SUPERIOR COURT OF JUSTICE - ONTARIO

2013 ONSC 6503

COBOURG COURT FILE NO.: 87/10

DATE: 20131018

SUPERIOR COURT OF JUSTICE - ONTARIO

In the matter of Section 243(1) of the Bankruptcy and Insolvency Act,

R.S.C. 1985, C. B-3, as amended; Section 101 of the Courts of Justice Act, R.S.O. 1990 C.C. 43, as amended; and Section 68(1) of the Construction Lien Act, R.S.O. 1990, C.30 as amended

BETWEEN:

Ontario Wealth Management Corporation

Applicant

AND:

1713515 Ontario Limited

Respondent

BEFORE: H.K. O’Connell, J.

COUNSEL: Lisa Corne for S.F. Partners, Inc., Receiver

Stephen Bale for the Lien Claimant, Sica Masonry

Amy Lok for Ontario Wealth Management Corporation

HEARD: May 21, 2013

ENDORSEMENT

[1] This matter was before me on May 21, 2013 at Cobourg. The Receiver, S.F. Partners seeks direction from the court in relation to priority over the remaining funds currently held by the Receiver.

[2] The Receiver takes the position that Ontario Wealth Management, the mortgagee, hereinafter referred to as Ontario Wealth, has priority.

[3] Mr. Bale for the Lien claimant, Sica Masonry and General Contracting, hereinafter referred to as Sica, argues that his client has priority.

Overview

[4] A brief overview will suffice to set out the particulars of the motion. SF Partners was appointed the Receiver and Trustee of 1713515 Ontario Limited, pursuant to section 243(1) of the Bankruptcy and Insolvency Act, section 101 of the Courts of Justice Act and section 68(1) of the Construction Lien Act.[^1]

[5] At the time the Receiver was appointed, 1713515 owned a property in Port Hope called the Walton Hotel. The property was under renovation for use as a boutique hotel. The renovations were not completed. The Receiver did not resume the renovations.

[6] The Receiver sold the property for $600,000.00 on May 16, 2012. Prior to the sale, Ontario Wealth held a first mortgage that was registered on November 10, 2008.[^2] That mortgage secured principal financing of $1.23 million. Ontario Wealth made advances on the mortgage totalling $1.191 million over the course of 7 payments, commencing in November 2008 and ending in December 2009.

[7] The initial advance was for $500,000.00. Of that advance, $457,117.75 was applied to re-finance a prior first mortgage, held by Crombee Construction Ltd.[^3]

[8] On April 08, 2010, the Lien claimant Sica registered its construction lien[^4]. Sica claims it is owed $203,655.76; however its priority claim is restricted to $123,947.04, which represents the deficiencies in the holdbacks required to be retained by the owner, 1723515, and now administered by the Receiver.

[9] Given the amount that Sica says it is entitled to as a priority, and to minimize the accrual of interest on the mortgage, the Receiver obtained an order authorizing it to distribute a portion of the sales proceeds in the amount of $255,000 to Ontario Wealth.[^5] Sufficient funds are being held by the Receiver to protect the interest of Sica, pending determination of this motion before me.

Position of the Receiver

[10] Ms. Corne for the Receiver argues that the legal opinion[^6] that it has obtained in relation to its position that the initial advance under the mortgage attributable to the repaid mortgage together with interest has priority over Sica’s claim.

[11] Ms. Corne references the following sections of the Construction Lien Act (CLA): sections 78.(1), (2) and (3) and section 22.(1)

[12] Section 78 of the CLA defines an “improvement.” The Receiver says that improvement relates to a specific contract, as opposed to a specific project. Counsel references Boehmers vs. 794561 Ontario Inc.[^7], where Killeen J. at paragraph 27 noted:

The term improvement is meant to be a term of art under this definition. It is the project designed and to be undertaken as between the owner and general contractor…. Only intended to deal with and control the general contract and not the subcontract.

[13] Counsel submits that this interpretation is supported by the decision in Yale Developments Corp. vs. A.L.H. Construction Ltd., 1973 CarswellAlta 131. In that case, the Alberta Court of Appeal held that a lienholder’s right to recover is limited to the holdback on a specific contract under which he is working.

[14] This reasoning was likewise followed in two other cases cited from Ontario[^8], where the courts held that a lien claimant is entitled to priority only to the extent of a deficiency in the holdback required to be retained by an owner on a specific contract under which they were retained.

