Scott, Pichelli & Easter Limited v. Dupont Developments Ltd., 2021 ONSC 6579
CITATION: Scott, Pichelli & Easter Limited v. Dupont Developments Ltd., 2021 ONSC 6579
DIVISIONAL COURT FILE NO.: 445/19
DATE: 20211005
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
IN THE MATTER OF THE Construction Lien Act, R.S.O. 1990, c. 30
Penny, Sutherland and Favreau JJ.
B E T W E E N:
Scott, Pichelli & Easter Limited, as assignee for CAM Mouldings & Plastering Ltd. And Gentry Environmental Systems Ltd, by its Trustee, Scott, Pichelli & Easters Limited.
Plaintiffs/Respondents
- and –
Dupont Developments Ltd., The Rose and Thistle Group Ltd., Florence Leaseholds Limited, Beatrice Leasehold Limited and ADA Leaseholds Limited
Defendants/Appellants
Antonio Conte, for the Respondents/lien claimants
Michael A. Handler and Emily Evangelista, for the Appellants
Heard at Toronto: June 10, 2021-video conference
REASONS FOR DECISION
Sutherland J.:
Introduction
[1] This appeal is from a decision of Sossin J., the motions judge, as he then was, dated July 19, 2019[^1], on a motion to oppose confirmation of the Report of Master Albert.[^2]
[2] The main issue in this appeal is the interpretation of section 78(3) of the Construction Lien Act (CLA).[^3] The question is whether prior mortgages have priority over arrears in interest, fees, charges and expenses that relate to the mortgage or if lien claimants have priority. Furthermore, this case addresses how priority is determined when a prior mortgage is in default.
[3] Master Albert issued her report dated May 24, 2018 following an eight-day hybrid trial of a consolidated lien action pursuant to a Judgment of Reference of Hood J. dated September 30, 2015. The issues at trial concerned a priority contest between lien claimants, Scott, Pichelli & Easter Limited, as assignee for Cam Moulding & Plastering Ltd. and Gentry Environmental Systems Ltd., and the mortgagees, Florence Leaseholds Limited, Ada Leaseholds Limited and Beatrice Leaseholds Limited (FAB), pursuant to section 78(3) of the CLA. FAB were the holders of a vendor take back mortgage (VTB) in the amount of 6.5 million dollars registered against the property municipally known as 1485 Dupont Street, Toronto, Ontario (the Property).
[4] The Property was sold by way of power of sale and had net proceeds of sale in the amount of $608,119.43, which were paid into Court in place of the lien claimants’ security on the Property, pursuant to a vesting order of Newbould J. dated May 11, 2015 (the Vesting Order).
[5] Master Albert determined that the VTB had priority over the lien claimants and that the net proceeds of sale that were paid into Court should be paid to FAB.
[6] The motions judge determined that the Report of Master Albert was in error and that the Master failed to determine whether FAB had priority over the lien claimants with respect to a deduction for Receiver Fees in the amount of $463,892.46, arrears in interest on the VTB in the amount of $429,104.15, and other charges in the amount of $108,676.64. The motions judge determined that the Master’s decision that FAB are entitled to all monies that were paid Court is set aside.
[7] The motions judge ordered that the lien claimants be paid in full on the amounts of their liens. The total sum was $329,135.43, encompassing $70,658,85 for Cam Moulding and $258,476.58 for Gentry Environmental.
[8] The motions judge also ordered costs in favour of the lien claimants in the amount of $15,000[^4] for the motion to oppose confirmation of the Report of Master Albert, and $35,000 for the trial.[^5]
[9] FAB appeals to this court, asking us to reverse the motions judge’s decision and to confirm Master Albert’s Report. FAB contends that the motions judge erred in law in determining that the lien claimants had priority over the VTB to the extend of the Receiver’s Fees, arrears in interest owing on the VTB and other charges related to the enforcement of the VTB.
[10] The lien claimants did not bring a cross appeal.
[11] For the reasons that follow, I agree with FAB. The appeal is allowed, and the Report of Master Albert is confirmed.
