Court of Appeal for Ontario

Date: 2025-03-13
Docket: COA-24-CV-1056
Coram: MacPherson, Huscroft and Dawe JJ.A.

Between

Alleghe Mortgage Fund Ltd.
Plaintiff (Respondent)

and

Winona Park Towns Ltd. and Pedram Talebzadeh
Defendants (Appellants)

And Between

Winona Park Towns Ltd.
Plaintiff by Counterclaim (Appellant)

and

Alleghe Mortgage Fund Ltd. and 2819152 Ontario Corporation
Defendants to the Counterclaim (Respondents)

Counsel:
Christopher J. Somerville and Jeanette Saliba, for the appellants
Robert B. Macdonald and Max Samuels, for the respondent

Heard: March 11, 2025

On appeal from the judgment of Justice Robert Centa of the Superior Court of Justice, dated September 26, 2024, with reasons reported at 2024 ONSC 5321, and from the costs order, dated October 15, 2024.

Reasons for Decision

Background

[1] In August 2022, the respondent Alleghe Mortgage Fund Ltd. (“Alleghe”) loaned $2 million to the appellant Winona Park Towns Ltd. (“Winona”). The loan was for a term of seven months, maturing in March 2023, and bore interest at a rate of 12% for the first six months and 18% thereafter. It was secured by a second mortgage on land that Winona intended to use for a residential housing development. The appellant Pedram Talebzadeh, who is Winona’s principal, personally guaranteed the loan.

[2] The loan was intended to cover the “soft costs” of Winona’s development project, and most of the loan funds – approximately $1.76 million – were paid to the City of Toronto to cover the cost of building permits. The appellants signed a separate document, titled “Direction re: Development Charges” (the “Direction”), in which they irrevocably authorized Alleghe to cancel the building permits and have the money that had been paid for them returned to Alleghe by the City.

[3] In November 2022, Winona breached the loan agreement by failing to make a contractually required interest payment. Alleghe later delivered a notice of sale and a notice of intention to enforce security, and in March 2023 commenced an action against the appellants. Winona in turn counterclaimed against Alleghe.

[4] The mortgage agreement had a term that allowed Alleghe to pay out any encumbrance on the title of the property and add this amount to the loan principal. In June and July 2023, Alleghe exercised this term and paid approximately $6.2 million to the first mortgagee to discharge the first mortgage on the property.

[5] Both sides brought motions for summary judgment, which were heard together. The motion judge dismissed the appellants’ motion and granted summary judgment to Alleghe. He awarded Alleghe $9,728,218.11 plus post-judgment interest at the contractual rate of 18% annually, and ordered that the appellants deliver possession of the mortgaged property to Alleghe.

[6] The appellants appeal from this decision. At the conclusion of the appellants’ oral submissions, we dismissed the appeal with reasons to follow.

The Appellants' Arguments

[7] The appellants do not dispute that they breached the loan agreement. Their first argument on appeal is that the motion judge erred by not finding that Alleghe breached its duty of good faith by not considering invoking the Direction, canceling the building permits, and obtaining a refund of the money that had been advanced to the City of Toronto before it exercised its rights under the mortgage to sell the property.

[8] The motion judge gave three reasons for rejecting this argument. First, he noted that there was “no provision in any of the loan or security documents that required the lender to realize on its security in any particular order.” Second, he found that the Direction gave the lender “the option, not the obligation, to obtain the return of the funds advanced to the City for the building permits.” Third, he held that:

[N]either the duty of good faith performance of contractual duties nor anything in the text of the loan or security documents required the lender to subordinate its interests to those of the lender in the event of a default. The lender was free to act to maximize its chances of recovering the amounts owed to it by the borrower after the default. If the lender concluded that it preferred to sell the land with the building permits attached, it was allowed to do so. [Footnotes omitted.]

[9] The motion judge concluded:

I am satisfied by the evidence on this motion that the lender acted reasonably and did not breach any duties of good faith owed to the borrower by not cancelling the building permits associated with the development or crediting that sum against the debts owed by the borrower and Mr. Talebzadeh.

Analysis and Decision

[10] We see no errors in the motion judge’s analysis or his conclusion. Assuming that Alleghe could have obtained partial repayment of the loan principal by cancelling the building permits and obtaining a refund of $1.76 million from the City, cancelling the building permits would have reduced the value of the property, thus putting at risk Alleghe’s prospects of obtaining what it was entitled to receive under the loan agreement: namely, full repayment of the loan principal, plus interest. The motion judge was entitled to conclude, as he did, that Alleghe acted in good faith when it chose to exercise its contractual rights under the mortgage, including its right to pay out the first mortgage and add that amount to its loan to Winona.

[11] We are unpersuaded by the appellants’ submission that the motion judge erred in articulating or applying the test for the exercise of contractual discretion in good faith. Relying on Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7, [2021] 1 S.C.R. 32, the appellants contend the motion judge erred “by failing to connect the exercise of contractual discretion with the purpose of the contract.”

[12] Even if we accept that the purpose of the contract was for Alleghe to be repaid the money it had loaned to Winona, plus interest, we are not persuaded that the motion judge erred by finding that Alleghe acted in good faith when it chose to exercise its contractual rights to pay out the first mortgage and to attempt to sell the property. The appellants’ argument that Alleghe ought instead to have cancelled the building permits and obtained a $1.76 million reimbursement from the City is premised on their contention that they would then somehow have been able to raise sufficient funds to pay Alleghe the rest of what it was owed. However, as the motion judge noted, the appellants have made no payments towards the loan since November 2022, nor “provided any evidence that they are capable of paying the amounts they owe to the lender.”

[13] The appellants contend that they had arranged refinancing with another lender, and that these arrangements only fell through because Alleghe did not expedite providing a discharge statement, and reneged on a non-binding suggestion that it might be willing to loan Winona more money to finance a Tarion deposit. However, the evidence was that the new lender withdrew its offer to loan money to Winona in October 2022, before Winona breached its loan agreement with Alleghe. As the motion judge noted, the letter from the new lender explaining why it was terminating its loan commitment gave other reasons for its decision.

[14] Moreover, while the appellants contend that the mortgaged property is worth more than $25 million, this claim is undermined by the uncontroverted evidence that when Alleghe tried to sell the property in 2023 and 2024, it was unable to find a buyer, even after it progressively reduced the asking price over several months from $14.5 million to $8.5 million.

[15] We are also not persuaded by the appellants’ second argument on appeal. They contend that the motion judge made palpable and overriding errors in concluding that the issue of whether Alleghe acted in good faith did not require a trial.

[16] The appellants pointed to various actions by Alleghe that they argued should be viewed as indicative of bad faith. In our view, the motion judge was entitled to conclude, as he did, that the issue of whether Alleghe had acted in bad faith was one that could properly be determined on the record before him.

[17] The motion judge was also entitled to conclude that the appellants had not established any basis for preventing Alleghe from exercising its rights under the mortgage – rights that the appellants chose to give Alleghe in exchange for the loan.

[18] The question of whether Alleghe’s conduct in exercising its contractual rights demonstrated bad faith was a factual determination for the motion judge to make, and his decision is entitled to appellate deference. The appellants have not demonstrated that the motion judge made any palpable and overriding errors that would permit us to interfere with his factual findings and conclusions.

Disposition

[19] The appeal is accordingly dismissed. In accordance with the parties’ agreement, Alleghe is entitled to its costs of the appeal, fixed at $10,000, inclusive of disbursements and HST.

“J.C. MacPherson J.A.”
“Grant Huscroft J.A.”
“J. Dawe J.A.”