SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: DBDC Spadina Ltd. and Those Corporations Listed on Schedule A Hereto, Applicants

AND:

Norma Walton, Ronauld Walton, The Rose & Thistle Group Ltd. and Eglinton Castle Inc., Respondents

AND:

Those Corporations Listed on Schedule B Hereto, To Be Bound by the Result

BEFORE: D. M. Brown J.

COUNSEL:
S. Roy, for the Applicants

N. Walton, in person

M. Dunn, for Schonfeld Inc., Manager and Inspector

R. Dodokin, for Woodgreen Management Inc.

V. DaRe, for RioCan Real Estate Investment Trust and Trinity Urban Properties Inc.

I. Flett, for Woodgreen Red Door Family Shelter

HEARD: June 18, 2014

REASONS FOR DECISION (corrected)

I. Priority dispute between two mortgagees

[1] Two Schedule “B” Companies own the lands at issue: Red Door Developments Inc. owns 875 Queen Street East, Toronto, and Red Door Lands Ltd. owns the adjacent land at 887 Queen Street East. They were acquired on July 6, 2012.

[2] RioCan Mortgage Corp. holds a first mortgage on 875 Queen for a face amount of $7 million, under which $6.2 million has been advanced. That mortgage is also registered in second place on 887 Queen. The first mortgagee of 887 Queen, Woodgreen Management Inc., holds a vendor take-back mortgage with a face amount of $1.2 million.

[3] The Manager initially brought a motion returnable on June 10, 2014, for the approval of a proposed agreement of purchase and sale of the Queen Street properties. As a result of a dispute which had arisen about the priority of the two mortgages, the Manager deferred its sale approval motion.

[4] As will be explained below, the dispute between the mortgagees turns, in large part, upon the legal consequences of a series of steps surrounding a July 9, 2013 certified cheque in the amount of $399,152.50 from the Fogler, Rubinoff firm, acting for RioCan, made payable to Woodgreen.

II. The evidence

A. The mortgages on 887 Queen

[5] Red Door Lands and Red Door Developments are Schedule B Companies jointly owned by the applicants and the respondents. In July, 2012, the Red Door Companies purchased the Queen Street Properties from Woodgreen. Woodgreen sold 887 Queen to Red Door for $2.4 million with a vendor take-back first mortgage of $1.2 million.

[6] RioCan financed the purchase by the Red Door Companies of 875 Queen and 887 Queen. RioCan entered into a July 6, 2012 Loan Agreement with the Red Door Companies as borrowers and Ron and Norma Walton as guarantors. Under that Loan Agreement, RioCan agreed to advance $1.2 million for the purchase of 887 Queen and $4.6 million for the purchase of 875 Queen. As security, RioCan received a $7 million mortgage in respect of 875 Queen, as a first charge, and in respect of 887 Queen, as a second charge subsequent in priority to Woodgreen’s VTB Mortgage.

[7] The Woodgreen Mortgage provided that Red Door Lands was to make three annual payments of $400,000 each on account of the outstanding principal, the first of which was to be paid on July 5, 2013. Red Door had secured financing from RioCan to fund the annual payments due under the Woodgreen Mortgage. Specifically, section 2.3(c) of the Loan Agreement provided that RioCan would advance Red Door the sum of $400,000 on July 5, 2013 “to be applied by the Borrower as a principal payment under the VTB Mortgage”.

[8] The RioCan Mortgage registered against the Queen Street Properties disclosed that it secured the principal amount of $7 million. The Schedule of Additional Charge Provisions attached to the registered mortgage disclosed, in section 1, that the charge was a collateral one securing the obligations of the Chargor pursuant to a Loan Agreement dated as of July 6, 2012. However, the registered charge did not attach the Loan Agreement nor did it recite RioCan’s agreement to advance the sum of $400,000 to be used by the borrower as a principal payment under the Woodgreen VTB Mortgage.

[9] The President of Woodgreen Management, Mr. Jory Kesten, deposed that prior to November, 2013, neither Woodgreen nor its lawyers had received notice that a second mortgage had been registered against the property, nor had Woodgreen received notice of the terms of the second mortgage or a copy of the RioCan Loan Agreement. As pointed out by RioCan in its evidence, the first part of Mr. Kesten’s assertion was not correct. On Friday, July 6, 2012, counsel to Red Door had sent an email to Woodgreen’s counsel advising that a second mortgage was being placed on 887 Queen Street East in favor of RioCan Mortgage Corp. Later that same day, Red Door’s lawyer sent Woodgreen’s counsel an email which attached a commitment for title insurance which clearly disclosed that 887 Queen would be encumbered by a first mortgage in favor of Woodgreen in the amount of $1.2 million and a second mortgage in favor of RioCan securing the principal sum of $7 million.

