Court of Appeal for Ontario

DATE: 20200213 DOCKET: C66961

Feldman, Brown and Zarnett JJ.A.

BETWEEN

Stoney Creek Centre Inc. Applicant (Appellant)

and

2459437 Ontario Inc. Respondent (Respondent)

Counsel: Brian N. Radnoff and Mordy Mednick, for the appellant Chris Reed, for the respondent

Heard: January 21, 2020

On appeal from the judgment of Justice Janet Leiper of the Superior Court of Justice, dated April 18, 2019, with reasons reported at 2019 ONSC 2450.

BROWN J.A.:

Overview

[1] This appeal concerns the amount the chargor, the appellant Stoney Creek Centre Inc. (“Stoney Creek”), must pay to the chargee, 2459437 Ontario Inc. (“245”), to discharge a mortgage on a commercial property known as the Lewis Property. Stoney Creek submits that the application judge erred in holding that it was required to pay the chargee, 245, the $3 million face amount of the mortgage, together with interest, instead of the lesser amount of approximately $2.7 million that had been advanced, plus interest.

Background Facts

[2] Tony Perruzza is the principal of Stoney Creek. Dr. Gillian Stanley is the principal of 245. In 2015 and 2016, they and their related companies were involved in two overlapping transactions.

[3] In the first transaction, Perruzza-related companies agreed to purchase two properties (the “Lakefront Properties”) from 245. Under those agreements, the purchasers had two conditional periods totaling 210 days in which they could end the transactions. Closing was scheduled for mid-2016.

[4] The second transaction stemmed from efforts by Perruzza in late 2015 and early 2016 to obtain financing to purchase the shares of the company that owned the Lewis Property. Stanley learned that Perruzza was encountering difficulties in securing financing. She expressed an interest in assisting Perruzza to finance the share purchase if he would waive the conditions on his acquisition of the Lakefront Properties.

[5] Initially, Stanley planned to source the funds to loan to Perruzza from an institutional bank. That source of funding did not materialize.

[6] At that point, the closing date for Perruzza’s share purchase was approaching. Perruzza introduced Stanley to another source of funds, Toronto Capital Corp. Stanley was prepared to borrow money from Toronto Capital to provide a bridge loan to Perruzza that would enable him to close the share purchase.

[7] Stanley and 245 accepted a loan commitment from Toronto Capital for $3 million, secured in part by mortgages on their Lakefront Properties. Under the terms of the Toronto Capital mortgage commitment, the net amount advanced, after various deductions, would be close to $2.7 million.

[8] Perruzza received a copy of the Toronto Capital commitment letter and was aware of its terms before his company, 218, entered into an agreement to borrow money from Stanley’s company, 245, to fund the share purchase. In the section entitled “Use of Proceeds”, the Toronto Capital commitment letter stated, in part: “The proceeds will be used as follows: Complete share purchase: 2,703,000.”

[9] After accepting the Toronto Capital commitment letter, 245 then entered into a private mortgage financing agreement as lender with Perruzza’s 218, as borrower (the “Mortgage Financing Agreement”), in respect of the Lewis Property. In a section entitled “PURPOSE”, the Mortgage Financing Agreement stated: “The purpose of this Loan is to provide financing for the completion of the Share Purchase Agreement. This Loan is conditional upon amongst other things, the waiving of all conditions of the Purchase and Sale Agreements of [the Lakefront Properties].”

[10] The other key terms of the Mortgage Financing Agreement relevant to the issues on this appeal are:

TYPE OF LOAN: Third Mortgage. Principal and interest. TERM: 16 Month Term following the date of initial advance. LOAN AMOUNT: $3,000,000 (Face value of the mortgage charge) is based on appraisal provided. ADVANCE AMOUNT: $3,000,000 less the Lender’s financing charges. Due on Closing LENDER FEE: A lender fee of 3% shall be deducted on advanced amount. LEGAL: The borrower/project will pay the Lender’s legal fees for closing, registration and discharge

[11] As part of the security for the loan transaction, Stoney Creek provided 245 with a mortgage on the Lewis Property (the “Mortgage”). The principal amount of the Mortgage was shown as $3 million.

