1186708 Ontario Inc. et al. v. Attara Developments Limited et al.

COURT FILE NO.: CV-09-8023-00CL DATE: 20130611

SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: 1186708 ONTARIO INC., 746190 ONTARIO LIMITED, AND 746191 ONTARIO LIMITED, Applicants/Moving Parties

AND:

ATTARA DEVELOPMENTS LIMITED, BELLCREST BUILDERS LIMITED, BRENTHALL APARTMENTS LIMITED, CHELSANDY DEVELOPMENTS LIMITED, GROVER REALTY MANAGEMENT (a partnership), GROVER REALTY CABLE (a partnership), LILLIANA BUILDINGS LIMITED, LURAY INVESTMENTS LIMITED, PAULDOR DEVELOPMENTS LIMITED, 375685 ONTARIO LIMITED, 678678 ONTARIO LIMITED, MATANAH INVESTMENTS CORP., SYDNEY GERSTEIN, DAWN TRADING LIMITED, 497505 ONTARIO INC., 781527 ONTARIO INC., KILBARRY HOLDING CO., STAN VINE CONSTRUCTION LTD., MERNICK CONSTRUCTION LIMITED, 781526 ONTARIO INC., ESTATE OF BELLE MERNICK, SAUL MINTZ, IRWIN MINTZ, HOWARD MINTZ, RHONDA STRASBERG, MINKIDS HOLDINGS (a partnership), ETTIE WOSNICK, MORRIS WOSNICK, 2135637 ONTARIO INC., and FAYE MINTZ, Respondents/Responding Parties

BEFORE: MORAWETZ J.

COUNSEL: Derek J. Bell and Emrys Davis, for the Applicants J. Rosekat, for the Sales Officer, A. John Page & Associates Inc. T. Kerzner, Q.C., for Mintz-Gerstein, except the Applicants

HEARD: MARCH 18, 2013 SUPPLEMENTARY SUBMISSIONS RECEIVED: APRIL AND MAY 2013

ENDORSEMENT

[1] This motion was heard on March 18, 2013, at which the Applicants moved for an order dealing with two discrete post-closing issues which were resolved without argument. At the same hearing, the Respondents, represented by Mr. Kerzner (the “Kerzner Respondents”) sought payout on two mortgages, on a basis of what the Applicants considered to be a premium, whereby in addition to the outstanding principal and accrued interest, the Kerzner Respondents also sought an “unbargained pre-payment penalty” on a related party mortgage.

[2] The dispute arises out of mortgages on the Rhona Property and the Diplomat Property.

[3] The Rhona Property was the subject of a 50-year mortgage granted to Canada Mortgage and Housing Corporation (“CMHC”) on May 5, 1972.

[4] The Diplomat Property was also subject to a 50-year mortgage in favour of CHMC granted on October 5, 1972.

[5] In 1997, the two CMHC mortgages were replaced. The replacement mortgages on the Rhona Property and the Diplomat Property were granted by 375885 Ontario Limited (“375”) in favour of 788771 Ontario Limited (“778”). The mortgages were signed by Mr. Irwin Mintz, on behalf of the trustee as mortgagor, at a time when Mr. Mintz was also a director and officer of 778.

[6] Ownership of the Rhona Property is held by the Applicant, 746190 Ontario Limited (Sharon Gerstein), as to a 20% interest with the Kerzner Respondents holding the remaining 80%. The same ownership structure is in place on the Diplomat Property.

[7] On December 11, 1997, the Kerzner Respondents, but not Sharon Gerstein, loaned funds to Rhona and Diplomat and on the same day each of Rhona and Diplomat used those funds to pay off the principal amounts outstanding on the original CMHC mortgages. Since then, payments have been made payments on the mortgages to 788.

[8] The position of the Applicants is as follows:

(i) the mortgages in favour of 788 were placed on title without their knowledge or consent;

(ii) the relationship between 375 and 788 is such that mortgages were self-dealing transactions;

(iii) the Kerzner Respondents seek to justify the self-dealing transactions on the basis that they simply mirrored the terms of then existing CHMC mortgages. The mortgages in favour of 788 would have been inherently fair had they matched the terms of other mortgages available in 1998.

(iv) the mortgages issued in 1998 should have carried (a) a lower interest rate and (b) a shorter term. The Applicants referenced the mortgage on the Sheridan Property in favour of People’s Trust which was issued by a third party for 6.5% - a full 1% less in interest, and for a 20-year term, rather than a 25-year term obtained by the trustee.

(v) the mortgages were not on the same or similar terms as the CMHC mortgage. The Applicants submit that the Kerzner Respondents seek a pre-payment penalty – something that CMHC never insisted upon when the mortgage was refinanced and that waiver of a right to pre-payment penalty was never built into the later mortgages.

