained about the parties’ respective legal counsel acting on the transaction. Sharma said that the company lawyer for the mortgagor was Ranjeet Walia. The plaintiff said his lawyer was Amandeep Walia. Amandeep Walia and Ranjeep Walia are father and son. They work out of the same space. Both are related to the plaintiff. Ranjeet Walia has acted for the plaintiff on previous transactions. I can only presume that these two gentlemen communicated with each other.

[44] The second mortgage commitment was prepared by the plaintiff’s lawyer, at the plaintiff’s direction, with a place for both Sharma and Mollaj to sign. Sharma, in his examination for discovery, confirmed that he and Mollaj both sign all documents respecting loans. In answers to undertakings, the plaintiff provided a book of documents dealing with transactions between the parties, including the mortgage. Sharma and Mollaj both signed almost every document. Almost every document had signature lines for both Sharma and Mollaj. The glaring exception was the renewal agreement. It contained two signature lines, one for Sharma and one for the plaintiff and no signature line for Mollaj.

[45] In my view, the factual constellation described above supports the defendants’ position that the plaintiff knew, or ought to have known, that Mollaj’s signature was required on the renewal agreement. His signature does not appear, and Sharma’s own evidence is that it was required for the borrowing of monies by the corporate mortgagor. Accordingly, the indoor management rule does not apply.

[46] Counsel for the defendants suggests that the renewal agreement was prepared subsequent to events and was backdated. He points out that the first statement of claim issued September 26, 2017, made no reference to the renewal agreement. He points out that the application brought by Sharma dated October 26, 2017, makes no reference to the renewal agreement. He points out that the payout statement provided by the plaintiff dated October 26, 2017, calculates interest at the rate of 12 percent. There is no mention of a 21 percent interest payable. When asked why on his cross-examination, the plaintiff said that he prepared the payout statement himself and it was an “accounting mistake”. The renewal agreement did not come to light until a request for an up-to-date payout statement was made by Mollaj on December 13, 2017. Counsel for the defendants was not provided with a copy of the renewal agreement signed by the plaintiff until the date of the plaintiff’s cross-examination. The previously produced copy had only Sharma’s signature on it.

[47] Certainly the sequence of events raises suspicion of collusion on the part of the plaintiff and Sharma to collect an inflated amount of interest. However, it is my view that a finding of wrongdoing on the part of these two gentlemen is not necessary for the purpose of resolving this motion. Given my finding that the indoor management rule does not apply, as Mollaj did not sign the renewal agreement, it is of no force and effect.

Disposition

[48] The defendants claim that the principal amount of the mortgage is $337,755 as the plaintiff mortgagee did not advance the sum of $12,245. The plaintiff does not appear to dispute the principal amount owing. If that is not the case, and the parties cannot agree on the principal amount owing under the mortgage, I may be spoken to on the issue.

[49] I make the following order:

1. An order shall issue declaring that the Armoclan lien has expired and that the registration of the claim for lien shall be vacated.
2. A declaration shall issue that the term of the mortgage increasing the interest rate to 21 percent is invalid as per s. 8 of the Interest Act.
3. A declaration shall issue that the renewal agreement is not enforceable.
4. The quantum of interest payable is 12 percent. The administration fee of $4,500 is payable.
5. The mortgage shall be discharged upon payment of the principal, interest and administration fee outlined above within 30 days.
6. If the parties cannot agree on the amount payable, I may be spoken to on the issue. In that event, the parties are directed to contact trial coordination in Windsor to make the necessary arrangements.
7. The parties may make written submissions on costs, to include a costs outline, according to the following timeline: a) the defendants may make submissions within 20 days; b) the plaintiff may make submissions within 20 days thereafter; c) the defendants may make reply submissions within 10 days thereafter.

Original signed by Justice Pamela L. Hebner Pamela L. Hebner Justice

Released: February 13, 2019

COURT FILE NO.: CV-18-0001-0000 (Woodstock) DATE: 20190213 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: Surendra Walia Plaintiff – and – 2155982 Ontario Inc., Prem Chand Sharma, Agim Mollaj and Armoclan Engineering Ltd. Defendants Ruling on motion Hebner J. Released: February 13, 2019