[12] As additional security, 218 provided 245 with a promissory note for $3 million, guaranteed by Stoney Creek.

[13] The parties agree that $2,711,691.48 was advanced by Toronto Capital to 245 on its $3 million loan, net of various deductions Toronto Capital was entitled to make pursuant to the terms of its commitment letter to 245. The Statement of Advance for the closing of the Mortgage Financing Agreement showed the receipt of the $2,711,691.48, from which 245 deducted its lender fee, legal costs and title insurance cost, leaving a balance disbursed to 218 of $2,604,691.48.

[14] In 2017, Perruzza sought to discharge the Mortgage on the Lewis Property. 245 took the position that the amount required to discharge the Mortgage was the face amount of $3 million, together with interest. Perruzza took the position that the principal amount due on the Mortgage was the $2,711,691.48, plus interest.

[15] In order to discharge the Mortgage, 218/Stoney Creek paid into escrow the difference between the $3 million face amount of the Mortgage and the $2,711,691.48, plus interest (the “Disputed Amount”). The Disputed Amount is being held in a lawyer’s trust account pending determination of the dispute.

[16] The application judge held that the chargee, 245, was entitled to the Disputed Amount, based on Stoney Creek’s obligation to pay $3 million, plus interest, to discharge the Mortgage.

Analysis

[17] The law recognizes that a person may give a mortgage for a larger sum in consideration of the loan of a smaller sum where there is an actual agreement to that effect: Edmonds v. The Hamilton Provident and Loan Society (1891), 18 O.A.R. 347, at pp. 362-63. Stoney Creek submits that in the present case the parties did not enter into such an agreement. As a result, Stoney Creek contends that in order to discharge the Mortgage it is only required to pay the actual amount advanced, plus interest, not the Mortgage’s face amount of $3 million.

[18] Stoney Creek advances three main arguments in support of its position.

First Argument

[19] Stoney Creek submits that the application judge erred in her interpretation of the term in the Mortgage Financing Agreement that stated: “ADVANCE AMOUNT: $3,000,000 less the Lender’s financing charges. Due on Closing” (emphasis added) (hereafter the “Disputed Term”). According to Stoney Creek, the application judge erred by: (i) interpreting the Disputed Term as evidencing an agreement that Stoney Creek would pay all the fees and costs 245 incurred in borrowing the money from Toronto Capital that it used to consummate its loan to Perruzza’s company, 218; and (ii) by rejecting Stoney Creek’s argument that the reference to the “lender’s financing charges” was the same as the “lender’s fee” on the second page of the Mortgage Financing Agreement.

[20] I am not persuaded by these submissions. Stoney Creek has not demonstrated that the application judge’s interpretation of the Disputed Term in the Mortgage Financing Agreement was tainted by palpable and overriding error. As she was required to do, the application judge interpreted the Disputed Term in light of the factual matrix concerning the two related transactions, the provisions of the Mortgage Financing Agreement, and the terms of the related documents.

[21] The material evidence about the factual matrix included:

(i) Stanley and 245 assumed financial risk for the benefit of Perruzza and Stoney Creek by mortgaging the Lakefront Properties as security for the funds borrowed from Toronto Capital, which they lent to Perruzza as a bridge loan to enable him to acquire the shares of the company that owned the Lewis Property;

(ii) Very shortly after 245 and Stanley accepted Toronto Capital’s commitment letter, they entered into the Mortgage Financing Agreement with Perruzza’s company, 218; and

(iii) Before his company, 218, entered into the Mortgage Financing Agreement, Perruzza knew the terms of the Toronto Capital commitment letter which included: (a) a clear statement on the face of the commitment letter that $2.703 million of the $3 million loaned by Toronto Capital would be used to complete the share purchase Perruzza wished to consummate; and (b) a description of the deductions from the $3 million to arrive at the $2.703 million. In his examination for discovery, Perruzza admitted that he knew the advance from 245 would be $2.7 million instead of the $3 million.