[10] I therefore find that as of July 6, 2012, Woodgreen had actual notice that a $7 million second mortgage in favor of RioCan would be registered behind its charge on the 887 Queen property.

[11] I accept Mr. Kesten’s evidence that by July, 2013, Woodgreen had not been provided with a copy of the RioCan Loan Agreement.

[12] RioCan submitted that Woodgreen, as a first mortgagee, labored under some duty to make sufficient inquiries to ascertain the terms of the Loan Agreement between RioCan and Red Door. While I accept that as of July 6, 2012, Woodgreen knew about the existence of the RioCan second mortgage and therefore can be taken to have actual notice of the terms of that mortgage as disclosed in the charge registered on title, I do not accept that Woodgreen, as first mortgagee, labored under a positive legal duty in the circumstances to dig down further and go behind the registered mortgage to locate any other related documents, including the Loan Agreement.

[13] That then, was the state of affairs as of early July, 2013, when the material events concerning this dispute unfolded.

B. The July, 2013 events

[14] As mentioned, Red Door Lands was required to make a $400,000 payment in reduction of the principal under the Woodgreen VTB Mortgage on July 5, 2013. Under the Loan Agreement RioCan was to advance the $400,000 on July 5. As matters transpired, RioCan and Woodgreen did not communicate directly with each other on this issue at the time. Instead, the clearinghouse for information about the $400,000 payment was the Walton Group - either Norma Walton, an employee at The Rose & Thistle Group Ltd., or their counsel at the law firm of Devry Smith Frank LLP, in particular Todd Holmes and his financial services law clerk, Rafaela Paiva. Both RioCan and Woodgreen relied on the Walton Group to facilitate the $400,000 payment.

[15] According to the evidence, on the morning of July 5, 2013, communications began between Walton’s counsel and the lawyers for RioCan to secure the $400,000 advance. RioCan’s counsel asked for the completion of several items prior to the advance of funds, including a statement from the lender under the VTB Mortgage confirming the current balance and that the mortgage was in good standing.

[16] By early afternoon Paiva was advising Norma Walton that she had contacted Woodgreen’s solicitor who had not heard from their client. Paiva wrote: “I am assuming that we will be making the net advance payable to Woodgreen directly. Please confirm with Woodgreen.” Walton informed her counsel that the funds would be paid to Woodgreen’s solicitor, and by late afternoon Paiva had sent RioCan’s counsel a direction signed by the Red Door Companies that the sum of $399,152.50 be made payable to Woodgreen Management Inc. or its solicitors in trust. Paiva advised that she was waiting to hear back with respect to the delivery of funds.

[17] At around the same time on July 5, Kesten emailed a Rose & Thistle employee confirming that the VTB mortgage was in good standing and requesting the $400,000 principal installment be made payable to Woodgreen Management Inc. Norma Walton forwarded that email to her counsel’s office, who in turn sent it along to RioCan’s counsel with the notation: “Please see email below from Woodgreen confirming that the VTB is in good standing”.

[18] Pausing here, I would note that Kesten, in paragraph 9 of his June 9 affidavit, deposed: “Prior to the due date (July 2013) for the first $400,000.00 principal payment, Woodgreen invited Red Door to defer the due date for the first principal payment for another year.” I find that evidence difficult to reconcile with the contents of Kesten’s July 5 email calling for payment of the principal instalment.

[19] RioCan’s counsel, Fogler Rubinoff, prepared and certified the Tuesday, July 9, 2013 cheque in the amount of $399,150.50 payable to Woodgreen Management Inc. Just before noon on July 9, RioCan’s counsel informed Walton’s counsel that the cheque was ready and inquired how delivery would be handled. Walton’s counsel sent a courier to pick it up, and early that afternoon RioCan’s counsel emailed Walton’s counsel:

Please confirm that your client has delivered the cheque together with the balance of the $400,000 installment under the VTB mortgage to the mortgagee thereunder.

[20] Not receiving a response, on the morning of Thursday, July 11, 2013, RioCan’s counsel repeated his request. Walton’s counsel forwarded the email to her client, Norma Walton, writing: “Please see below and advise”. About three hours later Norma Walton responded to her counsel:

Yes, we did. The certified cheque has been deposited by the lender.

Walton’s counsel promptly transmitted her client’s information to RioCan’s counsel.

[21] Norma Walton’s representation that the lender had deposited the certified cheque - a representation which was re-transmitted to RioCan with the intention that RioCan rely upon it - was misleading in a very material respect. Why? Because the lender, Woodgreen, which had deposited the cheque, had immediately returned the funds to Red Door Lands, ostensibly taking the position that its deposit of the cheque had not constituted an acceptance of payment against principal of the mortgage. That sequence of events can be gleaned from the communications which had flowed back and forth between Walton and Kesten about which RioCan knew nothing.

