SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 04-CV-279541CM2
DATE: 20120618

RE:

The Toronto-Dominion Bank, Plaintiff

AND:

Belende Ndem, Benjamin Felix Bajikijaie, Babubhai Patel and CDN Business Investor Corp., Defendants

BEFORE: Pollak J.
COUNSEL: Eric Golden, for the Plaintiff
Stephen Werbowyj, for the Defendant Babubhai Patel
Percy Alexander, for the Defendant CDN Business Investor Corp.
HEARD: May 7 and 8, 2012

ENDORSEMENT

Facts

[ 1 ] Mr. Sean Spencer was approved for mortgage financing by The Toronto-Dominion Bank (“TD”) for the sum of $380,545 on his purchase of 13 Herbert Calbert Drive, Markham, Ontario (the “Property”), from Mr. Ndem for the amount of $538,000. Mr. Spencer was represented by a lawyer, the Defendant Mr. Bajikijaie who was also retained by the TD to act in the transaction. Mr. Bajikijaie, without TD’s knowledge, also acted for the Defendant Mr. Ndem, the vendor on the sale of the Property.

[ 2 ] On January 21, 2004, TD transferred $373,311.40 to Mr. Bajikijaie’s trust account for the completion of the TD mortgage and the sale to the purchaser Spencer.

[ 3 ] At that time, the Property had three registered mortgages, namely:

(a) a first mortgage in the amount of $273,000.00 in favour of Mr. Greenspoon and Mr. Lasman (the “Greenspoon/Lasman mortgage”);

(b) a second mortgage in the amount of $60,000 in favour of the Defendant, Mr. Patel; and

(c) a third mortgage in the amount of $30,000 in favour of the Defendant, CDN Business Investor Corp. (“CBIC”).

[ 4 ] Mr. Spencer did not close the sale on January 21, 2004, and the mortgage funds advanced to Mr. Bajikijaie were not returned to TD. Mr. Bajikijaie paid the $344,267.71 into court on Mr. Ndem’s behalf on March 9, 2004, to pay out the Greenspoon/Lasman mortgage pursuant to a Court Order. These monies were paid into court and paid out of court to Greenspoon/Lasman without the knowledge of TD. The payment of funds had the effect of discharging the first mortgage on the Property in favour of Mr. Ndem.

[ 5 ] Pursuant to a written agreement between the mortgagee Mr. Patel, TD and CBIC (the “Sale Agreement”), the Property was sold by Mr. Patel under Power of Sale for $420,000.00 in January 2006. The proceeds from the sale were paid into the trust account of Mr. Patel’s lawyer. A term of the Sale Agreement was that the proceeds would be disbursed on the agreement of the three parties.

[ 6 ] Other than Mr. Patel’s legal costs, TD paid all of Mr. Patel’s expenses related to the sale of the Property.

[ 7 ] At this time, in order of registered priority, Mr. Patel’s mortgage ranks first and the CBIC mortgage ranks second. TD does not have a mortgage registered on the Property.

[ 8 ] TD has a judgment for the amount of $339,487.71 against Mr. Ndem on the basis of unjust enrichment and against Mr. Bajikijaie on the basis of breach of contract and breach of duty of care in the amount of $368,531.40.

[ 9 ] In this motion for summary judgment, TD seeks to exercise the equitable remedy of subrogation to claim priority over Mr. Patel’s mortgage and the CBIC mortgage in the distribution of the sale funds.

[ 10 ] TD submits that the amount owing to it (approximately $415,000.00 excluding costs) almost exceeds the gross proceeds of sale of the Property ($420,000.00). There are therefore no proceeds for Mr. Patel or CBIC after TD is paid out.

[ 11 ] TD’s position on this summary judgment motion is that the evidence in the motion record is sufficient for this court to grant summary judgment. It is submitted that the only issue is a question of law -- whether TD is subrogated to Mr. Patel and CBIC as a result of paying out the Greenspoon/Lasman first mortgage on the Property. It is submitted that, as there are no material facts in dispute and there is no conflicting evidence on the record, findings of fact and credibility determinations are not needed. It is therefore not necessary to have a trial.

