Court of Appeal for Ontario
Date: November 27, 2017 Docket: C63304 Judges: Sharpe, Blair and Epstein JJ.A.
Between
John David Winters & Margaret Louise Winters Plaintiffs (Respondents)
and
Ray Harvey Hunking & The Manufacturers Life Insurance Company Defendants (Appellant)
Counsel
John A. Tamming, for the appellant, Ray Harvey Hunking
Tim Gleason and Rebecca Glass, for the respondents, John David Winters and Margaret Louise Winters
Heard
October 2, 2017
On Appeal
From the order of Justice Gordon D. Lemon of the Superior Court of Justice, dated January 16, 2017.
Endorsement
R.A. Blair J.A.:
[1] Introduction
[1] Ray Hunking mortgaged his family homestead farm near Dundalk, Ontario, for more than he could afford to repay. Sometime after he failed to do so, the mortgagees obtained a default judgment for foreclosure. A motion to set aside the judgment failed, and this appeal is the result.
Background
[2] Mr. Hunking did everything wrong.
[3] After borrowing $350,000 from the Winters on the security of the farm, he made no payments on the mortgage and did not pay all the taxes as he had agreed. When the Winters commenced the foreclosure action, he did not defend or file a request to redeem or a request for sale. When the Winters afforded him time to sell or find re-financing, he took no steps to pursue the latter and, on his own admission, "stubbornly" resisted a sale. Although he received an oral offer to purchase the farm, he declined to pursue the offer because he felt it was too low. When served with a final order of foreclosure, obtained after he was noted in default, he did not move immediately for relief. Instead, he waited another 12 months before bringing a motion to set aside the default judgment, requesting, at that time, the right to redeem or to convert the foreclosure process to a judicial sale. His motion was dismissed.
[4] From a procedural and strict mortgage-foreclosure perspective, Mr. Hunking attracts very little sympathy.
[5] But there is another side to the story.
[6] A 61-year old bachelor in ill health, Mr. Hunking is a low-income, illiterate, and physically disabled man, clinging unrealistically to his heritage and life as a farmer. According to medical information on the record, he is also severely mentally challenged and on daily doses of morphine for the chronic pain he endures, something that affects his reaction time and ability to respond to circumstances. He has lived on the mortgaged family homestead his entire life, acquiring it from his parents who, in turn, acquired it from his grandparents. It is apparent that he cannot continue in that capacity, and his doctor strongly suggests that he move into assisted living.
[7] It is also apparent that the farm must be sold, and it is on this point that the appeal turns, in my view.
[8] The evidence shows that a sale of the farm would generate a net equity (after payment of the mortgage in full, including interest and all costs) of approximately $250,000 to $337,000. What this appeal is really about, then, is not whether the remedies available to the mortgagees will enable them to recover the monies they advanced; it is about whether they – who will be paid in full and suffer no prejudice – or Mr. Hunking should receive the benefit of that significant equity.
[9] Over one-quarter of a million dollars must represent a great deal of money to someone in Mr. Hunking's circumstances. It is he and his family predecessors who have contributed over many years to the build-up of that equity, not the mortgagees.
[10] While I recognize that the motion judge's decision was discretionary and entitled to deference, the gravamen of a decision whether to set aside a default judgment for foreclosure is whether the equities in favour of the mortgagor outweigh those in favour of the mortgagee or – to the same effect, adopting the language pertaining to setting aside default judgments, generally – whether the decision to set aside the order leads to a just result in all the circumstances. Respectfully, the motion judge's decision does not lead to a just result.
[11] As I shall explain, the motion judge made errors that, in my view, warrant appellate intervention. I would allow the appeal.
Analysis
(1) The Applicable Principles
[12] No one contests that the court has a broad jurisdiction to set aside a default judgment and grant relief against foreclosure "wherever the equities in the mortgagor's favour outweigh all that are against him or her". As stated in Walter M. Traub, Falconbridge on Mortgages, loose-leaf, 5th ed. (Toronto: Thomson Reuters, 2017), at p. 26-33:
It has been said that a court of equity is always ready to hear a meritorious application for relief against a foreclosure, and will open it whenever good and substantial reasons for such a course are shown to it, provided the application is reasonably made. The mere fact that the land has been sold to a third person is not alone an insurmountable obstacle, and the true equitable principle is that the mortgagor may be permitted to redeem whenever the equities in the mortgagor's favour outweigh all that are against him or her. [Emphasis added.]
