Court of Appeal for Ontario

Date: 20220907 Docket: C69741

Miller, Nordheimer and Sossin JJ.A.

Between:

Gurmant Grewal Plaintiff (Respondent)

and

102095 P.E.I. Inc., 2151488 Ontario Inc. and Kamalpreet Khaira Defendants (Appellants)

Counsel: Eric Nadler, for the appellants Michael Suria, for the respondent

Heard: September 1, 2022

On appeal from the judgment of Justice Marvin Kurz of the Superior Court of Justice, dated July 12, 2021, with reasons reported at 2021 ONSC 4908.

Reasons for Decision

[1] The appellants seek to set aside, in part, a summary judgment granted by the motion judge. In doing so, they seek the return of $244,572.89 which they paid to the respondent in order to gain the return of a property that had been taken by the respondent under a collateral mortgage. [1]

[2] The individual appellant had borrowed monies from the respondent in order to fund his purchase of shares in the appellant, 102095 P.E.I. Inc. He signed a promissory note in that regard. The promissory note was, in turn, secured by a collateral mortgage which the appellant 2151488 Ontario Inc. gave over certain property. The individual appellant is the sole shareholder of 2151488 Ontario Inc.

[3] The individual appellant defaulted on the payments required by the promissory note. [2] The respondent commenced an action against the appellants on the promissory note and on the collateral mortgage. Because there was a difference between the interest rate contained in the promissory note, and the interest rate contained in the collateral mortgage, the amount due on the collateral mortgage significantly exceeded the amount due on the promissory note.

[4] The respondent brought a motion for summary judgment. The motion judge found that there was no genuine issue for trial and he granted summary judgment, both on the promissory note and on the collateral mortgage. The formal judgment directs the individual appellant and 102095 P.E.I. Inc. to pay the respondent $474,396.05 and it directs 2151488 Ontario Inc. to pay the respondent the sum of $532,804.80. It also directs 2151488 Ontario Inc. to deliver possession of the property covered by the collateral mortgage to the respondent.

[5] After the summary judgment was granted, and after the respondent had taken possession of the property, the individual appellant paid the respondent the amount of the judgment on the promissory note. However, the respondent demanded the additional amount due under the judgment on the collateral mortgage before he would return the property. In order to regain possession of the property, the individual appellant subsequently also paid this additional amount. The appellants now appeal from the summary judgment and seek the return of the additional monies paid. They do not take issue with the summary judgment that was granted on the promissory note.

[6] We agree with the appellants that, in the circumstances of this case, the respondent was not entitled to demand payment of the additional amount due on the judgment relating to the collateral mortgage. In our view, the error made by the motion judge was in granting what was, in essence, two separate judgments that related to the same obligation. Instead of doing what he did, the motion judge ought to have made the judgment on the collateral mortgage contingent on a failure to pay the judgment on the promissory note, since the obligation under the collateral mortgage only arose if and when the principal debt was unpaid. In fairness to the motion judge, it does not appear that this issue was presented to him, as it should have been, on the motion.

[7] In this case, once the individual appellant paid the amount that was due on the principal debt, that is the promissory note, the respondent no longer had any right to claim on the security, i.e., the collateral mortgage. The security was spent as a result of the honouring of the main obligation. The respondent simply cannot advance or maintain a claim under the security when the principal debt has been paid. Nor can the respondent enforce a judgment on that security when the judgment on the principal debt has been paid. To allow otherwise would be inconsistent with the fundamental purpose of the security, as is indicated by the use of the term “collateral” mortgage.

[8] This principle is a basic one in commercial law. It was recited by this court in Mortgage Insurance Co. of Canada v. Grant Estate, 2009 ONCA 655, 99 O.R. (3d) 535, at para. 39, with a simple quote from M.H. Ogilvie, Canadian Banking Law, 2nd ed. (Scarborough: Carswell, 1998):

Since a collateral security is one taken to secure the performance of an obligation, then upon the performance of the obligation the security should be surrendered or discharged.

[9] The respondent was not entitled to demand payment of the additional amount awarded on the collateral mortgage. The appellant, 2151488 Ontario Inc., paid that amount in order to gain the return of the property that had been given as security for the promissory note. It is entitled to have those monies returned to it.

[10] We allow the appeal in part and order the respondent to repay the sum of $244,572.89 to 2151488 Ontario Inc. In the circumstances, we would set aside the judgment against 2151488 Ontario Inc. The appellants are entitled to their costs of the appeal fixed in the agreed amount of $7,500, inclusive of disbursements and HST.

“B.W. Miller J.A.”

“I.V.B. Nordheimer J.A.”

“L. Sossin J.A.”

Footnotes

[1] The appellants had sought to appeal the motion judge’s costs award but they abandoned that aspect of their appeal at the hearing.

[2] There were in fact two promissory notes. The second replaced the first as part of an attempted resolution of the issues between the parties. Nothing turns on that fact.