[ 12 ] The defences of Mr. Patel and CBIC are based on the law of priority pursuant to the Land Titles Act, R.S.O. 1990, c. L.5. They submit that, because they have the only mortgages on title, they should get priority over TD.

[ 13 ] TD submits that there is no chance of success in this action for Mr. Patel and CBIC based on their defences.

[ 14 ] Mr. Patel and CBIC argue that, as TD was so negligent in advancing the funds, it should not be entitled to any equitable relief. TD is largely the author of its own misfortune. This is a case where TD failed to heed a warning to check out the bona fides of a transaction. TD does not come to the court with “clean hands” as is required by a court considering an equitable remedy.

[ 15 ] They assert that, as TD has a judgment against Mr. Ndem and against Mr. Bajikijaie, to allow the subrogation remedy to TD would be grossly unfair to Mr. Patel and CBIC. They submit that they had no part of, and were not aware of, the relationship between TD, Mr. Bajikijaie and Mr. Ndem. It is not up to the court to assess the value of the judgment obtained by TD against Mr. Ndem and Mr. Bajikijaie. It is only necessary for the court to know that an alternative remedy is available to TD which would make it manifestly unfair to grant it the additional remedy of subrogation to TD.

[ 16 ] These Defendants submit that based upon the recent decision of the Court of Appeal in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, 108 O.R. (3d) 1 certain facts raise genuine issues which require a trial, such as:

• the details of the actual principal-agency and trust relationship and connection between TD Bank and Bajikijaie;
• their total non-involvement in the TD Bank/Bajikijaie/Ndem relationship;
• the changes to the relative valuation of the Property in the various time periods;
• the absence of facts to support TD’s claim that these Defendants would be unjustly enriched if subrogation is denied;
• the prejudice to be suffered by them in the event that subrogation to TD Bank is granted.

[ 17 ] It is therefore submitted that TD’s motion for summary judgment must fail.

[ 18 ] The parties agree that, to determine if a court should exercise its discretion to award the equitable remedy of subrogation to TD to obtain priority of payment of sale proceeds over these Defendants, the principle consideration is one of fairness between the parties in the circumstances of this case.

[ 19 ] The parties agree that the following statement from Mutual Trust Co. v. Creditview Estate Homes Ltd. (1997), 1107 (ON CA), 34 O.R. (3d) 583 (C.A.) is applicable:

The fundamental principle underlying the equitable doctrine of subrogation is one of fairness in light of all the circumstances. Within this principle is an understanding that no injustice is done by the appropriate subrogation of a party to the rights of original mortgages.

It is agreed that fairness and the prevention of unjust enrichment are the prime considerations in determining whether to grant the equitable remedy of subrogation.

[ 20 ] TD submits that these Defendants bargained for and received second and third mortgages on the Property. The inherent risk in these Defendants’ mortgages was reflected by their high interest rates. It is argued that if TD had not paid out the amount of $344,267.71 to discharge the Greenspoon/Lasman first mortgage, Mr. Patel and CBIC would not have recovered anything under their mortgages as a result of a forced sale of the Property by the first mortgagees Greenspoon and Lasman. TD argues that the only evidence on the record shows that after payment of the costs of a sale, there would have been no equity remaining in the Property to pay these Defendants anything.

[ 21 ] In contrast, Mr. Patel and CBIC submit that subrogation should only be granted in circumstances where TD can establish that it is necessary to prevent their unjust enrichment. They submit that, as they had no part in any of the actions that depleted the equity of the Property, the court should not exercise its discretion and grant the remedy of subrogation to TD.

[ 22 ] They argue that, in order to find that these Defendants were unjustly enriched, TD would have to establish that they had participated in a legally relevant manner to cause the deprivation to TD.

[ 23 ] Further, they submit that the court must consider the causes which have created the shortfall as well as the connection of TD to such causes. The court must, in considering the equities, consider the connection between the innocent Defendants and TD, whose agent, Mr. Bajikijaie, caused the loss. This is so particularly when TD has an alternate remedy against Mr. Bajikijaie and Mr. Ndem.

