BARRIE COURT FILE NO.: CV-09-1293 and CV-09-1293A

DATE: 20120725

ONTARIO
SUPERIOR COURT OF JUSTICE

BETWEEN:

LOGOTECH INC. and STEVE TOBIAS
Applicants

– and –

RACHELLE McCONNELL and KEVIN McCONNELL
Respondents

BETWEEN:

RACHELLE McCONNELL
Applicant by Counterapplication

– and –

LOGOTECH INC. and STEVE TOBIAS
Respondents by Counter Application

Mr. M. Neirinck, for the Applicants (Respondents by Counter Application)

Mr. J. Barzo & Ms. A Pilkington, for the Respondent, Rachell McConnell (Applicant by Counter Application)
No one for the Respondent, Kevin McConnell

HEARD: July 5, 2012

REASONS FOR DECISION ON MOTION

R. MacKINNON J.

BACKGROUND

[1] The applicants Logotech and Tobias applied for a declaration that no part of the McConnell Muskoka property is a matrimonial home, and for an order that the respondents Rachelle and Kevin McConnell deliver up possession because they are in default of mortgages to Logotech. They have not actively pursued that application. They now argue that, in view of Kevin McConnell’s sworn November 15, 2007 verification statement that another different property had been designated as a matrimonial home of he and his wife, s.21(3)(d) of the Family Law Act deems that to be sufficient proof that this McConnell Muskoka property is not a matrimonial home. No relief is now claimed by them against the respondent Kevin McConnell who is now an undischarged bankrupt.

[2] Rachelle McConnell moves for an interim and/or interlocutory injunction prohibiting Logotech and Tobias from exercising any power of sale and/or enforcement proceedings relating to the properties covered in a 2009 Forbearance Agreement, in mortgages between the parties registered both in 2007 and in 2009, and for an order that the entire matter proceed to trial with directions. She argues that the presumption in s. 21(3) of the Family Law Act is rebutted.

[3] Steve Tobias was introduced to Kevin McConnell and his business partners in October 2007 by Tony Cina who was the accountant of both Tobias and the Forecast Group. Mr. McConnell was one of three principals of Forecast, which was engaged in real estate development. Tobias met with McConnell and also with Jerome and Todd Lisso, the other two Forecast principals. Cina told Tobias that McConnell and the Lissos were looking for a loan from Forecast in the amount of about $2,500,000.00 - in exchange for which they were offering as security both personal guarantees and mortgages over the Kevin McConnell Muskoka properties. Tobias agreed to loan $2,500,000.00 to Forecast secured by guarantees and a second mortgage in that amount against all six of McConnell Muskoka parcels behind a $750,000.00 first mortgage in favour of BMO.

[4] Tobias retained solicitor Derek Sorrenti to complete and close the loan transaction in November 2007. The required paperwork and registrations were left up to the lawyer. There is no evidence that any of the six parcels were actually inspected on site by Tobias or anyone on his behalf prior to closing. He did see a detailed property appraisal. His first attendance on site was when he later attended a barbeque with Mr. and Mrs. McConnell and friends in August 2008.

[5] In closing that 2007 mortgage transaction, solicitor Sorrenti commissioned a sworn declaration from Kevin McConnell on November 15, 2007 in which McConnell declared in paragraph two that the lands were not ordinarily occupied by him and his spouse as their family residence. There is strong evidence capable of belief that that sworn statement under s. 21(3)(b) of the Act was untrue. Rather, there is considerable evidence that the land, or parts thereof, had been and continued to be used by Mr. and Mrs. McConnell and their family for multi-season recreational purposes since their purchase in 2002 as a family property. Although Tobias asserts that Kevin McConnell told him the properties had been acquired for investment and development purposes, there is strong evidence capable of belief that the actual and intended McConnell family use of the property was that of a family compound and that the long-term family plan was that the six severed parcels would eventually devolve to family members.

[6] There is strong evidence in the record from Mrs. McConnell also contradicting her husband’s further assertion in paragraph 3 of that sworn declaration that another property had been designated as their matrimonial home. There is strong evidence capable of belief that that statement of Kevin McConnell under s. 21(3)(d) of the Act was also untrue. There is, however, no evidence that solicitor Sorrenti knew the truth about either incorrect statement. The only evidence in the record is that none of the contents of the sworn McConnell verification declaration were discussed at all by solicitor Sorrenti with Tobias at the time it was obtained or at any time before the November 2007 mortgage closing.

[7] By mortgage closing day in November 2007, there is strong evidence capable of belief that Steve Tobias, for himself and Forecast, then knew that the McConnell Muskoka properties included a family cottage. He knew and understood generally what a cottage was used for. He knew Mr. and Mrs. McConnell had children. Although he denies it, there is strong evidence that he had seen an aerial photograph of the property in August 2007. The photo shows images of a cottage, tennis courts, boats and docks – clearly recreational uses.