[13] Nor is there much debate that the factors to be considered in the exercise of the court's discretion include:
(i) whether the motion to set aside was made with reasonable promptness;
(ii) whether there is a reasonable prospect of payment at once or within a short period of time;
(iii) whether the applicant has been active in endeavouring to raise the money necessary;
(iv) whether the applicant has a substantial interest in the property or the property has some special intrinsic value to him or her; and
(v) where the property has been sold after foreclosure (not the case here), whether the rights of the purchaser will be unduly prejudiced.
See generally, Royal Bank of Canada v. Swan, 1979 CarswellOnt 3420 (Master), at paras. 15-16, aff'd 1980 CarswellOnt 3624 (Div. Ct.), at paras. 6-7; 355498 B.C. Ltd. v. Namu Properties Ltd., 1998 CarswellBC 2815 (S.C.), at para. 41, aff'd 1999 BCCA 138, 171 D.L.R. (4th) 513; Ricard v. Richards, 1986 CarswellBC 3757 (C.A.); Coast-to-Coast Industrial Investment Co. (2009), 88 R.P.R. (4th) 86 (Ont. S.C.) at paras. 14-20; Gowling Lafleur Henderson LLP, Marriott and Dunn, Practice in Mortgage Remedies in Ontario, loose-leaf, 5th ed. (Toronto: Thomson Reuters, 2017 Reissue), at pp. 15-12 to 15-13.
[14] Various authorities have added a further more all-encompassing factor, namely, whether there are "special circumstances" justifying the reopening of the foreclosure or, more generally (as noted above), whether the equities in favour of reopening the foreclosure order outweigh the equities against doing so: see Ricard, at para. 14, Namu Properties (S.C), at para. 41, Golansky v. Vellucci, 2006 CarswellOnt 2100 (Ont. S.C.), at paras. 6-8, aff'd 2006 CarswellOnt 6504 (C.A.); Marriott and Dunn, at p. 15-14. To this I would add that a weighing of the equities cannot be done without taking into account the relative prejudice to the respective parties in making or not making the order.
[15] Cases reopening a final order of foreclosure generally depend on their own particular facts: Marriott and Dunn, at p. 15-11. Since it is clear that this may be done at any time, even after the property has been sold (which is not the case here), I would observe as well that the various factors outlined above that turn on timeliness, need to be applied with this consideration in mind. As this Court has stated, in the context of setting aside default judgments generally, the various applicable factors are not to be treated as rigid rules; the ultimate task on such a motion is "to determine whether the interests of justice favour granting the order": Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 317 O.A.C. 255, at paras. 47-51.
[16] All parties accept that the decision to set aside a default judgment for foreclosure is discretionary. As such, it is entitled to deference in the absence of an error in law or principle, a palpable and overriding error of fact, or unless the decision is so clearly wrong as to amount to an injustice: see HSBC Securities (Canada) Inc. v. Firestar Capital Management Corporation, 2008 ONCA 894, 245 O.A.C. 47, at para. 22; Ontario Housing Corp. v. Ong, (1988), 63 O.R. (2d) 799 (Ont. C.A.). Again, however, it is the latter consideration that prevails in the end: the motion judge "must ultimately determine whether the interests of justice favour granting the order": Firestar, at para. 30.
(2) The Motion Judge's Decision
[17] The motion judge touched on the principles and factors outlined above. He reviewed the background facts. He dealt at some length with an argument that was a particular focal point of the parties concerning the application of the Farm Debt Mediation Act, S.C. 1997, c. 21, ("FDMA") to which I will return later. He outlined the positions of the parties and he conducted his analysis, bearing in mind most of, if not all, the relevant legal indicia. Generally, I would be disinclined to interfere with the exercise of discretion in such a case.
[18] However, the motion judge made four errors that, taken together, tainted his reasoning and, in my view, warrant appellate intervention. I do not think it matters whether they are viewed as errors in principle or of mixed fact and law because, in the end, the result reached does not meet the ultimate weighing of the equities/justness of the case threshold.
[19] First, the motion judge mischaracterized the nature of the appellant's mental frailties in his analysis, treating them as simply a matter of his mental competence to participate in the proceeding. As a result, he gave little, if any, consideration to whether those mental frailties, together with the appellant's obvious physical limitations and the effect of his medications, could have provided some explanation for the appellant's relative inaction and failure to respond to the foreclosure process. Instead, the motion judge fastened on Mr. Hunking's admitted "stubbornness".
