Court of Appeal for Ontario
Date: 2017-03-27
Docket: C60864
Judges: Feldman, Simmons and Lauwers JJ.A.
Between
S.A. Appellant
and
A.A. and Z.G. Respondents
Counsel
William Friedman, Judy Hamilton and Mark A. Russell, for the appellant
Harold Niman and Deborah MacKenzie, for the respondent Z.G.
Heard
August 24, 2016
On Appeal
On appeal from the judgment of Justice Emile R. Kruzick of the Superior Court of Justice, dated July 14, 2015, with reasons reported at 2015 ONSC 4397.
By the Court
A. Overview
[1] S.A. is A.A.'s father, and Z.G.'s former father-in-law. For convenience and ease of reference, these reasons will refer to S.A. as the father, to A.A. as the husband, and to Z.G. as the wife.
[2] The trial judge heard two matters that were consolidated, and heard one after the other. The trial judge heard the father's mortgage action against the husband and wife, followed by the matrimonial dispute between the husband and the wife, and issued consolidated reasons.
[3] We heard the father's appeal in the mortgage action and reserved the decision. On the wife's motion we adjourned the husband's appeal in the matrimonial dispute because he had not complied with the orders of the trial judge requiring the payment of spousal support and the posting of security for future spousal support payments: A.A. v. Z.G., 2016 ONCA 660. Some weeks later the matter came back before the panel, and in light of the husband's failure to make the payments, his appeal was dismissed: A.A. v. Z.G., 2016 ONCA 737.
[4] These are the reasons in the mortgage appeal.
B. The Facts
[5] The husband and the wife were married in 1991. They had a turbulent relationship, with at least two separations before the final breakup of the marriage in 2008. They lived affluently, with the husband concentrating on business matters, and the wife concentrating on raising their son. The wife was qualified in 1995 as a real estate sales agent and later as a broker, and worked part time outside the home throughout the marriage. The husband owned a company that manufactured exterior and interior mouldings for commercial and residential units.
[6] In April 2005 the couple purchased a property for $1,030,000. This was the matrimonial home at the date of separation. A first mortgage was registered on the property in the amount of $700,000 with HSBC as the lender.
[7] The couple had the original house demolished and began construction of a new home on the property. On January 6, 2006 a second mortgage in the amount of $800,000 was registered with the father as mortgagee. The mortgage did not require periodic payments or the payment of interest, and the principal was due on July 1, 2006.
[8] The father, husband and wife were all parties to the second mortgage. The mortgage was prepared by Donald Grant, a lawyer who acted for all three parties. Mr. Grant was well known to the family, having been engaged by them on other transactions. He advised each of the parties to obtain independent legal advice, but they declined to do so.
[9] A company owned in part by the husband, 808276 Ontario Inc. ("808"), made payments that funded the construction of the new home. The father claims these payments were his advances under the mortgage. When 808 was originally incorporated, it was owned 98% by the husband and 2% by the father. The shareholdings of 808 were restructured in 1993 and 2003. The father no longer owns shares in 808. On the trial judge's findings, funds were historically paid to the husband through 808 and 808 existed largely for the husband's benefit. There was also evidence that the father used 808 as an income splitting tool.
[10] The husband and the wife separated on June 12, 2008. The father did not demand repayment of the mortgage until August 2008, after the separation. He issued a statement of claim to enforce the mortgage against the husband and the wife on November 18, 2008, the same day on which the husband initiated his divorce application.
[11] The husband did not defend the mortgage action and default judgment against him in his father's favour was entered on March 23, 2009. However, following a trial, the father's action to enforce the mortgage against the wife was dismissed. That dismissal is the subject of this appeal.
C. The Decision under Appeal
The Father's Mortgage
[12] The trial judge set the context for the origination of the mortgage, at para. 102:
The father's fears that the marriage was not stable compelled him to insist on a marriage contract and then the mortgage. With these concerns, the father nevertheless provided funding for the construction. Clearly, the father and the husband wanted to protect the husband's interest in the property given that it would be an investment in excess of $2 million.
