COURT FILE AND PARTIES

COURT FILE NO.: CV-13-494801

DATE: 20140627

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Tony Amendola a.k.a. Toninio Amendola, Applicant

– AND –

Franco Carelli a.k.a. Frank Carelli, Respondent

BEFORE: Justice E.M. Morgan

COUNSEL:
George Corsianos, for the Applicant

Marco Drudi, for the Respondent

HEARD: June 9, 2014

ENDORSEMENT

[1] This Application pits the third mortgagee of a property at 22 Parson Court, Toronto (the “Property”), against the second mortgagee of the Property. The Applicant claims that the Respondent is subject to equitable estoppel, and that as a consequence the third mortgage has priority over interest payments claimed by the Respondent under the second mortgage.

[2] The Property has been sold and the principal amount of the Respondent’s second mortgage has been paid. The balance of the proceeds of sale are being held in an interest-bearing account by the Applicant’s counsel, in trust, pending the outcome of this Application.

I. The mortgages

[3] The Property was subject to a first mortgage in favour of the Bank of Montreal (“BMO”) for $450,000. The owner/mortgagor was the Respondent’s sister-in-law, Anna Corelli. In early April 2009, the Respondent lent Ms. Corelli $240,000, and registered a second mortgage against title to the Property to secure the loan.

[4] The second mortgage was for a six month term from March 30, 2009, maturing on September 30, 2009. The registered charge/mortgage specifies an interest rate of 10% per annum, with a calculation period described as “half-yearly, not in advance”. The lines for “payment date” and “first payment date” are left blank on mortgage documentation, while the “last payment date” is listed as September 30, 2009.

[5] In early 2010, the Applicant lent Ms. Corelli $65,000. As security for this loan, he registered a third mortgage against the Property on January 25, 2010. The evidence in the record shows that the Applicant inquired as to the state of the first two mortgages before advancing the third mortgage of $65,000 to the mortgagor.

II. The Respondent’s representations

[6] The first mortgagee, BMO, advised the Applicant that its mortgage was current. The Respondent, as second mortgagee, responded in writing to the Applicant’s inquiry on January 20, 2010. The Respondent’s email reads, in full:

I’m confirming that the second mortgage is in good standing to-date.

If you have any further questions I can be reached at 4168919201.

[7] On the strength of these representations, the Applicant assumed that both mortgages were in good standing in respect of all of their terms, and that they were up to date on all payments. He thereafter advanced the funds and registered a third mortgage in the amount of $65,000 on title to the Property.

[8] As it turned out, the second mortgage in favour of the Respondent was not up to date and in good standing in January 2010. Despite the fact that the second mortgage expressly required an interest payment to be made on September 30, 2009, the mortgagor had made no interest payment.

[9] The Respondent states that he had agreed with the mortgagor to waive, or defer, interest payments under the second mortgage. He contends that the Applicant should somehow have been able to deduce that private agreement between the Respondent and the mortgagor; or that, if anything were unclear, he should have inquired by phone as invited to do in the January 20, 2010 email.

III. Equitable estoppel

[10] In Elle Mortgage Corp. v Adalath, 2012 ONSC 7061, at paras 32-33, the court made it clear that a subsequent encumbrancer is entitled to rely on the statement of the prior mortgagee at the time of placing the subsequent mortgage. If there is something that the subsequent encumbrancer did not know about that was not in the mortgage statement, the subsequent encumbrancer cannot be prejudiced by it.

[11] The Respondent argues that in January 2010 he did not provide the Applicant with a formal mortgage statement but rather with a more informal email communication. Counsel for the Respondent concedes that had the Respondent provided a formal mortgage statement the Applicant would have been in a position to rely on his assurance that the second mortgage was in good standing, but that the less formal communication sent by the Respondent on January 20, 2010 did not amount to a proper mortgage statement with respect to the second mortgage.

[12] I agree that what the Respondent provided to the Applicant on January 20, 2010 was not a formal mortgage statement. That, however, does not make the misrepresentation contained in that email communication any less of a misrepresentation; likewise, it does not make the Applicant’s reliance on that communication any less reasonable.

[13] Leaving out a crucial piece of information such as the fact that the mortgage is in “good standing” only because interest payments have been waived, and then providing a phone number for “any further questions”, is either a very naïve or a very clever form of miscommunication. Nothing in the first sentence of the Respondent’s January 20, 2010 email puts the reader on notice that some further inquiry is necessary, making the second sentence containing the phone number appear superfluous.

[14] In short, in anticipation of the third mortgage the Applicant asked the Respondent about the state of the second mortgage, and the Respondent advised that it was current. This gives rise to an equitable estoppel, and prevents the Respondent from now claiming back interest payments that would only be owing if the second mortgage had not been current. The Respondent’s message was, as the British Columbia Supreme Court described a similar communication, “a representation by [the prior mortgagee] intended to induce a course of conduct. Reliance on the representation by [the subsequent mortgagee] and detriment to the receiver of the representation…in consequence of the reliance”: Standard Trust Co. v Panstar Developments Inc., 1993 1391 (BC SC).

[15] In Reynolds Extrusion Co. Ltd. v Cooper (1978), 1978 1671 (ON SC), 21 OR (2d) 416 (HCJ), it was observed that “the proper way to approach the matter is to consider the position of the second [i.e. subsequent] mortgagee. He is bound by the terms of the prior encumbrancer as known to him when he entered into his contract with the mortgagor.” [emphasis added] It does not assist the Respondent that he had made an undisclosed deal with the mortgagor to waive or defer interest payments that on the face of the registered second mortgage were due and payable.