[15] In addition, the Receiver submits that under section 78(2) of the CLA, Sica can only obtain priority over the Ontario Wealth mortgage if the advances fall within this section. In Royal Bank of Canada v. Lawton Developments Inc.[^9], Lane J. was required to determine if separate and distinct advances under a single mortgage intended for different purposes should be afforded separate and distinct priority treatment under the CLA.

[16] Lane J. stated in relation to section 78(2) that:

The import of this subsection is to give lien claimants priority over any mortgage intended to finance construction of an improvement and any mortgage taken out to repay such mortgage, to the extent of any deficiency in the holdbacks required.

[17] Lane J. went on to note that the purpose of the Act is to protect persons who add value to property and to require owners and mortgagees to ensure appropriate holdbacks, in order to afford that protection. Lane J. noted in Royal Bank that:

However, the Act generally recognizes that the rights of the lien claimants begin only when they begin to add value, and accordingly, in a normal situation where a person takes from a bank a mortgage for the purposes of acquiring land and nothing more, the fact that he subsequently begins a building project does not give the claimants any priority over the bank whose money has enabled the land to be acquired. In line with the general principle that the rights of lien claimants begin only when they begin to add value, it makes sense that, where a bank agrees to take a mortgage with the dual intention of financing the acquisition of the land, and thereafter, financing the erection of the building upon it, that the section should be interpreted in a way that is consistent with convenient commercial practice so as to allow the bank to take a single mortgage for more than one purpose…. it seems to me both commercially convenient and in the spirit of the intent of the Construction Lien Act to give the bank priority for those advances which the bank can prove were made in carrying out its intention to finance the land, as opposed to its intention to finance the building.

[18] Ms. Corne argues that the mortgage in the case at bar was to both refinance the repaid mortgage and to finance construction and renovation of the project. $457,117.75 was advanced by Ontario Wealth to refinance the then mortgage on the property.

[19] This was a non-construction advance and as such is not caught by section 78(2) but is rather a prior advance under a prior mortgage as contemplated by section 78(3). As a consequence the non-construction advance is entitled to priority to the extent of the lesser of the amount advanced and the value of the property when the lien first arose, pursuant to section 78(3) of the Act.

[20] What Sica is doing, says counsel, is attempting to bootstrap into an earlier improvement under a separate contract in order to assert a priority over Ontario Wealth. This is not what the CLA is meant to protect. In the case at bar, there was no deficiency in respect of any improvement at the time Ontario Wealth advanced funds. Sica was simply not in any contractual chain at the time that Ontario Wealth re-financed the mortgage or at the time that the Ontario Wealth mortgage was registered. All of the funds utilized by Ontario Wealth to pay out the initial mortgage were expended before Sica registered its lien and indeed before any liens were registered on title.

[21] If Sica’s argument was correct, then every time a mortgage lender came on board, they would be putting themselves at risk of being subrogated to holdback claims that post-date the financing. This would be legally and commercially absurd.

[22] Indeed at the time that Ontario Wealth became involved with the property, all prior liens were vacated or had been discharged. This, says counsel, is a very important part of this case.

[23] It is submitted that an improvement cannot relate back to an improvement that was prior to the time that Ontario Wealth advanced funds on the mortgage. This is not a case of a single stage contract as was the case in Dionisi[^10]. In the case at bar, there are 2 separate contracts and as a consequence the improvement by Sica is not governed by the same contract that existed prior to Sica coming on board.

[24] Statutory construction dictates that a strict construction of the CLA is required in the case at bar. Absent any evidence that the repaid mortgage was taken with the intention of securing the financing of an improvement, section 78(2) is not engaged.

[25] Irrespective, counsel argues, even if the court determines that the financing was undertaken to finance an improvement, it was done so under a different contract than that for which Sica was retained. Therefore, Sica’s rights to a deficiency in the holdback do not extend to the improvement financed by the repaid mortgage.

[26] Finally, in any event, the interest of Ontario Wealth is subrogated to that of the initial mortgagee. As Ontario Wealth paid off the prior mortgage, it is entitled to be subrogated to the payee’s priority position.

Position of Ms. Lok

[27] Ms. Lok appeared for Ontario Wealth. Her role was that of a party keeping a watching brief. She adopted the position of the Receiver and indicated that Sica’s claim has not been proven.