[20] Secondly, the motion judge erred in his consideration of the "substantial interest" factor referred to above. Although he accepted that the appellant had a substantial interest in the farm, the motion judge appears to have viewed that substantial interest solely as a matter of the appellant's "sentimental attachment" to the property, rather than focussing on the appellant's interest in the form of the substantial equity that remained in the property after all mortgage payments and costs are paid.
[21] Thirdly, the motion judge erred in confining his analysis of the "reasonable prospect of repayment" factor to Mr. Hunking's inability, or unwillingness, to refinance the mortgage, when the record shows that, on a sale of the farm, the mortgagees would be fully repaid.
[22] Finally, the motion judge failed to analyse the true nature and significance of the magnitude of the windfall to the respondents in the context of the appellant's circumstances and the prejudice to him of not setting aside the default judgment for foreclosure, and to weigh it against the virtual lack of prejudice to the respondents, who would be completely reimbursed and paid in full had a sale of the property been ordered.
[23] The motion judge stated he was "not persuaded that the arguments of notice and windfall strongly outweigh[ed] the other equitable factors in play". As I shall explain, however, given the foregoing errors in his analysis of the relevant equitable factors, his conclusion is not entitled to the deference it would otherwise attract, in my view.
(3) Mr. Hunking's Mental and Physical Health Issues
[24] It is conceded that the Mr. Hunking was at all material times frail, in poor health and in need of assisted living. His doctor reported that he is "severely mentally challenged" with "significant cognitive impairment", and described him as "a very simple man". The morphine he takes daily for chronic pain causes him to experience side effects of drowsiness and slowed reaction time. None of this is contested.
[25] In outlining the positions of the parties, the motion judge acknowledged Mr. Hunking's submissions regarding these health-related issues. However, in his analysis of the applicable criteria – particularly the factors relating to timely response and to the failure to take steps to put the mortgage in good standing – the motion judge limited his assessment of those frailties to his conclusion that the appellant was "mentally competent" in what I have described as the legal sense, i.e. he was able to cope with the questions put to him on cross-examination and give responsive answers. The motion judge dismissed the appellant's mental issues (saying nothing of his physical limitations) in the following single paragraph:
There is no argument that Mr. Hunking was in any way mentally incompetent; his counsel was at pains to confirm that. On cross-examination, Mr. Hunking had little difficulty with the questions and was clear with his answers.
[26] That was not the issue, however. The issue was whether Mr. Hunking's mental traits and his physical health problems, together with the side effects of his morphine treatment, could have had an impact on his responsiveness, or lack of responsiveness, to the mortgage issues, including his ability to understand and respond to whatever advice he received from his lawyer, and could have provided an explanation as to why his responses were not timely in all the circumstances. There was no such analysis.
[27] Yet all of the mental and physical frailties put forward in the appellant's submission, set out above, were supported by the evidence. In my view, the motion judge erred in failing to consider them in his assessment of Mr. Hunking's delay in bringing the motion and of his unresponsiveness to the foreclosure proceedings.
(4) Substantial Interest/Reasonable Prospect of Repayment
[28] These factors may be considered together.
[29] Although the motion judge accepted that Mr. Hunking had "a substantial interest" in the farm, he appears to have equated that substantial interest with Mr. Hunking's "sentimental attachment" to the farm. Concluding that the farm "will have to be sold", the motion judge therefore discounted Mr. Hunking's "substantial interest". But he failed to take into account that, when the farm is sold, there will be a substantial equity remaining after the mortgagees are paid in full and that Mr. Hunking's "substantial interest" lay in that equity as well.
[30] Similarly, having acknowledged that the farm will have to be sold, the motion judge should have taken into account that its value would be sufficient to repay the mortgagees and that, therefore, there was a reasonable prospect of repayment. The "reasonable prospect of repayment" factor is not confined to the mortgagor's ability to refinance, or otherwise pay out the mortgage, absent a sale.
[31] For these reasons, the motion judge erred in discounting the "substantial interest" and "reasonable prospect of repayment" factors in his analysis of the equities favouring the mortgagor.
(5) The Substantial Equity/"Windfall" Issue
[32] There is uncontested evidence in the record that there is a very substantial net equity in the farm, after payment of the mortgage principal, interest and all related costs in full. There are no other encumbrances against the property.
[33] Two expert appraisals place the value of the farm at between $825,000 (the low appraisal) and $887,000 (the high appraisal). On cross-examination, Mr. Hunking acknowledged that he had received an oral offer to purchase the farm in the amount of $600,000, but that he had not pursued it because he thought that price was too low. It turns out his opinion is supported by the evidence. If Mr. Hunking had accepted that offer, as the Winters argued before the motion judge he should have in order to pay off the mortgage and have money left over for himself, he would have been leaving a good deal of his life's equity behind.