[22] As the application judge noted, “[t]he face value of the mortgage is for $3 million and default on the mortgage makes that principal amount due and payable”: at para. 35. The Mortgage Financing Agreement expressly contemplated that the loan amount, secured by the $3 million Mortgage, would be greater than the “advance amount”. Further, the related transaction documents executed by and on behalf of Perruzza-related companies – the Mortgage, the promissory note, and the guarantee – clearly specify that the repayment obligation is for a principal amount of $3 million. No transaction document stipulates the repayment of only $2.711 million.

[23] The application judge rejected Stoney Creek’s argument that the reference to the “lender’s financing charges” in the Disputed Term was the same as the “lender’s fee” described in the Mortgage Financing Agreement. The language of the document supports her interpretation. The Mortgage Financing Agreement states that the lender’s fee “shall be deducted on advanced amount”, that is to say on the amount of $3 million “less the Lender’s financing charges”.

[24] The application judge found that the “Mortgage Financing Agreement is clear”: at para. 35. She was reinforced in that conclusion by the surrounding circumstances, stating, at para. 36:

This is a case where the Edmonds principle is displaced by the express agreement of the parties in the Mortgage Financing Agreement. There is no evidence of “fraud or oppression” in the negotiation of the agreement. Both parties were aware of the respondent’s financing costs. Both were represented by counsel on the deal. There were no allegations or evidence of any misrepresentations leading to a risk of loss. To the contrary, all of the documents contemplated that the respondent would seek financing of $3 million and that the agreement with the applicant would be to pay all the fees and costs of the respondent’s financing to consummate the loan to Mr. Perruzza’s company.

[25] I see no palpable and overriding error in the application judge’s finding that the parties agreed Stoney Creek would pay 245 the amounts that 245, in turn, was required to pay Toronto Capital in order to obtain the funds used to make the bridge loan to Stoney Creek. That agreement was reflected in the language of the Loan Amount term and Disputed Term of the Mortgage Financing Agreement. When assessed in light of the language of the Mortgage Financing Agreement, the terms of the additional security documents, and the factual matrix, the application judge’s interpretation of the phrase “the Lender’s financing charges” was a commercially reasonable one. Neither the language used nor the factual matrix support an agreement where Stanley would pay Toronto Capital $374,505.38 as well as mortgage her Lakeview Properties in order to provide a loan that Perruzza needed but could not obtain elsewhere.

[26] As a result, I agree with the application judge’s conclusion that Stoney Creek was required to pay 245 the amount of $3 million, plus interest, to discharge the Mortgage.

Second Argument

[27] Second, I do not accept Stoney Creek’s submission that the application judge took into account irrelevant evidence when considering the factual matrix. The application judge’s consideration of the evidence concerning Perruzza’s knowledge of the terms of the loan from Toronto Capital to 245 and Stanley did not constitute an impermissible use of one party’s subjective intention. Instead, by taking that evidence into account, the application judge considered the “surrounding circumstances known to the parties at the time of formation of the contract”, as she was required to do by Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 47.

Third Argument

[28] Finally, Stoney Creek contends that the application judge’s order is inconsistent with her decision because she ordered Stoney Creek to repay only some, but not all, of 245’s borrowing costs. I do not accept this argument. The parties completed the discharge of the Mortgage on the basis that Stoney Creek would pay into an escrow account the agreed Disputed Amount of $374,693.00. The Disputed Amount represents the difference between the discharge balance (i) calculated using the Mortgage’s stated principal amount of $3 million and (ii) that arrived at by using the amount of $2,711,691, which was the amount loaned by Toronto Capital to 245 and Stanley net of its financing charges. In granting judgment in favour of 245, the application judge simply ordered that the agreed Disputed Amount, together with interest, be released and paid to 245. In those circumstances, I see no merit to this submission by the appellant.

Disposition

[29] For the reasons set out above, I would dismiss the appeal.

[30] 245 is entitled to its costs of the appeal from Stoney Creek, fixed in the amount of $25,000, inclusive of disbursements and applicable taxes.

Released: “KF” FEB 13 2020

“David Brown J.A.”

“I agree. K. Feldman J.A.”

“I agree. B. Zarnett J.A.”