Court File and Parties

Court of Appeal for Ontario Date: 20210406 Docket: M52272 (C69083)

Paciocco J.A. (Motion Judge)

Between:

Thomas Patrick Farrell and The Midas Investment Corporation Plaintiffs (Appellants/Moving Parties)

and

John Kavanagh, Cosa Nova Fashions Ltd., B & M Handleman Investments Limited, Comfort Capital Inc., 693651 Ontario Ltd., E. Manson Investments Limited, Natme Holdings Ltd., Francie Storm, Barsky Investments Ltd., Stephen Handleman, Rosewill Investment Corporation, Thomas Bock, The Bank of Nova Scotia Trust Company and Canada Investment Corporation, Colina King, C & K Mortgage Services Inc. o/a Rescom Capital, Gary Gruneir, Bill Shimbashi, 1888871 Ontario Inc. and Carlo Parentela Defendants (Respondents/Responding Parties)

Counsel: Maurice J. Neirinck, for the moving parties David P. Preger, David Seifer and Reeva M. Finkel, for the responding parties

Heard: April 1, 2021 by video conference

Endorsement

Overview

[1] The moving parties, Thomas Patrick Farrell and The Midas Investment Corporation (“Midas”), appeal the order of Koehnen J., dated December 31, 2020, dismissing their action concerning the validity of two mortgages. Mr. Farrell owns a controlling share of Midas. The dismissed action related to mortgage debt of $5 million secured against two properties Midas owned in the City of Toronto: 205 Yonge Street and 90 Eastern Avenue (the “Properties”).

[2] In their action, the moving parties claimed the mortgages were fraudulent. They sought a money judgment against John Kavanagh, a Midas insider and the alleged ringleader in the alleged mortgage fraud. Among other relief, they also sought a declaration that the mortgages were invalid based on what they alleged the responding party mortgagees knew about the supposed fraud.

[3] After over seven years of litigation, the trial judge ruled against the moving parties. Among other dispositions, he declared that the mortgages were valid. In the motion before me, the moving parties seek a stay of that declaration of validity and of the enforcement of the mortgages pending the outcome of the appeal.

[4] For the reasons below, I dismiss the motion.

Analysis

[5] As the parties agree, the test in RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311 applies when determining whether to grant a stay pending appeal: 2257573 Ontario Inc. v. Furney, 2020 ONCA 742, at paras. 19-20. In applying the RJR-MacDonald test, the overriding question for the court is whether the interests of justice favour a stay: Circuit World Corp. v. Lesperance (1997), 33 O.R. (3d) 674 (C.A.), at p. 677.

[6] Applying that test, I am not persuaded that a stay pending appeal is in the interests of justice.

(i) There is a serious issue to be determined on the appeal, but barely

[7] The threshold to establish a serious question on the appeal is low. The court must make a preliminary assessment of the merits of the case and determine whether the issues on appeal are either frivolous or vexatious: RJR-MacDonald, at p. 337; Circuit World Corp., at p. 677.

[8] Although, in my view, the grounds of appeal hold out little prospect of success, I cannot say that they are frivolous or vexatious. I therefore accept that there is a serious issue to be determined on appeal.

[9] However, the three considerations identified in RJR-MacDonald are not “watertight compartments”; the strength of one may compensate for the weakness of another: Starkman v. Home Trust Company, 2015 ONCA 436, at para. 7. I will therefore elaborate on my view that, while the low threshold of a serious issue to be determined on appeal is met, it is barely met.

[10] I agree with the responding parties that the grounds of appeal advanced largely represent an attempt by the moving parties to re-try factual findings and credibility determinations that were for the trial judge to make. I also agree that the moving parties have not identified any palpable and overriding errors in the trial judge’s factual findings that raise a realistic prospect of success on appeal. However, I cannot say that all the criticisms of the trial judge’s reasoning are frivolous or vexatious. The odds are strongly against these grounds of appeal succeeding, but it cannot be said that they do not raise a serious issue.

[11] A further challenge that the moving parties will have on appeal is that, even if the key credibility findings are called into question on the grounds advanced, the trial judge provided alternative reasons for his decision based on the hypothetical assumption that Mr. Kavanagh did commit the fraud alleged by the moving parties. Those alternative reasons explain why the mortgages would nonetheless be valid. In my view, it is highly unlikely that an appeal panel would accept the moving parties’ core submission – that these alternative reasons are tainted by the trial judge’s credibility findings. Nor, in my view, do the few alleged legal errors identified by the moving parties offer much hope for success. Once again, since I cannot say that all of these grounds of appeal are frivolous, they satisfy the first criterion of a serious issue to be determined, but barely so.

(ii) No irreparable harm to the moving parties

[12] Irreparable harm is “harm which either cannot be quantified in monetary terms or which cannot be cured, usually because one party cannot collect damages from the other”: RJR-MacDonald, at p. 341.

[13] I am not persuaded that the moving parties will suffer irreparable harm if the declaration of validity remains and enforcement efforts are permitted to proceed. There is nothing unique about the Properties. Even if the moving parties are successful in the appeal, any loss they incur by the sale of the Properties pending appeal can be compensated with money. There is no suggestion that the responding party mortgagees could not pay a money judgment to recompense the moving parties, if required.