[22] Early on the morning of July 9, Walton had emailed Kesten at Woodgreen as follows:

Tammy mentioned to me that you may not need repayment of the full $400,000 and that you may be interested in leaving part or all of it in place and continuing to earn interest on it for another year. We’d be happy to keep all or part of the money in place. Today I will have the $400,000 certified cheque and new interest cheques for delivery to you. If you could let me know what you propose if different from payout of the full $400,000, I’ll adjust the principal payment and interest cheques accordingly before delivering to you.

Kesten replied:

We are prepared to leave the first 400,000 principal installment with you for one year. We can simply agree that the maturity of the first principal installment will be extended to July 6, 2014, at the same interest rate and monthly payment. Otherwise the terms of the Mortgage remain unamended.

Please confirm your acceptance on behalf of the Mortgagor of these amended terms.

[23] Walton promptly confirmed that arrangement and asked Kesten to provide her with phone number “as we may need you to deposit our certified cheque then bring back a new one payable to us as I believe the one we requisitioned for you from the lawyers is already certified”.

[24] Just after noon on July 9, Walton emailed Kesten:

We were not in time to prevent the lawyers from certifying the cheque to you for $400,000 payable to Woodgreen. That cheque will be at our offices at 2 p.m. Let me know if you wish to pick up or if you wish me to courier to you. If you don’t mind depositing it then writing back to us a cheque for the same amount payable to Red Door Lands Ltd. and certifying it, that would be perfect. I apologize for the extra banking for you but have no doubt it will be far simpler than having the lawyers try to reverse and re-issue.

No evidence was placed before me that Walton or her counsel had ever attempted to prevent RioCan’s lawyers from certifying the cheque. On the contrary, about 30 minutes before Walton had sent that email to Kesten, her counsel was informing RioCan’s lawyers that “our client will send a courier” to pick up the cheque. Also, if by her reference to “reverse and re-issue” Walton meant that Fogler’s, as RioCan’s counsel, might be prepared to reverse the cheque payable to the intended recipient under the Loan Agreement – Woodgreen – and re-issue it to an unintended recipient – Red Door – then Walton must have known there was no reasonable basis for her statement.

[25] Kesten emailed Walton just after 3 p.m.:

Please acknowledge issuance of 400,000 cheque from Red Door Lands Ltd. to Woodgreen Management Inc. today is in error, and is being replaced and returned, and is not intended to be a payment against the outstanding First Mortgage.

A few minutes later Kesten sent Walton a further email, entitled “swap”, which stated:

I will arrange for Darlene to pick up cheques from your office and visit local TD branch to obtain certified replacement. Apparently they need a signing officer to issue certified cheque. She will call you to schedule timing probably tomorrow.

[26] At 3:28 p.m. Walton emailed Kesten:

I have prepared an actual acknowledgment which is attached signed along with the printed email. I’ll mail both to your attention. Note that Fogler’s deducted their fees off of the $400,000 so the exact amount of the certified cheque is the $399,152.50 so that is the amount to certify back to Red Door Lands Ltd. (emphasis added)

The Acknowledgment to which Walton referred was directed to Kesten, dated July 9, 2013, signed by Walton, personally and on the half of Red Door Lands Ltd., was not signed by Wooodgreen, and stated:

I hereby acknowledge that the certified cheque for $399,152.50 payable to Woodgreen Management Inc. is in error and is not intended to be a repayment against the principal of the outstanding first mortgage of $1.2 million owed by Red Door Lands Ltd. and secured against 887 Queen Street East.

[27] In his affidavit sworn June 9, 2014, Kesten deposed:

The cheque was not accompanied with any letter from RioCan or RioCan’s lawyers indicating that the funds were a mortgage advance. I know now that the cheque payable to Woodgreen was drawn on the law firm Fogler Rubinoff’s trust account and was actually in the amount of $399,152.50 (not the amount of the deferred mortgage payment of $400,000). I did not actually see this cheque.

[28] I have several concerns with this evidence of Kesten:

(i) In his affidavit, Kesten leaves the impression that he did not know in July, 2013, that the cheque was drawn on the Fogler Rubinoff law firm. Yet Walton, in her July 9, 2013 email to Kesten at 3:28 p.m., had informed him that the cheque was from Fogler’s;

(ii) Kesten also attempted to leave the impression in his affidavit that because the cheque was not accompanied by a letter and because the amount of the cheque – $399,152.50 – was not the precise amount of the deferred mortgage payment of $400,000, he was not aware that the funds were a mortgage advance. Yet Walton, in her 3:28 p.m. email to him, specifically told him that “Fogler’s deducted their fees off the $400,000 so the exact amount of the certified cheque is the $399,152.50…”

I should observe that the emails which passed between Walton and Kesten on July 9 were attached by Kesten as exhibits to his affidavit. Accordingly, this is not a case where the affiant made statements without knowing about the existence of documents which contained contradictory information.