Background
[12] FAB acquired the Property in 1963. FAB sold the Property to Rose & Thistle Group (R&T) in trust for a purchase price of $8 million with a VTB in the amount of $6.5 million. The VTB provided for an annual interest rate of 4.5% and incorporated the Standard Charge terms with the filing number 200033. These terms are indicated in the VTB, as registered on title of the Property. The VTB was registered on title on September 10, 2012. Shortly after the closing, the owners of the property, R&T, commenced improvement work on the Property.
[13] R&T was placed into receivership on November 5, 2013 pursuant to an order of Newbould J. (the Receivership Order). The receivership dealt with numerous corporate entities, including R&T, and approximately 50 properties which included the Property.
[14] The Receivership Order appointed Schoenfeld Inc Receivers + Trustees, as managers without security of all the assets, undertakings and properties. Justice Newbold ordered that any expenditures properly incurred by the Receiver in managing the properties, including legal fees, were in priority to all security interests, trusts, liens, charges and encumbrances—statutory or otherwise—in favour of any person.
[15] The VTB went into default in February 2014. The receiver paid the interest accruing on the VTB up to February 2014. At that time, there were six construction liens registered on title of the Property. By the time Master Albert dealt with the trial, there were only two liens claiming an interest in the security.
[16] On October 9, 2014 Pattillo J. issued an order lifting the stay of proceedings imposed by the Receivership Order as it pertained to the Property, to permit the appellants/mortgagees to enforce the terms of their VTB.
[17] The Vesting Order was granted, approving of the sale of the Property and vacating the claims of the six lien claimants. The Vesting Order required FAB to pay into Court the calculated net proceeds from the sale of the Property in the amount of $608,119.43, as security for the lien claimants until the Construction Lien Court adjudicated the issue of priority.
[18] The amount of the net proceeds paid into Court was reduced by $195,896.27 pursuant to the Order of Master Albert dated June 16, 2016 following the settlement and release of interest of four of the six outstanding lien claimants.
[19] The property was sold for a price of $7.5 million with a VTB of $5.5 million. Interest accrued on the VTB from February 2014 until the Property was sold.
[20] On February 9, 2015 Newbould J. released a decision[^6] dealing with the Property. FAB attempted to have the VTB rank in priority to the manager’s fees or in the alternative, excluding the VTB from the Receivership Order. FAB was not successful. The managers’ fees and disbursements were in priority to the VTB. Justice Newbould determined that FAB had not moved “forthwith” to vary the Receivership Order. In addition, Newbould J. determined that FAB acquiesced to the manager’s appointment and benefited from the manager’s work, knowing that they could have had the Property “carved out” of the Receivership Order as others had done.[^7] FAB appealed the decision of Newbould J.[^8] The appeal was dismissed.
[21] On April 4, 2015 Newbould J. released his decision[^9] concerning the approval of the fees and disbursement of the manager’s counsel and the allocation of the fees to the different assets in the receivership. The manager sold 21 properties for some $165 million. In so doing, $159 million of mortgages were paid. At this motion, representatives of FAB were present along with representatives of three lien claimants, known as the Cityview lien claimants.[^10] The respondents did not participate in this motion. Justice Newbould approved the fees and disbursements of the Manager and its counsel and further approved the Fee Allocation Methodology put forth by the manager.
Jurisdiction and Standard of Review
(a) Jurisdiction
[22] This is an appeal from a decision of a Justice of the Superior Court, deciding not to confirm a master’s report in a construction lien reference. Pursuant to s. 71 of the CLA, this appeal is properly brought to the Divisional Court.[^11]
(b) Standard of Review
[23] This appeal turns on questions of law and mixed fact and law. Errors in law are reviewable on a standard of correctness and errors of mixed fact and law are reviewable on a palpable and overriding error standard, unless there exists an extricable error in law which case the correctness standard applies.[^12]
The Decisions Below
(a) The Master’s Report
[24] In her reasons, the Master made some critical findings. These findings are:
(a) There is no evidence of any collusion or fraud as between RAT and FAB or any of their principles.
(b) There is no evidence that RAT and FAB are in any way related.
(c) The value of the Property was at least $6.5 million on September 11, 2012, the day the first lien arose.