IV. The Respondent’s continued representations

[16] On July 25, 2011 a fourth mortgage in the amount of $75,000 was put on the property by an unrelated mortgagee, and on December 20, 2012 a fifth mortgage in the face amount of $100,000 (of which $50,000 was actually advanced) was placed on the property by the Applicant. Again, prior to advancing the fifth mortgage funds to the mortgagor, the Applicant sought assurances as to the good standing of the prior mortgages; and again, on December 19, 2012, the Respondent sent a very succinct email to the Applicant stating that the second mortgage “is up to date and in good standing” and, in the second sentence, advising that the Applicant should call him if he required “any further information”.

[17] In January 2013, the mortgagor defaulted on the third mortgage. The Applicant took a number of steps to enforce the his rights under the third mortgage, which included making payments on the first mortgage to BMO in order to keep it in good standing as well as making insurance payments for the Property to keep the coverage current.

[18] In the face of the mortgagor’s default and in preparation for enforcement proceedings, the Applicant also asked the mortgagor about the state of the second mortgage. In response, the Applicant received a message by email directly from the Respondent on April 19, 2013. This communication, which was similar to the Respondent’s previous email messages, stated: “This is to confirm that the second mortgage is in good standing.” This time, however, a further sentence was added to the message: “No principal or interest payments have been made to date.”

[19] This was the first time the Respondent ever mentioned that no interest payments had been made on the second mortgage. The Applicant, as third mortgagee, had been assured on January 20, 2010 that the mortgage payments on the second mortgage were entirely up to date; moreover, the Applicant, as fifth mortgagee, had received the same assurance as recently as December 20, 2012.

[20] Accordingly, the Applicant assumed that the Respondent’s April 19, 2013 email referred to interest payments that might have been due since the Respondent’s email of December 20, 2012. After all, that was the last date on which the Respondent had stated in an unqualified way that the second mortgage was up to date.

V. The mortgage enforcement proceedings and priority dispute

[21] In July 2013, the Applicant obtained judgment on the third mortgage and a writ of possession for the Property. He also continued to make payments on the first mortgage and to spend money maintaining, repairing, and marketing the property.

[22] The Property was ultimately sold by the Applicant as mortgagee in possession for $950,000. The sale has now closed, the first mortgage and the principal amount of the second mortgage have been paid out, and the remaining proceeds of sale have been placed into trust as of December 17, 2013. These funds, with accrued interest, will be paid out in accordance with the result of the present Application.

[23] On December 6, 2013, the Respondent, through his solicitors, provided the Applicant with a mortgage discharge statement claiming that the Respondent, as second mortgagee, was owed the full principal of the loan – $240,000 – plus interest at 10% from the inception of the second mortgage in 2009. This is despite the fact that the Respondent had represented to the third, fourth, and fifth mortgagees that the second mortgage was in good standing and up to date at the time that those mortgages were placed.

[24] Applicant’s counsel submits in his factum that the Respondent “is attempting to obtain money at the expense of the third, fourth and fifth mortgagees.” The fourth and fifth mortgages are not strictly in issue in this Application, so I come to no conclusion on those. I do observe, however, that they appear to follow the same pattern of representations that the Respondent provided in respect of the third mortgage.

[25] As for the third mortgage, given the Respondent’s misrepresentations, or his providing of incomplete information, to the Applicant in his capacity as third mortgagee, I am inclined to agree with Applicant’s counsel. The undisclosed waiver or deferral of interest was an agreement between the Respondent as second mortgagee and Ms. Corelli as mortgagor; if the Respondent wanted to claim those waived or deferred interest payments in priority to a subsequent mortgagee, it was incumbent on him to fairly disclose the arrangement.

[26] The Respondent is estopped from claiming that the second mortgage was not in good standing as of the date of his last representation to that effect. Given the information on the face of the mortgage, the last interest payment would have been due on the anniversary of the renewal date – i.e. September 30th of each year. Since the Respondent advised the Applicant on December 20, 2012 that the second mortgage was current, the estoppel prevents the Respondent from claiming any interest on the second mortgage from prior to September 30, 2012.

VI. Disposition

[27] From September 30, 2012 until December 16, 2013, the Respondent is entitled to receive interest at 10% per annum on $240,000, and from December 17, 2013 until the date of payment the Respondent is entitled to receive 10% per annum on the accrued interest thereon. These amounts shall be paid from the proceeds of sale and accrued interest thereon held in trust by the solicitors for the Applicant.

[28] The Applicant is entitled to payment of the principal and interest due on the third mortgage, to be paid out of the proceeds of sale and accrued interest held in trust by his solicitors. The Applicant is also entitled to be reimbursed from the funds held in trust any expenses that he has incurred in maintaining and repairing the Property, and for preparing the Property for sale and conducting the sale. The Applicant is to provide the Respondent with a mortgage statement for the third mortgage and an accounting of all expenses claimed, with supporting receipts or invoices, prior to payment being made to the Applicant.

VII. Costs

[29] Counsel advise that the parties have agreed that the successful side will receive $10,000 in costs. That is an entirely reasonable arrangement, and I commend the parties for reaching that accommodation.

[30] The Respondent shall therefore pay the Applicant $10,000, all inclusive, as costs of this Application. This amount shall be paid by the Respondent and shall not be paid out of the funds held in trust by the Applicant’s solicitors.

Morgan J.

Date: June 27, 2014