[14] The moving parties’ concern that market conditions are currently poor, making a sale improvident, is not borne out on the evidence. The suggestion that market conditions for a sale of the Properties would improve if delayed until the end of the appeal period is speculative. Moreover, the moving parties’ claimed aversion to a sale under current conditions is undermined by their efforts to sell the Yonge Street property, including through the late-breaking acceptance of an offer to purchase that property. The execution of this agreement of purchase and sale also takes the wind out of the sails of the moving parties’ claim that a sale now would rob them of the benefit of any potential increase in value of the Properties that might accrue while the appeal plays out.

[15] On the evidence before me, the responding party mortgagees’ immediate plan is to seek the appointment of a receiver. I am advised that a hearing to appoint a receiver is set for April 6, 2021. If a receiver is appointed, the receiver will be obliged to consider the moving parties’ interests as well as any offers they have procured, including from the anonymous party that signed the late-breaking agreement of purchase and sale. I appreciate that a distress sale, such as a receiver’s sale, can suppress values, but I also agree with the responding parties that the purpose underlying court-supervised receivers is to avoid improvident sales. The risk that the Yonge Street property will be sold at less than market value is speculative.

[16] Accordingly, I am not persuaded that denying the requested stay would cause irreparable harm to the moving parties.

(iii) The balance of convenience does not favour granting a stay

[17] Nor am I persuaded that the balance of convenience favours the moving parties. I will first consider the alleged inconvenience to the moving parties of denying the stay.

[18] For the reasons I have given, the harm the moving parties apprehend is compensable with money. Moreover, the moving parties claim that Mr. Farrell has an imposing net worth, and that the value of the mortgaged Properties exceeds the amount the responding party mortgagees claim. If this is so, the moving parties could have ameliorated the risks they apprehend, without acknowledging the mortgage debt they deny, by paying the required amount into court to the credit of the action. They have chosen not to do so. The moving parties therefore bear some responsibility for bringing about the inconveniences they now attempt to invoke.

[19] In their factum, the moving parties also argue that they would be inconvenienced if the mortgages are enforced because, based on the implication of correspondence exchanged between the parties, they expected that enforcement would not be sought until the action is finally disposed of on appeal. I am not persuaded by this submission. There was no clear agreement to this effect and no evident breach by the responding party mortgagees of such an undertaking.

[20] I do accept that there would be inconvenience to the moving parties in having to recover from the 13 responding party mortgagees if the appeal is successful. However, this inconvenience does not outweigh the continued costs to the responding parties, which I will now recount.

[21] The mortgages have been in default since October 2013. It is evident that the moving parties have no intention of making payments on what they continue to maintain is a fraudulent debt. Interest on the mortgages is accumulating at a rate approaching $100,000.00 per month. Based on the long-standing practices of the moving parties, it is probable that unpaid taxes will also continue to accumulate and further encumber the Properties. The moving parties, who bear the onus on this motion, have not presented evidence supporting their position that there is ample equity in the Properties to mitigate the risk to the responding parties if a stay is granted. In my view, on the record before me the balance of inconvenience arising from the risk of financial shortfall favours the responding party mortgagees.

[22] I am also not persuaded that delay is a benefit to the responding parties simply because interest is accruing on the mortgage debt. So far, the responding party mortgagees have seen none of the interest owing under the mortgages. Quite simply, the money the responding parties advanced has been “sunk money” almost from day one. They have enjoyed no benefits from their investment. If granted, the enforcement delay would only perpetuate this, effectively freezing the responding parties’ investment for what the moving parties estimate will be at least another year.

(iv) A stay is not in the interests of justice

[23] Finally, the moving parties urge that the interests of justice require a stay in this case because they contest the validity of the mortgage debt. It therefore cannot be said, as it can in many cases where similar stays are denied, that the moving parties are seeking to stay enforcement measures they had agreed to accept when the mortgage was executed.

[24] I have considered this submission, but it does not sway me towards granting the stay. It is uncontested that Mr. Farrell benefited from a significant portion of the money advanced, which was used to pay other debts he owed, or to increase Midas’ equity in the Properties by retiring prior encumbrances. He has enjoyed those benefits since shortly after the mortgage money was advanced yet has paid virtually nothing in return. Moreover, the trial judge found that the mortgage Midas entered into was valid, both in fact and in law. I have already commented on the problems the moving parties face in their efforts to disturb this finding on appeal.

Conclusion

[25] Accordingly, the moving parties have not met their burden. In all of the circumstances, it is not in the interests of justice to stay the declaration of validity or the enforcement of mortgage security. The motion is dismissed.

[26] The parties have yet to prepare bills of costs in this motion. The responding party mortgagees are permitted to file written submissions not to exceed 3 pages, supported by a bill of costs, within 10 court days of the release of this decision. The moving parties are likewise permitted to file costs submissions, not to exceed 3 pages, supported by a bill of costs, within 5 working days of the receipt of the responding parties’ submissions. A costs order will then be issued.

“David M. Paciocco J.A.”