Position of Sica

[28] Mr. Bale notes that the report of Mr. Traub which is referenced in the Motion Record of the Receiver, wherein Mr. Traub voices his view of the priority issue, is of no utility to the court. I note here that Ms. Corne agreed that it had no evidentiary value for the court.

[29] Mr. Bale reminds that liens arising from an improvement have priority under section 78(1) over all mortgages affecting the owner’s interest, and that this is the central interpretative principle to adjudicate on priorities between lien claimants and mortgagees. To this end, “the burden [is] on the mortgagee to persuade the court that it somehow falls clearly within a specified exception to the generalized priority of liens.”[^11]

[30] Reference to section 1(1) of the Act was made as the starting point to define the term improvement. The threshold issue, counsel says, is whether the improvement financed under the first mortgagee’s advance was obtained to finance the same improvement for which the Ontario Wealth mortgage was obtained.

[31] Sica argues it is one and the same improvement. The work done prior to Sica’s involvement and post Sica’s involvement is all in respect of the same improvement. If this is the case, Sica has priority under sections 78(2) and (5) of the CLA.

[32] Counsel argues that Ontario Wealth has “no right to assume that the money it advanced would be applied to the purchase money segment of the Crombee mortgage.”[^12]

[33] Consideration of section 78(5) of the CLA is also germane to the case at bar. To quote Mr. Bale, “since the OWMC mortgage was registered after the time when the first lien arose in respect of the improvement, Sica has priority over the mortgage for the sum of $123,647.04, subject to OWMC’s claim to the equitable remedy of subrogation.”[^13]

[34] As the crux of this dispute primarily rests on the definition of improvement, case law was provided to assist with the definition. In Moffatt & Powell Limited v. 682901 Limited,[^14] the court held that 4 lien claimants who did not commence their own action could shelter under the liens that were duly perfected under section 36(4) of the Act. The court determined that the 4 unregistered lien claimants could shelter under the duly registered 12 lien claimants.

[35] In Bob Dionisi & Sons Ltd.[^15] the court held that as the wings of the building under construction were joined, the improvement was one improvement. The contract was a single stage event. Mr. Bale says that Ms. Corne’s argument has a logical fallacy: just because a single contract has one improvement does not mean that if there is more than one contract there is more than one improvement.

[36] In Metric Masonry Amalgamated Ltd. v. Life Centre Non-Profit Housing Corp. (Ajax)[^16] the Divisional Court held that horizontal sheltering was permissible, which allowed for a subcontractor and a further subcontractor to that subcontractor to shelter under the liens duly filed by other subcontractors. In 1463150 Ontario Ltd. v. 11 Christie Street,[^17] the Master held that all five lien claimants had one thing in common, namely the same improvement, even though there were two streams of contracting that were involved in the project.

[37] In Deslauriers Custom Cabinets Inc. v. 6383009 Canada Inc.,[^18] the Master determined that all four lien claimants contracted directly with the owner, and all worked on the same improvement, thus the failure of three of the four to perfect their liens under section 37 of the CLA did not disentitle the three from sheltering their liens under the lien claimant who had complied with section 37 of the Act, and had set the action down for trial within the 2 year mandated time period.

[38] Mr. Bale reminds that statutory interpretation requires a consideration of the context of the whole Act and as such the word improvement must be considered in the light of all of the sections of the Act that reference the term.

[39] As for the argument of Ontario Wealth in relation to subrogation, Mr. Bale submits that it is an equitable remedy. In the case at bar, Sica would not be unjustly enriched if it was given priority. It was otherwise within the power of Ontario Wealth to ensure that holdbacks were retained. Ontario Wealth did not do so. Recognizing that a mortgagee does not have a statutory holdback obligation, it nonetheless bears some responsibility to ensure that appropriate holdbacks are retained.

[40] Even if subrogation is found to be applicable, Ontario Wealth would be in no better position than Crombee, as Ontario Wealth would be subrogated to Crombee’s position.

Reply of Ms. Corne

[41] Counsel distinguished the cases that Mr. Bale referenced, in particular those involving issues of sheltering. Counsel argues that the case at bar is not a sheltering case.

