Court File and Parties

Court File No.: CV-11-436272
Date: 20131904
SUPERIOR COURT OF JUSTICE - ONTARIO

RE: TE-ZEN LIU, Plaintiff

AND:

MARINA LVOVNA RAKITOVA and ALEH BORTNIKOV, Defendants

BEFORE: D.L. Corbett J.

COUNSEL:
J. Gardiner Hodder, for the Plaintiff

Philip Viater, for Marina Lvovna Rakitova and 1291937 Ontario Inc.

Aleh Bortnikov, self-represnted

HEARD: December 18, 2012

ENDORSEMENT

[1] This is a motion for summary judgment brought by Mr Liu for remedies arising under a mortgage he holds on a motel business. The numbered company is the mortgagor. Ms Rakitova was the sole shareholder of the numbered company when the mortgage was agreed. Mr Bortnikov is Ms Rakitova’s common law spouse. Under a trust agreement subsequent to the mortgage, Mr Bortnikov came to hold an interest in the numbered company.

[2] Mr Liu is the former spouse of Ms Rakitova. The mortgage was part of their settlement after separation. A term of the mortgage is that Ms Rakitova may not transfer any interest in the motel. Mr Liu argues that the trust agreement transfers an interest in the motel to Mr Bortnikov in breach of the mortgage.

[3] Payments of principal under the mortgage are in good standing. The substantial issue in this case concerns interest. Interest is payable at 7% annually. However, unless there is a default in the mortgage agreement, Mr Liu waives interest under the mortgage.

[4] Mr Liu alleges he is entitled to interest because Ms Rakitova transferred an interest in the motel to her new husband.

[5] Ms Rakitova agrees that she entered into a trust agreement under which she beneficially transferred shares in the numbered company to Mr Bortnikov. Her response to Mr Liu is that:

(a) the trust agreement is not a default of the mortgage;

(b) in any event the trust agreement is void because she signed it under duress; and

(c) Mr Liu knew about and consented to the trust agreement.

[6] Mr Bortnikov, self-represented, repeats and relies upon Ms Rakitova’s reasons (a) and (c), above. He denies that the trust agreement was signed under duress.

[7] During the course of argument, three new defense arguments emerged, perhaps as a result of questions from the bench. First, there was a question as to whether a restraint on transfer to a new spouse was contrary to public policy. The mortgage arose in the context of settling family law proceedings. The courts may decline to enforce a provision that is designed to impede a former spouse from entering into a new relationship. Second, and related, it could be argued that the interest transferred to Mr Bortnikov reflected his equitable interest in the numbered company arising from his contributions to the business during his relationship with Ms Rakitova. Third and in any event, it could be argued that the interest waiver, as framed, was an unenforceable penalty clause.

[8] The family law dimension of this dispute was clear in the plaintiff’s explanation for the interest waiver clause. Mr Liu believes that he was generous with Ms Rakitova out of affection for her and desire to help her establish herself. But Mr Liu is not interested in supporting her new husband with an interest waiver. In substance, though, the provision does more than just reflect support for Ms Rakitova. The interest waiver does not terminate upon a new spouse gaining a beneficial interest in the numbered company. Rather, it cancels all past support for Ms Rakitova by way of interest waiver if at any point during the mortgage her new spouse should gain a beneficial interest in the numbered company. This case does not appear to be about a commercial contract that has an incidental effect on family relations; it seems to be a contract designed to control and limit those relations.

[9] The punitive and controlling nature of the interest waiver is clear by its terms. It is not that, upon an event of default, interest will then become due prospectively. The interest waiver provides (quoting from Mr Liu’s factum):

If Rakitova pays the monthly instalments when due and if Rakitova and [the numbered company] are not in default, then the interest payment in respect of the preceding year or years will be postponed to December 10 of the subsequent year and will be deemed to be reinvested and bear the same rate of interest as the purchase price, but in the event of default, then the entire unpaid principle and all deferred interest becomes payable.

[10] Ms Rakitova made her monthly payments of $7,000 per month against the principal amount of the mortgage ($1,092,938) from December 10, 2002. The alleged date of default was March 22, 2010. The date of the motion was December 17, 2012. Ms Rakitova had paid roughly $840,000 of the principal of the mortgage off. Yet Mr Liu claims he should now have interest going back to the start of the mortgage, which he calculates at $710,198.64, plus interest accruing since September 2011.

[11] The new summary judgment rules permit this court to scrutinize facts and make findings of credibility in a way that was not available under the former summary judgment regime. But the new regime has not done away with trials, and this is a case where the judge should have the benefit of seeing the witnesses in the witness box.

[12] Whether the trust agreement was signed under duress, and whether Mr Liu knew about and consented to the trust agreement are issues of fact that will turn in large part upon credibility. Whether the trust agreement is a default under the mortgage is largely a question of law, but one that will be affected by the context in which the agreements arise. The issues of whether the interest waiver clause is an illegal penalty, or otherwise against public policy, will turn in large part on the overall context of the agreements. All of this requires factual determinations that will be affected by credibility assessments.

[13] None of what I say in this endorsement, or what I said in motions court during argument, should be construed as findings on the issues in this case. I have described arguments that are to be left for trial; this motion was decided solely on the basis that these are triable issues.

[14] As I indicated at the conclusion of the motion, this was not an unreasonable use of the rules for summary judgment. Further, though it may turn out that the plaintiff fails in his claim after trial, he has been straightforward in his position. On the record before me, it appears that Ms Rakitova has been less than candid with Mr Liu, and her conduct may have been fodder for conflict. I leave the costs of this motion in the discretion of the trial judge.

[15] I regret the delay in releasing these supplementary reasons. I had intended to release them shortly after the motion, to assist the parties to bring this matter to trial relatively promptly. Unfortunately, I have been on medical leave since January 2013 following a heart attack in August 2012 and a premature return to work in October to December 2012. I have just resumed work full-time; hence the delay.

[16] The parties may make use of the materials filed on this motion to expedite their path to trial. Counsel for the plaintiff shall prepare a timetable of steps to complete this matter, and shall seek input and consent from the defendants. A consent schedule shall be forwarded to me for approval by October 31, 2013, failing which plaintiff’s counsel shall schedule a teleconference through my assistant to settle the schedule. The teleconference shall be no later than November 30, 2013. The parties should include in their schedule arrangements for a mediation, which should take place at an early date.

D.L. Corbett J.

Date: October 2, 2013