[13] In the face of two previous separations between the husband and the wife, the father was reluctant to finance the construction of the new house without financial protection for his son (at para. 71). He initially requested that the husband and wife enter into a marriage contract, but the wife refused (at paras. 31, 35), even in the face of alleged physical abuse by her husband (at para. 72).
[14] Although the wife refused to sign the requested marriage contract, she did sign the mortgage at the husband's insistence, because otherwise the father would not have provided the funds to build their new house (at paras. 35-36). The trial judge made the following finding of fact: "When the wife refused to enter a marriage contract, I find the father insisted on this self-serving mortgage in an effort to protect his son" (at para. 71).
Advances of Money
[15] The father's evidence was that during the construction period he advanced funds in excess of $900,000 although the face value of the mortgage was $800,000 (at para. 45). The funds were paid directly to the husband, the wife, the contractors, or the sub-trades.
[16] The trial judge accepted the evidence of the builder's principal that the invoice amount for the house construction was $1,147,033.44, and "that the record shows that some $889,750 of the construction costs came from the sources of the father" (at para. 79).
D. The Trial Judge's Analysis
[17] The trial judge provided three reasons for his finding that the mortgage was unenforceable against the wife. First, the wife signed the mortgage under some form of pressure or duress (at paras. 39, 101(j), (k), (l), 106). Second, the mortgage was a sham designed to achieve indirectly what the husband could not accomplish directly through a marriage contract (at paras. 100, 104). Third, the father had not proven that the money he provided to fund construction of the matrimonial home was advanced under the mortgage (at para. 96).
E. Analysis
[18] We address each of the trial judge's findings in order. Our conclusions are as follows. First, the trial judge erred in determining the mortgage was unenforceable on the basis that the wife signed it under some form of pressure or duress. The trial judge did not apply the proper test and the facts do not support the finding.
[19] Second, the trial judge erred in finding that the mortgage was a sham from the outset. The trial judge misapplied the sham test.
[20] Third, however, the trial judge did not err in finding that the father had not proven that he made advances under the mortgage. On this ground alone, the trial judge was correct in dismissing the father's action.
[21] We now explain these conclusions in more detail.
(1) The Wife's Signature on the Mortgage Was Not Obtained By Duress
[22] The trial judge did not specify the test he applied in determining that the mortgage to the wife was unenforceable on grounds of pressure or duress (which term we use in a general sense to catch the matters the trial judge addressed).
[23] The wife's position was that "she signed the mortgage with the father because she was forced to do so by the husband" (at para. 25), and that she signed "having being coerced by the husband and without independent legal advice" (at para. 26). The trial judge noted, at para. 27:
The wife maintains that she entered the mortgage in haste and without any choice in the matter. She takes the position that given traditional […] culture of the family, she obeyed her husband and found herself obliged to do as her husband and his father requested.
[24] The trial judge's findings begin at para. 39:
Her evidence, which I accept, is that she reluctantly agreed to sign the mortgage. The wife testified that she was afraid and concerned for what would happen to her and the couple's plan if she did not accommodate the husband and father by entering the mortgage. She also testified that she did not want to show any disrespect for the father, whom she liked and esteemed.
[25] He builds on this, at para. 101(j) – (l), in which he states that the wife "was told to enter into the mortgage and did not have the benefit of independent legal advice"; "entered into the mortgage pressured by her husband"; and adds that: "The mortgage was imposed on the wife by the father and her husband because she refused to enter into a marriage contract with the husband." Finally, the trial judge comments, at para. 106: "I also accept the [wife's] evidence that when she signed the mortgage she did so reluctantly, without independent legal advice and feeling pressured by the husband and the father, pressure that she felt she could not resist."
[26] The law will not lightly set aside contracts reached by parties having contractual capacity: John D. McCamus, The Law of Contracts, 2d ed. (Toronto: Irwin Law, 2012), at p. 378. Duress is one basis upon which an otherwise valid contract can be rendered unenforceable.