[42] In addition, there is no evidence that any funds advanced by the original first mortgagee were advanced to finance an improvement to the property. Counsel concedes that if Sica lien was based on the same improvement that Crombee financed, then Sica would have priority under the CLA, however there was no contract in place at the time. The first advance of $500,000.00 occurred in an era when there was no construction contract and no liens were registered or work done.

[43] Simply put theree is no legal authority that allows a lien claimant to leap frog a mortgagee when at the time the mortgage was advanced there was no lien or contract for improvements in existence.

Analysis

Does the CLA assist Sica?

[44] I agree with the position of Ontario Wealth. When Ontario Wealth came onto the scene, there were no construction liens on title. They had been vacated or discharged. They were not something for which Ontario Wealth was bound.

[45] I accept therefore that Ontario Wealth advanced the original $500,000.00 to pay out the Crombee mortgage. That advance was for payout of the land portion of the mortgage and not improvements.

[46] I therefore agree with Ontario Wealth that section 78(3) of the CLA is applicable. The advance of Ontario Wealth takes priority over any lien claim in favour of Sica.

[47] In this respect I adopt the reasoning of Justice Lane in Royal Bank, as set out in paragraph 16 above. The commercial sense and practice in this case establishes that the prior advance under a prior mortgage, advanced by Ontario Wealth, engages section 78(3) of the Act.

[48] In any event, there is no evidence before me that the improvement undertaken by Sica related to any of the same improvements undertaken prior to Ontario Wealth coming on board in November 2008. In this regard I note that Sica claims for contractual undertakings for the period January 12, 2009 – March 28, 2010, for which it registered its lien in April 2010.

[49] The case at bar is therefore very distinguishable from the fact patterns in the cases provided by Mr. Bale. In all of those cases the court either held that a lien was registered at the material time and/or that a lien claimant could shelter under another’s construction lien for the same improvement.

[50] I cannot find that the improvements undertaken by Sica relate to the same contract. They very well may relate to the same project but are otherwise, on this record, stand-alone improvements disconnected from the prior lien claimants interests that were discharged or vacated prior to Ontario Wealth providing financing.

Subrogation

[51] I also find favour with the argument of Ontario Wealth that subrogation favours the position of Ontario Wealth. A mortgagee that pays off prior encumbrances is entitled to be subrogated to the payee’s priority position. There was no reason for Ontario Wealth to retain holdbacks on an equitable basis, when there were no liens on title.

Conclusion

[52] Ontario Wealth is in a priority position to that of Sica. The Receiver may remit the balance of the funds under its administration to Ontario Wealth Management Corporation.

[53] In relation to costs, the Receiver shall provide submissions on costs inclusive of a bill of costs not to exceed 5 pages within 15 days of release of this endorsement. Sica to respond on the same terms within 10 days of receipt of the Receivers materials. Any reply by the Receiver within 5 days thereafter. Materials on costs to be provided to the attention of my assistant, Ms. Joan Russell, at the courthouse, 150 Bond Street East, 6th floor, Oshawa.

The Honourable Mr. Justice H.K. O’Connell

Date: October 18, 2013

[^1]: Appointment Order, September 01, 2010.
[^2]: See Tabs L and M of Motion Record with respect to Ontario Wealth’s mortgage advance.
[^3]: Motion Record, Appendix Q.
[^4]: Motion Record, Appendix X.
[^5]: Motion Record, Appendix G.
[^6]: Motion Record, Appendix J.
[^7]: 1993 CarswellOnt 821 (SCJ).
[^8]: Prophetic Non-Profit Homes (Richmond Hill) Inc., 1994 CarswellOnt 4719 and Lindsay Brothers Construction Ltd. v. Halton Hills Development Corp., 1992 CarswellOnt 865.
[^9]: (1994) 16 O.R. (3d) 450.
[^10]: Bob Dionisi & Sons Ltd. and The Manufacturers Life Insurance Company, 1992 CarswellOnt855.
[^11]: Supra, Note 4.
[^12]: The Crombee mortgage was the mortgage that Ontario Wealth paid out.
[^13]: See paragraph 24 of Sica’s factum.
[^14]: [1992] 49 C.L.R. 205 (Ont.Ct. General Division).
[^15]: See fn 10.
[^16]: [1998] O.J. No. 364.
[^17]: [2007] O.J. No. 4111, per: Master Polika.
[^18]: [2012] O.J. No. 2608, per: Master MacLeod.