[ 24 ] It is submitted by these Defendants that the court must determine which of the parties is the closest to the initiating cause of the loss. In this case, it is submitted that, as Mr. Bajikijaie was the initiating cause of the loss, TD should bear the loss.

[ 25 ] The amount of principal and simple interest outstanding on Mr. Patel’s mortgage was $135,771.26 (on October 1, 2011) with a per diem amount of $24.66. Mr. Patel has also incurred costs and legal fees.

[ 26 ] The amount of principal and simple interest outstanding on the CBIC mortgage on October 1, 2011 was $76,512.69 with a per diem amount of $14.79. CBIC has also incurred costs and legal fees,

The Law of Subrogation

[ 27 ] The parties rely on the cases of: Mutual Trust Co, supra, Midland Mortgage Corp. v. 784401 Ontario Ltd. (1997), 1946 (ON CA), 34 O.R. (3d) 594 (C.A.) and Armatage Motors Ltd. v. Royal Trust Corp. of Canada (1997), 1629 (ON CA), 34 O.R. (3d) 599 (C.A.), Elias Markets Ltd.(Re) (2006), 31904 (ON CA), 216 O.A.C. 49. (

[ 28 ] The Armatage decision, in particular, is relied on by the Defendants. That decision was not referred to in the more recent Court of Appeal decision in Elias, which is relied on by TD.

[ 29 ] The Court of Appeal in the earlier Armatage case stated the following with respect to prejudice:

21 Royal Trust and Moore appeal from the decision of Desmarais J. and argue that it should be reversed and that Royal Trust should be given priority over Armatage. They argue that Desmarais J. erred in relying upon the belief that Royal Trust had a remedy at law against Moore and in considering the prejudice to Armatage. That prejudice, the appellants say, was not caused by Royal Trust or by Moore but by the declining real estate market.

22 In my view, Desmarais J. was right in his conclusion and right in considering the prejudice to Armatage and the fact that Royal Trust had another source of compensation or potential source of compensation for any damage it might suffer.

25 In the two cases heard with this appeal (Mutual Trust Co v. Creditview Estate Homes Ltd. and Midland v. 784401 Ontario Ltd..), there was no injury caused to either party against whom subrogation was sought. In neither Mutual Trust nor Midland Mortgage was there any evidence that any of the claimants was going to suffer any financial loss.

26 In the present case, it is very clear that if subrogation is allowed, Armatage will recover no part of its $91,000 mortgage. Royal Trust would rank ahead of Armatage to the extent of $412,379.34, as would the taxes then amounting to $71,788.96, and the real estate commission of $16,050, a total of $506,218.30.

27 It is not clear whether the reference to "injury caused" in Brown v. McLean means any injury resulting to the party against whom relief is sought or only "injury caused by the negligence in question." In any event, if subrogation is allowed, Armatage will suffer injury in that nothing will be recovered on its mortgage.

29 Those statements are not entirely accurate in the instant case. Armatage, when he found he had priority by virtue of the subsequent registration of Royal Trust's mortgage, confirmed his situation by consulting a lawyer. The lawyer told him his mortgage was first in line and, in the circumstances, as interest was still being paid, he should do nothing. Armatage followed this advice and should not be criticized for doing so.

30 In the particular circumstances of the case, it appears that Royal Trust stood by believing it was first in priority, and Armatage also stood by knowing it was first, while the Sawyers attempted to extricate themselves from a declining market aggravated by a vastly increased tax assessment.

33 Because of the particular combination of circumstances in the instant case - Armatage having to some extent relied on the abstract, Royal Trust appearing to have an alternative remedy, Armatage being certain to suffer a serious loss and subrogation being a discretionary remedy, I would deny Royal Trust's claim to that remedy. [ emphasis added ]

In this case, TD does have and has accessed an alternate remedy, but there is no evidence that the Defendants relied in any way on their rights pursuant to the Land Titles Act to their detriment, as was the case in Armatage. Their funds were advanced before the TD’s funds were used to discharge the first mortgage on the Property. Although the existence of an alternate remedy was a relevant factor in considering the fairness of allowing the subrogation remedy in the Armatage case, it was not the only factor considered. The Court of Appeal in that case emphasized the fact that the moving party had relied on the absence of a proper registration of property rights. I agree that it is a factor to consider in applying the proper principle in this case, but do not find that on its own, in the absence of the type of evidence which I discuss below, it is enough to change the conclusions reached below.