[27] This court set out the test in Hill v. Forbes, 2007 ONCA 443, 225 O.A.C. 74, at para. 12, citing the earlier case of Stott v. Merit Investment Corp., 63 O.R. (2d) 545, 1988 CarswellOnt 887 (C.A.), at para. 48 (WL Can):
But not all pressure, economic or otherwise, is recognized as constituting duress. It must be a pressure which the law does not regard as legitimate and it must be applied to such a degree as to amount to "a coercion of the will", to use an expression found in English authorities, or it must place the party to whom the pressure is directed in a position where he has no "realistic alternative" but to submit to it, to adopt the suggestion of Professor Waddams (S.M. Waddams, The Law of Contract (2nd ed., 1984), at p. 376 et seq.). Duress has the effect of vitiating consent and an agreement obtained through duress is voidable at the instance of the party subjected to the duress unless by another agreement or through conduct, either express or implied, he affirms the impugned contract at a time when he is no longer the victim of duress.
[28] Another formulation of the test applicable to economic duress, taken from the Pao On v. Lau Yiu, [1979] 3 All E.R. 65 (P.C.), and cited in Stott, at para. 49 (WL Can), is: "the victim must have entered the contract against his will, must have had no alternative course open to him, and must have been confronted with coercive acts by the party exerting the pressure".
[29] Where duress is alleged, the contractual obligations often demonstrate some element of unusual advantage favouring the party with the dominant power.
[30] The evidence as laid out by the trial judge does not substantiate the finding of duress. There is no doubt that the father was the dominant party, in the sense that he had the money to which the husband and wife wanted to have access in order to build the house, but they were not under any compulsion to do so. The wife clearly wanted to have the house built, and giving a mortgage was the only way she was going to get access to the father's money for that purpose. Further, there is nothing to suggest that the father abused his bargaining power to obtain more favourable terms. He was not obliged to give money to the couple. There is nothing in the terms of the mortgage that render it unconscionable. There is, for example, nothing like punitive repayment terms or a punitive interest rate.
[31] As mentioned, the mortgage was prepared by a lawyer who acted for all three parties. Mr. Grant testified that he advised each of the parties to obtain independent legal advice, but they did not (at para. 41). The mortgage was executed in July 2005 and registered on the matrimonial home in January 2006. The lawyer's reporting memorandum to the father, the husband and the wife was excerpted by the trial judge, at para. 43:
As you are aware, the Mortgage is in the amount of $800,000.00 bears no interest and is to be advanced on an "as need" basis during the construction of your new home. It matures on July 1st, 2006. As explained, the Mortgage incorporates by reference the Standard Charge Terms No. 200033. We reviewed these terms and you appeared to understand same. I also provided you with a copy thereof for your records. I understand that the sum of $40,000.00 has already been advanced.
I further explained that it would be in order for you and for [S.A.] to seek independent legal advice but you indicated you did not wish to and would not do so.
Finally, I explained that if there arises any difficulty or difference with respect to any advance under the Mortgage or its repayment I would not be in a position to act for any of the parties hereto.
[32] Although the trial judge accepted that the wife felt pressured to give the mortgage, he did not address the fact that given her employment qualifications and experience in real estate, it is highly unlikely that the wife did not understand what her rights were in the circumstances. Nor did he consider that in refusing to sign the marriage contract, the wife demonstrated her independence.
[33] We respectfully conclude that the trial judge's finding that the factual circumstances were legally sufficient to constitute duress, and thus render the mortgage unenforceable against the wife, amounts to an error in law.
(2) The Mortgage Was Not a Sham
[34] As noted by the trial judge, the difficult matrimonial circumstances and history gave rise to the father's desire to protect the money he would provide to build the house.
[35] The trial judge concluded that the mortgage was a sham. He found that the mortgage was put in place to "trick" third party claims, or to recover only from the wife if the marriage failed.
[36] The most commonly cited definition of the sham doctrine is that of Lord Diplock in Snook v. London & West Riding Investments Ltd., [1967] 1 All E.R. 518 (C.A.). He stated, at p. 528, that a sham means:
[A]cts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties the legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create… [F]or acts or documents to be a "sham", with whatever legal consequences follow from this, all parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.