[34] At the time of the hearing on December 22, 2016, the respondents estimated the outstanding mortgage account to be around $500,000 plus costs of the application. The mortgage calls for monthly payments of $2,783.77 per month, which is roughly the 8.5% interest payable. Even allowing for the build-up of additional interest and costs by the end of 2017, the amounts outstanding might rise to, say, $550,000 - $575,000, leaving a net equity of between a low of $250,000 and a high of $337,000. Even if those estimates are off by a few percentage points, and taking into account that there would be costs associated with a judicial sale, there is a significant amount of equity in the property.
[35] It is important to recall that a mortgage operates as security for the payment of a debt. While at common law a mortgage constituted the conveyance of legal title to the mortgagee, subject to re-vesting in the mortgagor upon payment of the debt, equity long ago overtook the law in that respect, and began treating a mortgage as security only. This is well-summarized in the oft-cited passage from the decision of Jessel M.R. in Campbell v. Holyland (1877), 7 Ch.D. 166, at pp. 171-172:
The principle in a Court of Equity has always been that, though a mortgage is in form an absolute conveyance when the condition is broken, in equity it is always security; and it must be remembered that the doctrine arose at the time when mortgages were made in the form of conditional conveyance, the condition being that if the money was not paid at the day, the estate should become the estate of the mortgagee; that was the contract between the parties; yet Courts of Equity interfered with actual contract to this extent, by saying there was a paramount intention that the estate should be security, and that the mortgage money should be debt; and they gave relief in the shape of redemption on that principle.
... In [a] foreclosure suit the Court made various orders–interim orders fixing a time for payment of the money–and at last there came the final order which was called foreclosure absolute, that is, in form, that the mortgagor should not be allowed to redeem at all; but it was form only, just as the original deed was form only; for the Courts of Equity soon decided that, notwithstanding the form of that order, they would after that order allow the mortgagor to redeem. That is, although the order of foreclosure absolute appeared to be a final order of the Court, it was not so, but the mortgagee still remained liable to be treated as mortgagee and the mortgagor still retained a claim to be treated as mortgagor, subject to the discretion of the Court. [Emphasis added.]
[36] Foreclosure is a remedy available to a mortgagee upon default in which, as Laskin J. put it in Rushton v. Industrial Development Bank, [1973] S.C.R. 552, at p. 562, "there has always been close regard for the rights of the mortgagor". The rationale for foreclosure is not to punish a defaulting mortgagor for being obdurate or stubborn, or to express the court's reservations about the conduct of the mortgagor. Its underlying rationale is to enable the mortgagee to recover payment of the debt for which it stands as security, to the extent the value of the property permits. A mortgagee has no inherent right or, absent prejudice, any equitable right to benefit from foreclosure to a greater extent than that, in my view.
[37] The motion judge did address the appellant's argument with respect to windfall and the law pertaining to it. He acknowledged that there were cases where final orders of foreclosure have been set aside where there has been a "windfall", but observed that in those cases there were also factors other than windfall that led to the order being set aside: see, for example, Namu (S.C.), and Ontario Housing Corp. v. Ong (1987), 58 O.R. (2d) 125 (Ont. H.C.), aff'd (1988), 63 O.R. (2d) 799 (Ont. C.A.). He was not satisfied that windfall, together with other circumstances, was sufficient to outweigh the other factors in play that favoured dismissal.
[38] I have given careful consideration to the motion judge's reasons in this respect because I accept that the decision was made in the exercise of his discretion, to which considerable deference is ordinarily due. In outlining the positions of the parties, he acknowledged Mr. Hunking's claim that the farm was worth between $825,000 and $900,000. I am troubled, however, by the lack of any apparent recognition in the motion judge's analysis of the magnitude of the potential windfall in this case – possibly almost as much as the principal amount of the mortgage. And I am particularly troubled by the lack of such an analysis in circumstances where, in the event of a sale based on their security, the respondent mortgagees will recoup the debt in full and suffer no prejudice, whereas Mr. Hunking will be severely prejudiced by the loss of what are, in effect, his life's savings.