(d) The best estimate of value of the Property is $8 million, the actual sale price.
(e) The VTB advanced $6.5 million on September 10, 2012.
(f) A mortgage registered prior to a lien is an exception to the lien claimant’s priority over mortgages.
(g) “A lien claimant does not have priority over a prior registered mortgage where the amount advance under the mortgage was not more than the value of the property when the first lien arose.”[^13]
(h) The VTB financed the sale and the entire mortgage was advanced on September 10, 2012 and the balance of the purchase price was paid in cash.
(i) The VTB was not a collateral mortgage, in which the mortgage is a form of a guarantee where no funds are advanced.
(j) The VTB is the same as an institutional mortgage with respect to financing the purchase.
(k) The VTB is a facility by which the funds required to purchase a property is lent by the seller to the buyer who promises by way of the mortgage terms to pay the principal of the mortgage plus interest.
(l) It was not for the Construction Lien Court to go behind the calculations set out in the Vesting Order.
(m) There are no monies remaining to pay to the lien claimants after payment of the VTB and the fees, charges and expenses approved by reason of the Vesting Order.
(b) Decision of the Motions Judge
[25] In the motion opposing confirmation, the lien claimants alleged that the Master made numerous factual and legal errors.
[26] The motions judge did not accept the contentions of the lien claimants and found “that Master Albert has not committed a factual error that meets the palpable and overriding threshold.”
[27] Concerning the submissions on legal errors, the motions judge found that Master Albert made no errors in determining that:
i The mortgage funds were “advanced within the meaning of the Act.”
ii “[T]he defendant Mortgages met the requirement of s. 78(3), and established priority over the lienholders’ liens.”
iii It was not for the Master to look behind the accounting undertaken as part of Justice Newbould’s Vesting Order.
[28] The motions judge’s difficulty with Master Albert’s decision is stated in paragraphs 91 and 92 of his reasons:
[91] At no point did Master Albert appear to consider the possibility that the Defendant Mortgagees’ interest could have priority over the lienholders’ interest to the extent of the actual mortgage advances, but that the Lienholders could have priority over other fees, charges and expenses which form part of Justice Newbould’s calculation of net proceeds, and therefore be entitled to the funds held in court to an extent sufficient to pay their liens.
[92] Master Albert does not rely on case law for authority that fees and expenses of a mortgagee take priority over lienholders pursuant to s. 78(3) of the Act, or for the proposition that the Defendant Mortgagees are entitled by virtue of gaining under s. 78(3) to be “made whole” nor have the Defendant Mortgagees cited case law or other clear authority which stands for this proposition.
[29] After reviewing section 78(3) and various cases, the motions judge concluded, at paragraph 100:
[100] I am satisfied that, pursuant to s. 78(3) of the Act, the Defendant Mortgagees’ priority does not extend to fees, charges and expenses beyond those relating directly to the sale of the Dupont Property, such as legal expenses.
[30] The motions judge then dealt with the contention of the lien claimants, that arrears of interest on the VTB are not advances and cannot stand in priority to the claims of the lien claimants. At paragraph 103, the motions judge agreed with the lien claimants that interest charges which formed part of the “net proceeds” calculations in the Vesting Order cannot have priority over the lien claimants’ liens.
[31] On this question of law, the motions judge concluded that the lien claimants had priority over the deduction for arrears of interest, fees, charges and expenses calculated as part of the “net proceeds” in the Vesting Order and thus, the lien claimants should have access to the funds paid into Court.
Mortgage Priority and Section 78 (3) of the CLA
[32] It is much stated and accepted that the CLA is remedial legislation that provides a means for contractors and subcontractors to obtain payment for labour and material supplied to an improvement to property. The CLA balances the competing interests of owners, contractors, subcontractors and mortgagees.[^14]
[33] Section 78 of the CLA is one means that provides priority to contractors and subcontractors (lien claimants) over mortgages to obtain payment for labour and material supplied to an improvement to property.
[34] The critical issue in this appeal is the interpretation of section 78(3). Do prior mortgages have priority over arrears in interest, fees, charges and expenses that relate to the mortgage or do lien claimants have priority? How is priority determined when a prior mortgage is in default?