[ 30 ] As stated above, TD submits that there is no unfairness to the Defendants as they “got exactly what they bargained for”. They at all times would have been subordinate to the Greenspoon/Lasman mortgage. There is therefore no prejudice suffered by the Defendants in allowing TD’s subrogation. TD refers to the Elias case wherein the Court of Appeal stated:

[49] A total of $228,863.37 was advanced under the Mutual Trust charge. Of that sum, $227,967.14 was paid to Scotia Mortgage and the Bank for discharges of their charges.

[52] The motion judge in this case concluded that RBC was entitled to rely on the doctrine of subrogation to recover monies advanced to pay municipal taxes and to discharge prior mortgages on Parcel One, all of which totaled $854,184.11. She concluded there was ample authority for the proposition that a mortgagee who pays off earlier encumbrances is entitled to the priority position of those earlier charges. She quoted from Crosbie-Hill v. Sayer [1908] 1 ch. 866 (Eng. Ch. Div.), as follows:

[W]here a third party at the request of a mortgagor pays off a first mortgage with a view to becoming himself a first mortgagee of the property, he becomes, in a default of intention to the contrary, entitled in equity to stand, as against the property, in the shoes of the first mortgagee.

[ 31 ] The Defendants however rely on the Court’s finding in the Armatage case to argue that they are prejudiced because they will not recover their funds due to a lack of proceeds from the sale. In Armatage, the shortfall was caused by a downturn in the real estate market. In this case, the Defendants allege that the shortfall was caused by Mr. Ndem’s engaging them in litigation which greatly increased the costs of the sale of the Property.

[ 32 ] However, in both Court of Appeal decisions I have referred to, the following principle is affirmed:

The fundamental principle underlying the equitable doctrine of subrogation is one of fairness in light of all the circumstances. Within this principle is an understanding that no injustice is done by the appropriate subrogation of a party to the rights of original mortgages. …

It is equally clear that the defendant has not been in any way prejudiced by what has happened, and that no injustice will be done by replacing him in his former position.

[ 33 ] The Defendants submit that the question of fairness in this case is a genuine issue requiring a trial.

[ 34 ] TD responds by submitting that the question of fairness can be decided on the record in this motion and does not raise a genuine issue requiring a trial. TD submits that the only evidence before the court with respect to the costs of the sale of the Property are those costs actually incurred by Mr. Patel to sell the Property. Such evidence is the only evidence before the court which gives any indication about what the costs of the sale of the Property pursuant to the Greenspoon/Lasman mortgage would have been. Such costs show that these Defendants would not have recovered any of their funds if TD had not paid off the Greenspoon/Lasman mortgage and a sale of the Property had proceeded pursuant to that mortgage.

[ 35 ] There is no conflict in the evidence on the record on this point. These Defendants had the obligation of “putting their best foot forward” and introducing all relevant evidence with respect to the question of whether it is “fair in the circumstances of this case” to allow TD’s request for subrogation. This includes evidence regarding the Defendants’ submission that TD is the “author of its own misfortune”. It is alleged that TD was warned that the Spencer mortgage application was fraudulent and that TD nevertheless proceeded negligently in advancing the funds to Mr. Bajikijaie.

[ 36 ] The evidence the Defendants rely on is a reference to such a warning in correspondence from Mr. Booker, counsel for Greenspoon and Lasman, to counsel for TD, which was produced in TD’s motion record. There is no affidavit evidence from Mr. Booker to provide evidence with respect to whether the alleged warning was given to TD.

[ 37 ] TD submits that this does not constitute admissible evidence as it is “hearsay” and that the Defendants could have submitted the appropriate affidavit evidence but did not. There is therefore no evidence before the court which could demonstrate that there is a genuine issue requiring a trial. I agree with this submission.