[39] The respondents point out that they have taken steps to maintain the property, but they have provided no indication of what, if any, costs they have incurred in the taking of those steps. They quarrel mildly with one aspect of the real estate appraisals – the attribution of a value of $20,000 to the barn – but have produced no expert evidence contradicting the appraisals. They submit, correctly, that Mr. Hunking had sources of income, albeit modest sources, from which he could have made some payments on the mortgage: he lived on a disability pension of $600 per month, together with a small rental income from 25 acres of land farmed by another individual (at $50 per acre) and rental income of up to $21,000 per year from a wind turbine lease. But none of this detracts from the fact that there is a very significant equity in the property.
[40] A windfall in itself may not be dispositive of a motion to set aside a final order of foreclosure, but it remains an important factor in the analysis: see, for example, Namu (B.C.C.A.), at para. 17; Coast-to-Coast Development Co., at para. 19; Ontario Housing Corp. (H.C.), at pp. 127-128; Platt v. Ashbridge (1865), 12 Gr. 105 (U.C. Ch.). Where the analysis fails to take into account the magnitude of a windfall in the context of the circumstances, including any prejudice or the lack of prejudice to the mortgagee, the windfall factor has not been property assessed. It cannot be simply a matter of the weight to be given to the windfall factor when the significant magnitude of that factor has not been addressed in context.
[41] Here – based on the appraisal evidence – there is every likelihood that, through a sale of the property, the respondent mortgagees will be completely reimbursed and thereby suffer no prejudice, other than a certain inconvenience. The property has not been sold, and there are no other third-party rights that may be adversely affected. On the other hand, the appellant will suffer severe prejudice. He will lose over one-quarter of a million dollars in equity built up on the family homestead by him and his parents and grandparents for over a century. Over one-quarter of a million dollars that would provide a much-needed source of support over the rest of his life. Over one-quarter of a million dollars that would fall as a complete windfall to the respondent mortgagees who will have suffered no prejudice.
[42] Respectfully, viewed together with the other factors outlined above, I do not accept that such a result is what the justice of the case requires.
(6) The Farm Debt Mediation Act
[43] At the hearing and on the appeal, much attention was focussed on an issue relating to the FDMA. The issue arises because if Mr. Hunking were a farmer as defined at the relevant time – i.e., a person "farming for commercial purposes" – the respondents were required by s. 21(1) of the FDMA to give him written notice of their intention to enforce their remedy against the property and advise him of his rights to apply for a stay of proceedings under the Act. They gave no such notice, and their failure to do so would render the foreclosure proceeding null and void, pursuant to s. 22(1), and provide a complete answer to the appellant in defence of the foreclosure.
[44] There was considerable debate before the motion judge, and before us, about the applicability of the FDMA. Most of it focussed on whether the appellant qualified as a commercial farmer, but there was also an issue regarding the material date for the operation of the provisions (the date the mortgage was granted, December 2012, or the date of the commencement of proceedings in January 2015?).
[45] Given the appellant's inability to continue his farming operations and his receipt of a disability pension based on that state, and the fact that he presently has no livestock on the farm, there was support for the argument that he was not a "commercial" farmer. On the other hand, in November, 2013 – 11 months after the mortgage was granted – the appellant purchased a small herd of 16 cattle from a livestock yard, and incurred veterinary expenses in relation to the cattle. [1] His initial application for a disability pension was denied in 2013 on the grounds that, although his physical health was failing, he was still able to do some work; it was subsequently granted in 2014, after his physical health deteriorated further.
[46] I do not think much turns on this debate for purposes of the appeal, however. The motion judge accepted that there existed "a live issue as to whether the Act applie[d]" and an arguable defence for the appellant based on the FDMA, and proceeded in his analysis on that basis. My conclusions concerning the motion judge's treatment of the impact of the appellant's mental and physical health issues and of the significant windfall to the respondent are sufficient to dispose of this appeal and I express no view as to whether the motion judge erred in finding that the appellant raised an arguable defence based on the FDMA.
Disposition
[47] For the foregoing reasons, I would allow the appeal, set aside the default judgment for foreclosure and the noting in default, and order that the foreclosure proceedings be converted to an immediate judicial sale pursuant to rule 64.03(22) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
[48] In accordance with the agreement of counsel, the respondents shall pay the appellant's costs of the appeal, fixed in the amount of $12,000, inclusive of all taxes and disbursements. The appellant shall also be entitled to the costs below in the amount previously fixed in favour of the respondents.
Released: November 27, 2017
"R.A. Blair J.A."
"I agree Robert J. Sharpe J.A."
"I agree Gloria Epstein J.A."
Footnote
[1] According to the appellant's CPP disability benefit file, all but two of the cattle died because the appellant "forgot" to feed them – a further indication of his unclear state of mind.