[8] Logotech entered into a second loan agreement with Forecast in January 2008 under which it agreed to advance another $500,000.00. Notices were registered in July 2008 against all six properties, thereby increasing the overall second mortgage security to $3 million. The only evidence is that, on Tobias’ behalf, solicitor Sorrenti once again relied on the Kevin McConnell November 2007 spousal declaration with respect to the increase.

[9] Mr. and Mrs. McConnell have not separated but continue to reside together. She asserts their relationship is “strained”, in her words. She argues through her counsel, and I agree, that it is apparent that Logotech and Tobias were fully aware in 2007 that the property was ordinarily occupied by her and her family - yet they closed the mortgage transaction with her husband and advanced funds, through solicitor Sorrenti, all without her consent or knowledge.

[10] Tobias personally visited the property on site in August 2008 when he was invited with his wife and friends for a McConnell barbeque. In January 2009, the parties to the 2007 mortgages negotiated and signed further mortgages and a Forbearance Agreement under which Kevin McConnell acknowledged and affirmed the propriety and enforceability of the 2007 mortgages. There is strong evidence capable of belief that, although it was initially understood between the parties that the 2009 mortgages were to replace those registered in 2007, it was clear that by the time of the execution of the Forbearance Agreement and mortgages in 2009 that the signing parties considered the 2009 security as additional and not replacement security. It is common ground that Mrs. McConnell was at no time a party to any of the mortgages, guarantees, or to the Forbearance Agreement. The only evidence is that she knew of none of it.

[11] By the time of the execution and registration of the 2009 mortgage security and Forbearance Agreement, Steve Tobias knew everything that he had learned in 2007, all that he had seen on site in 2008 and, in addition:

(a) He wrote Paul King, one of his own lawyers, on December 30, 2008 that the McConnell Muskoka building was in fact a family cottage and instructed Mr. King to obtain the spousal consent of Mrs. McConnell.

(b) On Tobias’ behalf, solicitor King in turn notified the solicitors for Mr. McConnell on January 13, 2009 that the McConnell family cottage and tennis court were clearly visible through a Google map search. He requisitioned Mrs. McConnell’s spousal consent supported by independent legal advice; but,

(c) Tobias’ lawyers wrote Mr. McConnell’s solicitor on February 23, 2009, just prior to the closing of the 2009 mortgage transactions, acknowledging that the mortgage documents would not have Mrs. McConnell’s spousal consent. His lawyer asserted that Tobias understood the risks involved but had instructed to close the mortgage deal nonetheless.

[12] There is strong evidence capable of belief that by the time of closing of the 2009 transactions Steve Tobias continued to know full well that this was the family cottage of the McConnells and that it had been used as such at times over the years by Mr. and Mrs. McConnell and their children. He, of course, still had the November 2007 statutory declaration of Mr. McConnell given to his lawyer two years earlier and swearing, in effect, to exactly the opposite.

DISCUSSION

[13] A spouse without legal title has a personal possessory interest in the property. The focus on the determination of whether a property is a matrimonial home is on the evidence of ordinary occupation by a person and his or her spouse as a family residence. Spouses may have more than one matrimonial home. Under s.23 of the Act , a court may determine whether a property is a matrimonial home and may direct the setting aside of transactions encumbering an interest in it. Cottages, recreational and vacation property can be found to be matrimonial homes. The test remains the same for such property as it does for a primary residence – whether or not it was ordinarily used as a family residence. There is strong evidence capable of belief that the McConnell family regularly used their cottage both summer and winter since 2002, in a seasonal/recreational manner. That occupation in this case cannot be characterized as merely occasional or causal.

[14] At issue is the validity of both the 2007 and 2009 mortgage securities, none of which have Mrs. McConnell’s spousal consent pursuant to the Family Law Act , R.S.O. 1990. There is a serious issue to be tried on both the 2007 and 2009 security documentation as to:

(a) whether the subject property or any of its parts constitutes a matrimonial home pursuant to the provisions of the Family Law Act, and

(b) whether and when the applicants had constructive and/or actual notice that the property constituted a matrimonial home.

[15] Logotech and Tobias rely upon the statutory wording in s. 21(3)(d) of the Act which provides in its material parts that although a mortgage transaction may be set aside unless the person holding it acquired it for value, in good faith and without notice that it was a matrimonial home, for that purpose a statement by the mortgagor (here Mr. McConnell in circumstances where the property is not designated by both spouses as a matrimonial home), which statement verifies that a designation of another property is matrimonial home made by both parties has been registered and not cancelled shall, unless the person to whom the encumbrance is made had notice to the contrary , be deemed to be sufficient proof that the property is not a matrimonial home. This notice can be actual, constructive or a combination of both McCaskie v. McCaskie 2002 49567 (S.C.J.) at para. 35 .

[16] Where a spouse can prove that the party to whom the encumbrance was made had notice to the contrary , the onus then shifts to the party to whom the encumbrance was made to prove that he was without notice that the property was a matrimonial home. In 767648 Ontario Ltd. v. Engel 1993 Carswell Ont 322 (Gen. Div.) at para. 34 , the Court held that where a lender knew that the mortgagor was married and living under the same roof as his spouse as evidenced by documentation on title and a letter which referenced both Mr. and Mrs., sufficient questions were raised to amount to “ notice necessitating the lender to investigate more fully ”.