(vi) the previous CMHC mortgages specifically allowed for pre-payments when the mortgage covered a “rental housing project” as defined by s. 15 of the National Housing Act, 1954.

[9] At the heart of the argument is the Applicants’ position that it is inequitable for the Kerzner Respondents, having extracted payments from the Applicants beyond what third-party lenders would have charged, to seek a pre-payment penalty in circumstances where:

(a) there is no clause in any of the mortgages conferring a right to a pre-payment penalty;

(b) the self-dealing mortgages are held out to be fair because they mirrored the CMHC mortgages, but the waiver of a pre-payment penalty was not similarly captured; and

(c) in failing to include a clause allowing for pre-payment without penalty, just as CMHC allowed a pre-payment without penalty, the trustees preferred their own interests to those of the beneficiaries.

[10] The Applicants did not object to the repayment of principal and accrued interest of the mortgages (reserving rights about the quantum of interest to the future litigation) but object to awarding any pre-payment penalties to the Kerzner Respondents.

[11] In argument on March 18, 2013, the Kerzner Respondents took the position that there was a sound business reason to replace CMHC as mortgagee as that enabled the Properties to relieve themselves from the restrictions imposed by CMHC under the original mortgages granted as part of its limited dividend housing programme, which included leasing only to tenants whose income were below a certain level set by CMHC, leasing at below market rates and being subject to an annual compliance review.

[12] The Kerzner Respondents also took the position that it should not matter to Sharon Gerstein that monies are to be paid from the sale proceeds payout with the 788 mortgages being vested off title to the Rhona Property and the Diplomat Property, because if 788 had not replaced CMHC, then the CMHC mortgages would still be on title and the money would have to be paid to CMHC.

[13] As a point of principle, the Kerzner Respondents also submit that when a court vests a mortgage holder off title, it does not do so without compensating the mortgagee for what it has lost. In this case, the mortgagors receive approximately $380,000 annually in interest and principal from the two mortgages and that would be cut off by the vesting order and needs to be replaced by the discharge amounts.

[14] A number of the arguments put forth at the hearing on March 18, 2013 were made orally and I requested supplementary submissions from the parties. The invitation to provide supplementary submissions was with respect to legal argument. It was not an opportunity for the parties to put forth additional evidence.

[15] In their supplementary submissions, the Kerzner Respondents pointed out that the mortgages in favour of 778 do not contain a provision that provides for an “early payment penalty” because the mortgages do not contain an early payment privilege, so there would have been no need to deal with an “early payment penalty” since no early payment was contemplated under the mortgages. The Kerzner Respondents take the position that absent the vesting orders of March 5, 2013, the mortgages would be in place and payments would continue to be made over the next ten years to maturity.

[16] The Kerzner Respondents further point out that the original CMHC mortgages contained a pre-payment provision relating to a s. 15 National Housing Act mortgage but the original CMHC mortgages were 50-year mortgages and a s. 15 NHA mortgage is one that has a term not exceeding 20 years. Consequently, the original CMHC mortgages did not have a pre-payment privilege. Further, the 778 mortgages do not contain a pre-payment privilege. The 778 mortgages contain, in the applicable standard charge terms 9320, a provision that provides that on sale of the subject property, the whole mortgage comes due at the option of the mortgagee, an option which 788 has not exercised.

[17] In this case, the amounts being sought by 788 for future interest loss are amounts which use the future interest loss amount calculated by the Sales Officer. Mr. Kerzner takes the position that the onus rests on Mr. Bell to demonstrate that the amount for future interest loss (calculated by the Sales Officer and accepted by 788) should be different and that Mr. Bell presented no evidence to suggest any different number, just some comments by the Farber firm, which are not in evidence. I agree.

[18] Further, the Kerzner Respondents also submit that there is no evidence of what market rates were for the subject mortgages in December 1987 when the 788 mortgages were put in place. I agree.

[19] The Kerzner Respondents specifically addressed the supplementary argument made by Mr. Bell relating to the operating agreement for the Rhona mortgage (the “Rhona OA”). The Kerzner Respondents took objection to the introduction of the Rhona OA into evidence on the basis that it could have been submitted earlier. I agree. However, even if it were to be considered, I accept Mr. Kerzner’s argument that the Rhona OA is qualified by the pre-payment being made “in accordance with the terms of the mortgage” which refers back to the provisions of the original CMHC mortgage which contains a pre-payment privilege which only applies if the mortgage is one concerning a s. 15 NHA project, which, by definition, cannot exceed a 20-year term. As noted earlier, the subject CMHC mortgage has a 50-year term and cannot be considered to be a s. 15 NHA mortgage. Even if the Rhona OA were to be considered, I agree with Mr. Kerzner’s submission to the effect that on a true construction of the Rhona OA, there was no right to prepay the original CMHC mortgage.

[20] The Operating Agreement relating to the Diplomat Property was not produced.