[ 38 ] I must look at the evidence before the court on the record with respect to the issue of fairness to these Defendants.

[ 39 ] There is also the admission by TD that there will not be enough proceeds for these Defendants to recover any of their funds.

[ 40 ] As mentioned above, it is clear that in this case a court would apply the following principle:

The fundamental principle underlying the equitable doctrine of subrogation is one of fairness in light of all the circumstances. Within this principle is an understanding that no injustice is done by the appropriate subrogation of a party to the rights of original mortgages.

It is equally clear that the defendant has not been in any way prejudiced by what has happened, and that no injustice will be done by replacing him in his former position.

[ 41 ] As there is no conflict in the evidence with respect to the fact that these Defendants will not recover their funds, or the reason why they will not be able to collect, I am of the view that a trial judge will not be in a better position to “fully appreciate” the evidence on this point. If there is further evidence that should or could have been adduced by these Defendants, they had the burden of adducing such evidence on this motion to show that there is a genuine issue requiring a trial. They did not have the option of waiting until the trial to introduce the appropriate evidence.

[ 42 ] These Defendants’ evidence is that the shortfall in the sale proceeds and the reason they would not be paid is that Mr. Ndem’s actions significantly increased the costs of the sale of the Property. He was a party contracting with these Defendants. The only conclusion this court can reach on the evidence is that had the Greenspoon/Lasman mortgage sale proceeded without the payout of this mortgage by the TD, costs incurred for the sale would have decreased the proceeds of sale that would have been available to pay out these Defendants’ mortgages. There is no evidence on what these costs would have been. The only evidence is what the actual costs incurred by Mr. Patel on the sale of the Property were. It can however, be assumed, on the basis of common sense that similar costs such as real estate commissions, etc., would have had to have been incurred to sell the Property had it been sold by Greenspoon and Lasman.

[ 43 ] The reasoning of the Court of Appeal in Elias referred to above is applicable in this case. The facts of the Armatage case are different. In this case, there is no evidence of any reliance by the Defendants on the priority provisions pursuant to the Land Titles Act. The fact that TD has a judgment against Mr. Ndem and Mr. Bajikijaie is one factor to consider in this case. In applying the above-noted principle set out by the Court of Appeal, this court concludes that these Defendants would not have been in any better position if TD had not advanced the funds used to pay off the first mortgage. To deny TD the remedy they seek would, in my view, therefore result in the unjust enrichment of these Defendants. The reason for this is that these Defendants would then be in a better position than they would have been, had the first mortgage not be paid out, if this court denies TD the subrogation remedy. This would not be fair in the circumstances of this case.

[ 44 ] These Defendants had the burden of introducing evidence to refute this proposition to show that there were genuine issues requiring a trial and they did not. The same reasoning applies in the absence of any evidence on the record with respect to the allegations raised by these Defendants of TD’s negligence. As there is no conflict in the evidence, this court can find that, based on the evidence before it, it is not fair in all of the circumstances to deny the right of subrogation to TD.

[ 45 ] To conclude, I find that there are no genuine issues requiring a trial and that the granting of TD’s summary judgment motion is justified on the basis of the record.

[ 46 ] As I have found that it is fair in the circumstances to grant the remedy of subrogation to TD, it therefore has priority with respect to payment of the funds from counsel’s trust funds, subject to the terms of the Sale Agreement with respect to costs and legal fees.

[ 47 ] The parties have indicated that they will be able to resolve their dispute with respect to payment of Mr. Patel’s legal fees payable pursuant to the Sale Agreement.

Costs

[ 48 ] The parties have agreed that the successful party in this motion will be awarded $20,000 on a partial indemnity basis. As TD was the successful party I therefore award that:

(i) Mr. Patel pay to TD the amount of $20,000 including disbursements and all applicable taxes; and also

(ii) CBIC pay to the TD the amount of $20,000 including disbursements and all applicable taxes.

Pollak J.

Date: June 18, 2012