[37] This definition of a sham has been cited many times by all levels of Canadian courts, including the Supreme Court of Canada. In Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, 1984 CarswellNat 222, at para. 51 (WL Can), Estey J. described the element of "deceit" as being at the heart of the sham doctrine. In discussing the required level of deceit in Antle v. Canada, 2010 FCA 280, 413 N.R. 128, at para. 20, Noël J.A. held that it suffices that the parties to a transaction present it as being different from what they know it to be. The majority of cases involving the sham doctrine arise in the tax context, but the doctrine has been used in appropriate cases to strike down mortgages: see Moghimi v. Dashi, 2016 ONSC 2580.
[38] The trial judge identifies two possible shams at play here. The first was to give the mortgage proceeds priority over lien claimants. This is the explanation that the wife said her husband gave her at the time he asked her to sign the mortgage (at para. 35). The trial judge found this explanation to be "plausible given the various trades involved in the construction" (at para. 38). It was one of the reasons specified by the trial judge for finding the mortgage to be unenforceable against the wife (at paras. 101, 106).
[39] The other possible sham was that the mortgage was intended to defeat the wife's interest in the increase in the value of the house represented by the expended construction funds. But this was the exact purpose of the mortgage and would have been quite obvious to the wife, and the basic reason for her reluctance to sign it.
[40] The mortgage here does not meet the requirements of the sham doctrine. To the contrary, the transaction was prepared by a lawyer with advice to all parties. The mortgage was not a façade intended to deceive a third party or the courts. The wife was aware of what she was signing, and the legal obligations created by her signature. The father fully intended to create a legally binding mortgage, even if it was possible that he might never seek to enforce it. Far from being a sham, the mortgage created a legally-binding obligation on the part of the husband and wife to pay back funds advanced to them by the father, which is exactly what it purported to do.
[41] This case cannot be compared to Moghimi, in which the husband purported to encumber the matrimonial home with a mortgage from his father, but never informed his wife of the existence of the mortgage until separation. In that case, the mortgage clearly represented a common intention on the part of the husband and the father to defeat the rights of the wife. It is difficult to see how the sham doctrine can be applied to a case such as this, where the wife is a party to the mortgage prepared by a lawyer with her knowledge and participation, and there is no third party being deceived.
[42] The father was not obliged to provide any funds to the husband and wife. The mortgage was a legitimate commercial arrangement by which the father could protect the funds he was to provide for the construction of the house for the benefit of his son. This is not a nefarious arrangement that deserves the label "self-serving". In the true sense, any security is intended to serve the self-interest of the lender. The nature of the transaction is not more suspicious because, had the marriage worked out, the father might have forgiven the mortgage eventually.
[43] Furthermore, with respect, given the operation of the Construction Lien Act, R.S.O. 1990, c. C.30, in particular s. 78, the explanation that the mortgage was intended to defeat potential lien claimants is not plausible. The wife was an experienced business woman who had been employed in the property development business owned by the father and another owned by his brother and would have understood that the existence of the mortgage would not necessarily defeat a lien claim.
[44] The trial judge's conclusion that the valid mortgage signed by all parties was a sham amounts to an error in law.
(3) Did the Father Prove the Advances Were Made Under the Mortgage?
[45] While the mortgage was valid, the father, the named mortgagee, must prove that he made advances under it in order to enforce it against the wife.
[46] It is trite law that a mortgage is only security for the loan of funds advanced under it. The term "advance" does not have a technical meaning. It arises most frequently in construction lien cases where the competition is between the mortgage lender and lien claimants.
[47] The meaning of "advance" was discussed in Canadian Comstock Co. Ltd. v. 186 King Street (London) Ltd., [1964] 2 O.R. 439, 1964 CarswellOnt 134 (C.A.). This court affirmed the county court judge's interpretation of the term as referring primarily to an advance of money.
[48] The evidence confronted the trial judge with an issue to resolve: did the funds purportedly directed by the father to fund the construction constitute advances under the mortgage? He concluded they did not.
[49] To succeed, the appellant must establish that the trial judge made a palpable and overriding error of fact in concluding that payments made by 808 to fund the construction were not the father's advances under the mortgage.