[21] With respect to the discount rate, the Kerzner Respondents take the position that the supplementary submissions provided by the Applicants which appended calculation sheets, reference statements made by unnamed persons of the Farber firm. I agree with Mr. Kerzner that none of this is in evidence and cannot be considered. The only evidence on the subject is that provided by the Sales Officer.

[22] The brief written rebuttal submissions filed by the Kerzner Respondents on May 1, 2013 had two additional points.

[23] First, there was no indication of any special benefit to 375 nor is there any evidence that the Applicants were harmed as a result of the 1998 refinancing.

[24] Secondly, with respect to the 2% discount rate, Mr. Kerzner points out that the affidavit of Mr. Bhardwaj does contain sworn and unchallenged evidence where he states “I have calculated the losses in question … which I present valued by using a present value factor of 2% because of the low risk associated with the future cash flow”.

[25] Having considered the record before me on March 18, 2013, as well as the subsequent written submissions received, I accept the following:

(a) the CMHC mortgages did not contain an early payment privilege and, consequently, there was no need to deal with an early payment penalty since no early payment is contemplated;

(b) the mortgages in favour of 788 do not contain a pre-payment privilege;

(c) absent the vesting orders of March 5, 2013, the mortgages would be in place and payments would have to be made over the next years to maturity.

[26] From the standpoint of the Applicants, it seems to me that their main complaint is that they believe it is inequitable for the Kerzner Respondents to charge a pre-payment penalty in these circumstances, especially where the Kerzner Respondents have done very well for themselves as a result of the court-approved sale of the properties. As pointed out by the Applicants, tens of millions of dollars more were obtained because, at the insistence of the Applicants, a court-supervised process took place and the offer that the Kerzner Respondents were previously willing to accept was exceeded by a significant margin. The Applicants also take the position that the Kerzner Respondents have done very well through a self-dealing mortgage at an interest rate higher than what the market was offering and it is unconscionable for the Kerzner Respondents to seek a further extraction of wealth from the Applicants through the form of an unbargained for pre-payment penalty as a result of a court supervised sale.

[27] I find this argument flawed in several respects.

[28] Firstly, as most recently noted by Master McLeod in Bankruptcy of CAF +, 2013 ONSC 2749, “at common law, there was no right to prepay a mortgage as the mortgagee was entitled to repayment of the principal amount of the loan together with the interest originally bargained for unless the mortgage contained a prepayment clause”.

[29] In this case, I have concluded that there is no pre-payment provision.

[30] Secondly, it is not open to the mortgagor, or in this case, the 20% ownership interest to take unilateral steps to, in effect, amend the language of the mortgage.

[31] Third, I do not accept the argument that the 1998 mortgage refinancing gave rise to self-dealings. The referenced decision of Lac Minerals Limited v. International Corona Resources Limited, 1989 CanLII 34 (SCC), 2 S.C.R. 574 stands for the proposition that the fiduciary obligation will “most often include the avoidance of a conflict of duty and interest and a duty not to profit at the expense of the beneficiary”. In this case, the evidence does not establish, in my view, that the Kerzner Respondents profited at the expense of the Applicants. The pre-payment terms of the original CMHC mortgage were carried forward to the 788 mortgages. In my view, the interest rate and the term length cannot be considered unreasonable in the circumstances. As such, I am unable to conclude that the trustees preferred their own interests to those of the beneficiaries.

[32] Fourth, with respect to the argument that the Kerzner Respondents have done very well for themselves as a result of the court-approved sale of the properties, this statement is equally applicable to the Applicants. The complaint of the Applicants in this respect is misdirected. Both sides have done very well for themselves as a result of the court-approved sale of properties. The Applicants will receive the 20% equity interest to which they are entitled.

[33] Fifth, the mortgages vested off title on the Rhona Property and the Diplomat Property were the 788 mortgages and they have to be taken as they stand, namely, with no pre-payment privilege and a requirement to compensate for the loss resulting from the early vesting off title of those mortgages.

[34] I do note that in paragraph 20 of Mr. Kerzner’s submissions filed on April 19, 2013 that the Applicants might choose to raise for determination by the trial judge amongst all of the other issues raised for ultimate determination by the trial judge, a claim for damages for failure to duplicate the alleged (according to the Applicants’ interpretation) no penalty pre-payment privilege in the original CMHC mortgage, but that is a quite different claim (a claim if advanced that is subject to defences including the Limitations Act) from saying that no future interest losses are now payable under the 788 mortgages being vested off title.

DISPOSITION

[35] In the result, the mortgage future interest loss payment issue has been resolved in favour of the Kerzner Respondents and an order shall issue to that effect, incorporating the interest loss calculations as set out in Schedule “A” to the Memorandum of Argument submitted by the Kerzner Respondents dated March 18, 2013.

MORAWETZ J.

Date: June 11, 2013