Court of Appeal for Ontario

Date: 2018-05-02 Docket: C64379

Panel: MacFarland, LaForme and Epstein JJ.A.

Parties

Between

992548 Ontario Inc. Plaintiff (Respondent)

and

8657181 Canada Inc. Defendant (Appellant)

Counsel

Paul H. Starkman, for the appellant

Johanna McNulty, for the respondent

Jack Masterman, for LH Golf Group Inc.

Heard: April 12, 2018

On appeal from: the order of Justice Theresa Maddalena of the Superior Court of Justice, dated September 19, 2017.

Decision

Epstein J.A.:

[1] Introduction

[1] The appellant, 8657181 Canada Inc., mortgaged property it owned to the respondent, 992548 Ontario Inc. The appellant defaulted on the mortgage and the respondent obtained a default judgment for foreclosure. This is an appeal from the dismissal of the appellant's motion to set aside the judgment and for relief from forfeiture with respect to the default on the mortgage.

Background

[2] The respondent acquired four parcels of land and converted them into a golf course. In August 2014, the appellant purchased the golf course and related assets, including goodwill, for $5,500,000. On closing, the respondent took back a mortgage in the amount of $2,700,000. The terms of the mortgage required the appellant to make a $500,000 payment on account of principal on or before September 1, 2014 and monthly interest payments thereafter until August 12, 2016. The appellant made these payments. The mortgage also required the appellant to pay the respondent, on August 12, 2016, the outstanding amount under the mortgage of $2,200,000 plus accrued interest. The appellant did not make this payment.

[3] The respondent demanded payment. The demand included a notice to enforce security. The appellant did not respond. As a result the respondent instituted two separate actions.

[4] On December 16, 2016, the respondent commenced power of sale proceedings, requesting payment. The appellant's counsel said his client would address the claim. This, however, did not happen. On January 27, 2017 a notice of sale under mortgage was served on the appellant. Again, the appellant did not respond. On March 22, 2017 default judgment was issued against the appellant for $2,200,000 together with possession of the property.

[5] The respondent did not enforce the judgment. Rather, on March 30, 2017, the respondent initiated foreclosure proceedings. Again, the appellant did not defend. On May 17, 2017 default judgment was obtained in the foreclosure action. On May 19, 2017 the respondent took possession of the property.

[6] On May 26, 2017, the respondent accepted an offer to purchase the property from LH Golf Group Inc. for $3,100,000. The sale has not closed due to this proceeding.

[7] The first communication from the appellant disputing the foreclosure and the possession was by letter of May 30, 2017. On June 8, 2017 the appellant moved to set aside default judgment and for relief from forfeiture. On the day the motion was heard the appellant filed a document purporting to be a commitment letter for a mortgage in the amount of $3,200,000.

Analysis

(1) The Applicable Principles

[8] 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". Walter M. Traub, Falconbridge on Mortgages, loose-leaf, 5th ed. (Toronto: Thomson Reuters, 2017).

[9] 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.

[10] In addition, relief such as the appellant requested may be granted where there are "special circumstances" justifying the reopening of the foreclosure or, more generally, whether the equities in favour of reopening the foreclosure order outweigh the equities against doing so. In *Winters v. Hunking*, 2017 ONCA 909, Blair J.A. added 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".

[11] In these fact-based cases the ultimate task 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.

[12] 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*, 63 O.R. (2d) 799 (Ont. C.A.).

(2) The Motion Judge's Decision

[13] The motion judge reviewed the background facts and set out the correct legal principles outlined above. The motion judge found, at para. 39, that the appellant "made a conscious decision not to defend either [proceeding] and did not show a prima facie case on the merits". The motion judge went on to find that with respect to the foreclosure action, there was no explanation for the default. She rejected the appellant's assertion that it was confused by the two actions given it was served with all necessary documents and was represented by counsel, throughout. The motion judge found no evidence of an intent to defend and given the letter of commitment was not credible, no evidence of an ability to redeem the mortgage. Finally, the motion judge found that there was no defence on the merits.

[14] The motion judge went on to consider the appellant's request for an order granting relief from forfeiture pursuant to s. 98 of the CJA.

[15] She set out the proper test, which is virtually the same as the test for setting aside a default judgment set out above, and added to her findings her conclusion that a new purchaser was in possession of the property that would be prejudiced if the foreclosure were set aside.

[16] In the end the motion judge found no evidence that the appellant was able to redeem. The motion judge went on to find nothing special in the appellant's situation on which to base an equitable intervention. She refused to set aside the foreclosure order.

[17] The motion judge failed to analyse the nature and significance of the magnitude of the windfall to the respondent in the context of the appellant's circumstances of not setting aside the default judgment for foreclosure.

(3) The Principles Applied

[18] The appellant's primary argument is based on this court's recent decision in *Winters v. Hunking*, decided after the motion judge's reasons were released. The appellant argues that the motion judge erred by not considering the importance of the windfall the respondent would realize in the context of the appellant's circumstances if the default foreclosure judgment were to stand.

[19] The appellant submits that it has equity in the property of at least $2,500,000 and that the respondent has sold the property for approximately $800,000 more than the mortgage debt.

[20] The difficulty I have in applying the analysis in Winters v. Hunking to this case is as follows. In Winters, the evidence supported Blair J.A.'s conclusion that "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. 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".

[21] This case is very different. First, there is no appraisal evidence. The appellant tendered no evidence of the value of the property. Further, no evidence of the appellant's equity in the property was tendered, particularly none to support the appellant's assertion that the appellant had $2,700,000 in equity given that the original purchase price included, as I indicated, other related assets. In addition, there is no evidence to support the appellant's assertion that LH Golf underpaid for the property. The appellant did not provide any evidence relating to its investment, appraised value, or the portion of the purchase price allocated to the land in the original purchase. Its "commitment" was with non-arm's length purchasers. No evidence of $2.7 million in equity was tendered.

[22] There is no evidentiary foundation for the respondent's claim that the property is undervalued. No consideration of windfall possible without evidence.

[23] Second, the factual backdrop here does not attract the equities that animated the result in Hunking. Here, the party seeking equitable relief is a numbered company. In Hunking, it was an elderly disabled man in poor health. Here, the property in issue is investment property. In Hunking the property was the family homestead. Here, the only explanation for the delay is that the appellant – who was represented by counsel – was "confused by the two actions". Mr. Hunking's personal circumstances were understood to explain his difficulty responding to the legal proceedings. Unlike in Hunking in this case there was no evidence that would support a conclusion that the respondent would be reimbursed and suffer no prejudice if the default were set aside. In Hunking there was no third party to worry about. Here, there is no evidence that would support the conclusion that no third-party rights may be adversely affected. Unlike in Hunking, here there is no evidence that the appellant would suffer "severe prejudice" if the order were allowed to stand.

[24] It is important to emphasize that setting aside a default judgment for foreclosure is exceptional relief, and the outcome in Winters v. Hunking turns on its facts. The motion judge's decision was discretionary and entitled to deference. The issue is whether 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.

[25] Here, the result the motion judge arrived at is, in my view, precisely what the justice of the case requires.

Disposition

[26] For the foregoing reasons, I would dismiss the appeal.

[27] I would order costs in favour of the respondent, 992548 Ontario Inc., fixed in the amount of $25,000 inclusive of disbursements and HST.

Released: May 2, 2018

"Gloria Epstein J.A."

"I agree. J. MacFarland J.A."

"I agree. H.S. LaForme J.A."