[50] The father had a great deal of difficulty reconstructing the cash flow on which he relied to show that he was the source of the construction funds. He eventually resorted to a tracing exercise by an expert. The trial judge found the tracing evidence to be unconvincing in its specific details because the accountant who undertook the task refused to provide the documents referred to in his scope of work (at paras. 87-88, 97). Further, we observe that the father did not advance funds to the husband and wife, the mortgagors, directly, or at their direction to those building the home. There is also no evidence that the father observed any of the formalities in the mortgage.
[51] The trial judge concluded, at para. 85, that most of the funds came from 808. He noted, "I accept that the funding is traced to 808 and the funds came from the father's related company" (at para 87).
[52] The trial judge stated, at paras. 96-97:
The father puts great stock in the tracing of the funds back to him. However, he has not substantiated or corroborated his claim that he advanced $800,000 (or any money) under the mortgage. An analysis of the invoices and cheques produced by the father, and purporting to be advances under the mortgage, shows that the monies received by the general contractor, Pegah Construction, were received from multiple sources. The majority of the funds – approximately $625,838.96 according to the cheques and invoices produced by the father – came from 808. A portion of the alleged advances by the father were paid to D […] Inc., a company which was owned by the husband. The evidence supports that D […] Inc. expended a total of $232,000 on the construction of the home.
Even if I accept the tracing report of Mr. Yabrov, it does not prove that advances of funds made by the father to 808 were made under the mortgage. From the evidence, I am satisfied that the husband always had a financial dependency upon the father, from which the husband and wife both benefitted. The money which the father provided to 808 benefited the husband and the wife. The father now […] obviously regrets any benefit to his former daughter-in-law. [Emphasis added.]
[53] Among the reasons for concluding that the mortgage is unenforceable, the trial judge made the following observations, at para. 101(h): "A large portion of the money later alleged to be advanced under the mortgage came from 808, a company in which the father had no interest and in which the husband originally held 98% and latterly, at least 24% interest"; and, "The evidence supports that historically funds were paid to the husband through 808 and that the company existed largely for the husband's benefit." The trial judge was clearly troubled that there had been a "history of intermingling of funds between the husband and his father", so that "it is impossible to say with any degree of certainty where the husband's interests stand and the father's begin" (at para. 89).
[54] In our view, the funds advanced by 808 to fund the construction cannot be both advances under the mortgage, and income to the husband. The trial judge's uncertainty about the character of the funds comes from the evidence about the nature and purpose of 808.
[55] As the trial judge noted, starting at para. 55, the evidence of the father's accountant Lloyd Raskina was that when 808 was originally incorporated, it was owned 98% by the husband and 2% by the father. The shareholding was re-structured in 1993 and again in 2003. Mr. Raskina's evidence was that 808 was used by the father for "income splitting" purposes. While the father and the husband take the position that 808 is the father's company and he is the controlling mind, he owns no shares in it.
[56] The trial judge noted, at para 84:
The evidence of the father and his accountant, Mr. Raskina, was that the father put money into 808. The source of these funds was the father's business activities, namely management and consulting fees that the father earned. It was, then, the father's evidence that he put these funds into 808 so that he could share his income with his three children, one being the husband. His evidence was that he did so for income tax purposes. His position is that in doing so, he did not intend to benefit his daughter-in-law.
[57] The evidence is that 808 paid the personal expenses of the family pre-separation and has paid those of the husband post-separation. The evidence amply substantiates the trial judge's finding that the financial affairs of the father and the husband have been intermingled.
[58] The trial judge made no palpable and overriding error in concluding that the father did not prove that he had made advances under the mortgage, since at least some of the funds flowing from 808 appear to be treated as income in the husband's hands for tax purposes as part of an income splitting scheme funded by the father. As noted, those payments cannot also be advances under the mortgage. It was the father's task to prove that the 808 payments were advances under the mortgage. This he failed to do to the trial judge's satisfaction.
F. Conclusion
[59] In the result, for the reasons set out above, the appeal is dismissed. As agreed by the parties, the respondent is entitled to her costs in the amount of $25,000.
Released: March 27, 2017
"K. Feldman J.A."
"Janet Simmons J.A."
"P. Lauwers J.A."
Appendix: Construction Lien Act, Section 78
Priority over mortgages, etc.