[17] I find that, considered separately in 2007 and in 2009, sufficient strong evidence capable of belief has been adduced by Mrs. McConnell to shift the onus to Logotech and Tobias to prove that they were without notice that the Muskoka property was a matrimonial home. Despite the s. 21(3)(b) demonstrably false sworn verification statement made by Mr. McConnell on November 15, 2007, there is strong evidence capable of belief, and I find for the purposes of this motion, that Tobias and Logotech then knew otherwise. I further hold that the evidence known to them in 2007 and again in 2009 rose to a level well sufficient to put them on their inquiry necessitating them to investigate much more fully rather than just closing on the materially double false verification statement of Mr. McConnell. I find for the purpose of this motion that they have not met their onus.

[18] There is no evidence in the record that, at the time of either of the two mortgage closings, either Tobias or his lawyer Sorrenti knew the section 21(3)(d) declaration was false. However, I have already found that there is strong compelling evidence Tobias knew on both closings that the McConnell Muskoka property was, in part at least, a matrimonial home. He had noticed the contrary of that fact. I cannot conceive that, in passing into law s.21(3) of the Family Law Act , the Ontario Legislature intended to make it lawful for the reader of one material part of a mortgagor’s verification statement which the reader or his lawyer knows to be false-to then be able to rely on another material part of that statement in order to defeat the possessory rights of an untitled spouse. Section 21(3)(d) of the Act is no haven to the mortgagee in these circumstances.

[19] I find that Mrs. McConnell will suffer irreparable harm if an injunctive order is not granted. The validity of the Applicants’ mortgages would be rendered moot. She would inevitably lose her possessory rights to the property and her ability to secure her position through negotiations with subsequent mortgagees.

[20] The balance of convenience favours the granting of the order. In this case, it is not the debtor seeking to restrain mortgage enforcement. The applicants point to no substantial change in circumstances since they first commenced their legal proceedings in October 2009. They have taken no active steps to pursue the sale of the property. I am not persuaded by the applicants that Mrs. McConnell’s application is, in effect, merely an attempt at delay.

[21] The focus at this state of the injunctive test is on the balancing of risk of harm to the applicants inherent in granting remedial relief to Mrs. McConnell before the merits of the dispute can be fully explored at trial – against the risk that her rights will be significantly impaired while awaiting trial. It seems to me that the effects of an injunction on the applicants would be far less severe than the effect on Mrs. McConnell if an injunction is not granted.

CONCLUSION

[22] After a full consideration of the three-stage injunctive test and of the collective impact, my view is that an interlocutory injunction should issue. I am fully persuaded that the matters in issue can only be determined on an assessment of the credibility and reliability of witnesses which requires viva voce evidence. I am, however, far from satisfied that the usual injunction damages undertaking not be provided by Mrs. McConnell. Rule 40.03 requires it and I am not close to being persuaded to order otherwise. The filed undertaking is in satisfactory form.

[23] Accordingly, I order that:

(a) The applicants be restrained from initiating or continuing and power of sale of the subject properties pending trial or final disposition of this court;

(b) The applicants’ Application and the Respondent’s Counter-Application proceed to trial, with directions, including but not limited to as follows:

(i) The issues to be tried are:

(1) Is the subject property a matrimonial home within the meaning of the Family Law Act?

(2) Did the applicants’ mortgages registered in 2009 replace the mortgages registered in 2007?

(3) If the mortgages registered in 2007 are of continued force and effect, can the applicants rely upon the statements made by Kevin McConnell in his Statutory Declaration sworn November 15, 2007?

(4) If the mortgages registered in 2007 are of continued force and effect, should they be set aside pursuant to s. 23 of the Family Law Act?

(5) In relation to the 2009 mortgages, can the applicants rely upon any statements made by Kevin McConnell to the effect that the subject properties were not ordinarily occupied as a family residence?

(6) Should the 2009 mortgages be set aside pursuant to s.23 of the Family Law Act?

(ii) The applicant be plaintiff and the respondent, Rachelle McConnell be defendant, plaintiff by counterclaim;

(iii) The applicants’ application record along with all affidavits of Steve Tobias be deemed to be the Statement of Claim and the respondent, Rachelle McConnell’s application record and all of Rachelle McConnell’s affidavits be deemed the Statement of Defence and Counterclaim;

(iv) The transcripts of the cross-examinations of Steve Tobias and Rachelle McConnell be treated as examinations for discovery.

(c) The trial shall be expedited.

[24] If the parties cannot agree on the question of costs of this motion they may, within twenty days of the release of these Reasons, submit written submissions of no more than four pages, single-spaced, together with Bills of Costs. The responding party on costs may file materials of the same length within a further ten days. Reply materials may be filed within five days thereafter. All costs materials shall be forwarded to me in care of my secretary at Barrie.

R. MacKINNON J.

Released: July 25, 2012