[35] Subsections 78 (1), (2), and (3) reads:
Priority over mortgages etc..
78 (1) Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises. R.S.O. 1990, c. C.30, s. 78 (1); 2017, c. 24, s. 70.
Building mortgage
(2) Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered. R.S.O. 1990, c. C.30, s. 78 (2).
Prior mortgages, prior advances
(3) Subject to subsection (2), and without limiting the effect of subsection (4), all conveyances, mortgages or other agreements affecting the owner’s interest in the premises that were registered prior to the time when the first lien arose in respect of an improvement have priority over the liens arising from the improvement to the extent of the lesser of,
(a) the actual value of the premises at the time when the first lien arose; and
(b) the total of all amounts that prior to that time were,
(i) advanced in the case of a mortgage, and
(ii) advanced or secured in the case of a conveyance or other agreement. R.S.O. 1990, c. C.30, s. 78 (3); 2017, c. 24, s. 70, 71.
[36] I will first begin by reviewing section 78.
[37] Section 78 deals with two forms of mortgages: prior mortgages and building mortgages.
[38] Prior mortgages, generally speaking, are mortgages that pay for the purchase of the property. The monies paid, or advanced, are generally made prior to any improvement to the lands and premises that are the subject of the mortgage. This makes logical commercial sense, because until the property is owned and mortgage registered on title, monies would not be advanced to finance any improvement to the property.
[39] Building mortgages are mortgages that fund the costs of labour and material for an improvement to the property. The funds are usually advanced at different stages of construction, as the construction progresses. Building mortgages are subject to a deficiency in holdback obligations.[^15]
[40] Section 78 therefore deals with situations where there are “advances” prior to the time the first lien arose, and advances made subsequent to the time the first lien arose.
[41] For this matter, the issue concerns advances made prior to when the first lien arose with a mortgage that goes into default.
[42] The Ontario Court of Appeal in Parkland Plumbing & Heating Ltd v. Minaki Lodge Resort 2002 Inc.[^16] reviewed whether a mortgagee was an “owner” under the CLA and as such whether section 78 applied in the circumstances of that matter. In doing so, the Court of Appeal reviewed section 78(3)[^17] and stated
Section 78(3) deals with priority of a derivative interest (like a security created by a mortgage) that is registered prior to the time when the first lien arose, in particular, advances made prior to the time when the making of the improvement commences: McGuinness, at para.5.132. It does not apply where the interest in the premises in respect of which priority is claimed is that of an owner.
Put somewhat differently, the language of section 78(3) confirms that it is concerned with the conveyances, mortgages or other agreement that affect an existing interest of an owner in the premises, as distinct from those that create an owner’s interest in the premises. The priorities contemplated by s., 78(3) assume that an owner’s interest in the premises already exists…
[43] Justice Wilton-Siegel in Re: Jade-Kennedy Development Corporation[^18] determined the relative priorities between lien claimants and mortgagees who provided financing to purchase the land and the construction, or improvement upon the land. Justice Wilton- Siegel reviewed the Supreme Court of Canada decision in M. Sullivan & Son Ltd v. Rideau Carleton Raceway Holdings Ltd.[^19] for the principle that principal and interest are equally secured under the mortgage: “The right to interest is an essential, inseparable, constituent part of the advance made on account of the mortgage.”[^20]
[44] Justice Wilton-Siegel concluded, at paragraph 49
First, M. Sullivan & Son and XDG Ltd. demonstrates that the concept of an “advance” is not limited to the principal amount advances under a mortgage. It includes all amounts which the mortgagor is contractually obligated to pay in respect of any principal amount advanced, including interest and the costs of registration of any principal amount advanced, including interest and the costs of registration, perfection and enforcement of the mortgagee’s security for the advance irrespective of when incurred. As the Supreme Court noted, without such a right, building loans and other commercial loans would not be made in a commercial manner.
[45] From reviewing the plain meaning of section 78(1) and (3) and the cases noted, I discern the following.