[29] To conclude the narrative of the events on July 9, by 3:37 p.m. Walton had informed Kesten that the certified cheque could be picked up from reception at The Rose & Thistle or couriered to Darlene, who was Kesten’s sister, and Kesten had informed Walton that the Acknowledgment was fine.

[30] According to Kesten, his sister, Darlene, received the certified cheque on July 10 and had proceeded to deposit it into Woodgreen’s account. Kesten continued: “The said funds were immediately returned to Red Door as per Norma Walton’s request for Woodgreen to accommodate the cheque cancellation process.”

[31] In her June 9, 2014 affidavit, Norma Walton did not describe the mechanics of how money went from Woodgreen to Red Door Lands. However, the Manager, in paragraph 79 of its Tenth Report, stated:

On July 9, 2013, (sic) $399,152.50 was deposited in Red Door’s account. Red Door then transferred this amount to Rose & Thistle. Bank account statements evidencing the deposit and the transfer are attached as Appendix “13”.

In actual fact, Appendix 13 showed the deposit into the account of Red Door Lands taking place on July 10, with an immediate transfer out of $399,100 on July 10. In the result, Red Door Lands did not use the funds advanced by RioCan for the purpose prescribed by the Loan Agreement - making a principal payment on the Woodgreen VTB Mortgage.

[32] As mentioned, at around noon on July 11, 2013, Walton informed her counsel that “the certified cheque has been deposited by the lender”. Apart from failing to tell her counsel and RioCan that by July 11 the lender, Woodgreen, had issued a cheque to Red Door for the amount of the RioCan advance, Walton also failed to tell them that by that time Red Door had transferred those funds to The Rose & Thistle – not a recipient intended by RioCan.

[33] On April 11, 2014, Manager’s counsel wrote a letter to various parties providing some information about the Queen Street Properties. Manager’s counsel advised that Ms. Walton had provided information to the Manager which:

[S]tated that these transactions are reflected in the books and records of Red Door. The Manager has reviewed these records and can advise as follows:

• when the Manager received Red Door’s records in connection with its role as Inspector, the $400,000 advanced by RioCan and described above was not shown in those books and records…

• Red Door’s G/L was subsequently updated to reflect this advance on October 25, 2013…

III. Analysis

[34] At the heart of this dispute between the two Queen Street mortgagees is the question about how one characterizes the events involving the transmittal of the Fogler Rubinoff cheque to Woodgreen, the deposit of the cheque by Woodgreen, and Woodgreen’s payment by cheque to Red Door Lands of an equivalent amount. RioCan takes the position that by depositing the cheque Woodgreen accepted payment on its first mortgage and then re-advanced the same amount to Red Door Lands. Woodgreen pointed to the Acknowledgment prepared and signed by Walton, on her own behalf and on the half of Red Door Lands, that the cheque to Woodgreen had been in error and was not intended to be a payment against the principal.

[35] Critical to the determination of this issue is the state of knowledge of Woodgreen, specifically its principal, Kesten, concerning the Fogler Rubinoff cheque. In paragraphs 18 and 28 above, I identified concerns which arose from my review of Mr. Kesten’s written evidence. This motion proceeded quickly, given the pending sale of the Queen Street Properties, and no cross-examinations were conducted of the affiants, including Kesten. To make findings of fact on this issue, I will have to make findings of credibility. Accordingly, before doing so, I wish to afford Mr. Kesten an opportunity to give brief viva voce evidence before me addressing the concerns about his evidence which I have identified and affording RioCan the opportunity to test those explanations by way of viva voce cross-examination.

[36] I think procedural fairness requires that RioCan make available its affiant, Mr. Sdao, a lawyer at Folger’s, for cross-examination on the events of July 5, 2013, if required. If Woodgreen wants to conduct a brief cross-examination of Sdao on those events, it should so advise RioCan.

[37] There is a sale of the Queen Street Properties waiting in the wings and therefore this brief hearing which I am directing must be held quickly, specifically on either Wednesday, June 26 or Thursday, June 27, for no more than one hour. I am prepared to commence the hearing at 8:30 a.m. either morning. The parties shall consult and advise me which date they prefer no later than 5:00 p.m. today, Friday, June 20, 2014.

[38] It is always open to the parties to settle this motion.

D. M. Brown J.

Date: June 20, 2014