78. (1) Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner's interest in the premises. R.S.O. 1990, c. C.30, s. 78 (1).
Building mortgage
(2) Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered. R.S.O. 1990, c. C.30, s. 78 (2).
Prior mortgages, prior advances
(3) Subject to subsection (2), and without limiting the effect of subsection (4), all conveyances, mortgages or other agreements affecting the owner's interest in the premises that were registered prior to the time when the first lien arose in respect of an improvement have priority over the liens arising from the improvement to the extent of the lesser of,
(a) the actual value of the premises at the time when the first lien arose; and
(b) the total of all amounts that prior to that time were,
(i) advanced in the case of a mortgage, and
(ii) advanced or secured in the case of a conveyance or other agreement. R.S.O. 1990, c. C.30, s. 78 (3).
Prior mortgages, subsequent advances
(4) Subject to subsection (2), a conveyance, mortgage or other agreement affecting the owner's interest in the premises that was registered prior to the time when the first lien arose in respect of an improvement, has priority, in addition to the priority to which it is entitled under subsection (3), over the liens arising from the improvement, to the extent of any advance made in respect of that conveyance, mortgage or other agreement after the time when the first lien arose, unless,
(a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or
(b) prior to the time when the advance was made, the person making the advance had received written notice of a lien. R.S.O. 1990, c. C.30, s. 78 (4).
Special priority against subsequent mortgages
(5) Where a mortgage affecting the owner's interest in the premises is registered after the time when the first lien arose in respect of an improvement, the liens arising from the improvement have priority over the mortgage to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV. R.S.O. 1990, c. C.30, s. 78 (5).
General priority against subsequent mortgages
(6) Subject to subsections (2) and (5), a conveyance, mortgage or other agreement affecting the owner's interest in the premises that is registered after the time when the first lien arose in respect to the improvement, has priority over the liens arising from the improvement to the extent of any advance made in respect of that conveyance, mortgage or other agreement, unless,
(a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or
(b) prior to the time when the advance was made, the person making the advance had received written notice of a lien. R.S.O. 1990, c. C.30, s. 78 (6).
Advances to trustee under Part IX
(7) Despite anything in this Act, where an amount is advanced to a trustee appointed under Part IX as a result of the exercise of any powers conferred upon the trustee under that Part,
(a) the interest in the premises acquired by the person making the advance takes priority, to the extent of the advance, over every lien existing at the date of the trustee's appointment; and
(b) the amount received is not subject to any lien existing at the date of the trustee's appointment. R.S.O. 1990, c. C.30, s. 78 (7).
Where postponement
(8) Despite subsections (4) and (6), where a preserved or perfected lien is postponed in favour of the interest of some other person in the premises, that person shall enjoy priority in accordance with the postponement over,
(a) the postponed lien; and
(b) where an advance is made, any unpreserved lien in respect of which no written notice has been received by the person in whose favour the postponement is made at the time of the advance,
but nothing in this subsection affects the priority of the liens under subsections (2) and (5). R.S.O. 1990, c. C.30, s. 78 (8).
Saving
(9) Subsections (2) and (5) do not apply in respect of a mortgage that was registered prior to the 2nd day of April, 1983. R.S.O. 1990, c. C.30, s. 78 (9).
Financial guarantee bond
(10) A purchaser who takes title from a mortgagee takes title to the premises free of the priority of the liens created by subsections (2) and (5) where,
(a) a bond of an insurer licensed under the Insurance Act to write surety and fidelity insurance; or
(b) a letter of credit or a guarantee from a bank listed in Schedule I or II to the Bank Act (Canada),
in a form prescribed is registered on the title to the premises, and, upon registration, the security of the bond, letter of credit or the guarantee takes the place of the priority created by those subsections, and persons who have proved liens have a right of action against the surety on the bond or guarantee or the issuer of the letter of credit. R.S.O. 1990, c. C.30, s. 78 (10); 1997, c. 19, s. 30.
Home buyer's mortgage
(11) Subsections (2) and (5) do not apply to a mortgage given or assumed by a home buyer. R.S.O. 1990, c. C.30, s. 78 (11).