[46] First, construction liens that arise from an improvement to the property that is the subject of the lien have priority “over all conveyances, mortgages or other agreement affecting the owner’s interest in the premises.”
[47] Second, a prior mortgage has priority over liens in certain situations. For advances made prior to when the first lien arose, the mortgage has priority to the extent of the lesser of
(a) the actual value of the premises at the time when the first lien arose; and
(b) the total of all amounts that prior to that time were,
i advanced in the case of a mortgage, and
ii advanced or secured in the case of a conveyance or other agreement.
[48] Third, an owner cannot have priority and cannot avail themselves of the priority exceptions in section 78(3).
[49] Fourth, the nature and purpose of a prior mortgage has not been altered or changed by the registration of a lien. The mortgage encompasses obligations and terms that the mortgagee and mortgagor are responsible for and that are secured by the mortgagor’s interest in the lands and premises. These obligations are not diluted or separated by the registration of a lien on the title of the land and premises. This includes any interest due and any reasonable expenses or charges incurred that directly relate to the mortgage or enforcement of the mortgage, if the mortgage is in default. The mortgage is a legitimate and authentic mortgage, until, on the balance of probabilities, it is proven otherwise.
[50] Fifth, the effect of section 78(3) is to prevent a situation where the amount secured by the mortgage is greater that the value of the of the lands and premises that are subject to the mortgage or the total amounts advanced at the time. This is to prevent a situation where the mortgage is used as a vehicle to hinder or prevent a lien claimant from realizing any security from any equity in the lands and premises in which the improvement was made.
[51] Thus, I am of the view that with a prior mortgage in default, arrears of interest along with reasonable charges, expenses and fees that relate to enforcement of the security (i.e. the mortgage) are not issues to be adjudicated in a proceeding concerned with priority. The determination of the amount owed on a mortgage in default, be it arrears in interest and reasonable expenses incurred should be determined through proceedings such as power of sale proceedings, bankruptcy proceedings or through the appointment of a trustee.[^21]
[52] I will now turn to the circumstances in this appeal.
Application
[53] There are several material findings that are not challenged in this appeal. These are:
(a) There is no fraud or collusion on the VTB. The VTB is legitimate and authentic.
(b) Funds were advanced on the VTB prior to when the first lien arose.
(c) The VTB is no different than a mortgage that is provided to purchase the property where monies are advanced for that purchase.
(d) FAB’s mortgage has priority over the interest of the lien claimants.
(e) Justice Newbould assessed the interest and costs incurred for the enforcement of the VTB and determined the amount for which FAB is responsible.
(f) It was never an issue that FAB is a mortgagee and not an owner.
[54] In these circumstances, once the motions judge concluded that the VTB had priority over the lien claimants, the analysis should have ended. The whole of the mortgage has priority. This includes interest and reasonable charges to enforce the mortgage.[^22] In this case, it is not within the realm of a determination of priorities for the motions judge to separately determine that arears in interest or reasonable expenses incurred on the VTB did not have priority over the lien claimants.
[55] I am of the view that the motions judge erred in law in embarking on an analysis that the arrears of interest and reasonable costs incurred to enforce the VTB separately had priority over the lien claimants under section 78(3) of the CLA.
[56] I agree with Master Albert when she found:
[131] …Justice Newbould approved these items implicitly in the Vesting Order at paragraph 4 wherein he defined net proceeds of sale as including the charges and expenses that are listed in the accounting statement. Nevertheless, the lien claimants seek to go behind the accounting statement in these lien proceedings.
[133] For the VTB to be made whole under the VTB that triggered the power of sale proceedings, FAB would be entitled to the entire balance of the monies paid into court, unless the lien claimants have a priority claim by reason of the Construction Lien Act. For the reasons given, I find that the lien claimants do not have a priority over FAB as first mortgagee…
[57] It was not necessary for Master Albert to make specific findings about priority over “other fees, charges and expenses” once it was determined that the VTB had priority over the lien claimants. The calculation of the amount owed to FAB on the VTB was already determined. The conclusion of the Master was correct, given her finding that the VTB had priority.
Disposition
[58] The appeal is allowed, and the Report of Master Albert dated May 24, 2018 is confirmed.
Costs
[59] The appellants and respondents have agreed on costs. The agreement included that if the appellants are successful on the appeal, the respondents would pay costs to the appellants in the amount of $15,000 for the appeal and $25,000 for the motion to oppose confirmation. The order as to costs by Master Albert would apply.
[60] Accordingly, I order the respondents to pay costs to the appellant, FAB, in the amount of $15,000 for the appeal, $25,000 for the motion to oppose confirmation and $86,325.50 for the trial. These amounts are to be paid in thirty days.
___________________________ Sutherland J.
I agree: ___________________________ Penny J.
I agree: ___________________________
Favreau J.
Date of Release: October 5, 2021
CITATION: Scott, Pichelli & Easter Limited v. Dupont Developments Ltd., 2021 ONSC 6579
DIVISIONAL COURT FILE NO.: 445/19
DATE: 20211005
ONTARIO
SUPERIOR COURT OF JUSTICE
IN THE MATTER OF THE Construction Lien Act, R.S.O. 1990, c. 30
Penny, Sutherland and Favreau JJ.
B E T W E E N:
Scott, Pichelli & Easter Limited, as assignee for CAM Mouldings & Plastering Ltd. And Gentry Environmental Systems Ltd, by its Trustee, Scott, Pichelli & Easters Limited.
Plaintiffs/Respondents
- and –
Dupont Developments Ltd., The Rose and Thistle Group Ltd., Florence Leaseholds Limited, Beatrice Leasehold Limited and ADA Leaseholds Limited
Defendants/Appellants
REASONS FOR JUDGMENT
SUTHERLAND J.
Released: October 5, 2021
[^1]: 2019 ONSC 4555. [^2]: 2018 ONSC 3126. [^3]: *Construction Lien Act*, R.S.O. 1990, c. C.30. The CLA was amended in 2017 by the Construction Lien Amendment Act, S.O. 2017, c. 24, and is now the Construction Act. The provisions of the CLA apply in this matter given that the contracts in question were entered into in 2013, before the amendments became operative in 2018, per section 87.3(1). All citations to the CLA in this judgment are to the CLA, as amended, immediately prior to the coming into force by way of the Construction Lien Amendment Act. [^4]: This fixing of costs is found in the motions judge’s reasons on the motion to oppose confirmation. [^5]: 2019 ONSC 7508. [^6]: 2015 ONSC 870. [^7]: Ibid at para. 18. [^8]: 2015 ONCA 625. [^9]: 2015 ONSC 2550. [^10]: The lien claimants were: Fox Contracting Limited, Laser Heating and Air Conditioning Inc. and Gemtec Wall & Ceiling Systems Ltd. [^11]: CLA, s.71(1). [^12]: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 SCR 235; Yorkwest Plumbing Supply Inc. v. Nortown Plumbing (1998) Ltd. et al., 2014 ONSC 5655, at para. 1. [^13]: Supra note 2, at para. 100. [^14]: Tepee Excavation & Grading Ltd. v. Niran Construction Ltd.(2000), 2000 3447 (ON CA), 49 O.R. (3d) 620 (C.A.) at para. 24; RSG Mechanical Incorporated v. 1398796 Ontario Inc., 2015 ONSC 2070 (Div. Ct.). [^15]: Section 78(2) of the CLA. [^16]: 2009 ONCA 256, [2009] O.J. No. 1195. [^17]: See paras. 77 to 83. [^18]: 2016 ONSC 7125. [^19]: 1970 21 (SCC), [1971] S.C.R. 2. [^20]: Supra note 17, at para. 39. [^21]: Lien claimants can challenge the enforcement of a mortgage and amounts claimed by the mortgagee under the provision of the *Mortgages Act*, R.S.O. 1990, c. M.40, such as section 43 and Rule 64 of the *Rules of Civil Procedure*, R.R.O. 1990, Reg. 194. Further, a lien claimant can seek an appointment of a trustee to manage the property, including its sale and discharge of a mortgage registered, per section 68 of the CLA. [^22]: See Re: Jade-Kennedy Development Corporation, supra, note 18.```