SUPERIOR COURT OF JUSTICE - ONTARIO

RE: RSG Mechanical Incorporated

Plaintiff

AND

1398796 Ontario Inc., Bloorwood Group, London Guarantee Insurance Company, Northern Indemnity Inc., Realty Growth & Revenue Fund General Partner Inc., Marketpoint Development Corp. and MCAP Financial Corporation

Defendants

BEFORE: F.L. Myers J.

COUNSEL: Michael A. Handler, for Realty Growth & Revenue Fund General Partner Inc., Moving Party

Antonio Conte, for the Plaintiff/Respondent

Robert C. Harason, for Quality Rugs of Canada, Cross-Moving Party

HEARD: June 23 & 24, 2014

endorsement

The Motion

[1] The defendant, Realty Growth & Revenue Fund General Partner Inc., opposes confirmation of the report of Master Polika dated April 5, 2013. The Master’s report concerned a reference under the Construction Lien Act, R.S.O. 1990, c. C.30. Realty Growth asserts that the Master made a number of fundamental errors of law in his report and in his reasons dated March 15, 2003.

The Standard of Review

[2] This motion is brought under Rule 54.09 of the Rules of Civil Procedure. It is not specifically an appeal from the Master’s decision. Under Rule 54.09, I may dispose of this motion by requiring the Master to give further reasons or I may “confirm the report in whole or in part or make such other order as is just”. In R.P. International v. DiFlorio, 2010 ONSC 4648, Grace J. discussed the standard of review on a motion such as this as follows:

[18] The Master is entitled to considerable deference. There ought to be no interference with the interim report unless:

a) there has been some error in principle;

b) the Master’s jurisdiction has been exceeded; or

c) there has been some patent misapprehension of the evidence.[8]

[19] Even if one of those elements is established the interim report “should not be disturbed unless it appears to be unsatisfactory on all of the evidence.”[9]

[8] Jordan v. McKenzie (1987), 26 C.P.C. (2d) 193 (Ont. H.C.J.) aff’d (1990) 39 C.P.C. (2d) 217 (C.A.).

[9] Ibid at para. 10. See, too, Heyday Homes Limited v. Gunraj 2006 24913 (ON LRB), 2006 24913 (Ont. S.C.J.) and the cases cited at paragraph 9 of that decision. In Jordan v. McKenzie, Anderson J. explained his rationale. He adopted the approach of Roach J.A. in Agnew v. Minister of Highways, 1961 168 (ON CA), [1961] O.R. 234 (C.A.). In Agnew, the Court of Appeal refused to overturn a decision of the Ontario Municipal Board despite being critical of its reasons because the Court of Appeal was of the view the appellant had failed to satisfy the onus of demonstrating the award was unsatisfactory. It should also be noted that on a Rule 54.09 (2) motion the judge is given the power to “confirm the report in whole or in part or make such other order as is just”: Rule 54.09 (5).

[3] The parties accepted that the basic review for errors should be conducted on the standard of review applicable to an appeal with review being limited to palpable and overriding errors of fact and questions of mixed fact and law (other than extricable questions of law) and correctness on questions of law. (See: Housen v. Nikolaisen, 2002 SCC 33) Then, Mr. Conte argues that there is a need to consider the matter from a holistic point of view to assess whether, despite any errors found, the outcome is nonetheless satisfactory. In light of the basis for my decision set out below, there is no separate sense in which the outcome reached by the Master can be viewed as satisfactory.

The Facts

[4] The Master conducted a 14 day trial in 2008. His chronology of facts is lengthy and detailed. While Mr. Handler challenges some inferences made by the Master, all parties accept the basic chronology. It is set out mainly in 119 sub-paragraphs listed under paragraph 56 of the Master’s reasons. There is a legal finding in sub-paragraph 56(84) that is considered below. Apart from that issue, the recitation of the chronology by the Master is not seriously contested.

[5] In essence, the defendant, 1398796 Ontario Inc. was the developer of the construction project that is in issue. It went by the trade name Bloorwood Group. Its principal shareholder and operating officer was John Rego. Mr. Rego was a real estate broker by trade. In 1999 Mr. Rego came upon the lands in question. Sensing an opportunity for a profitable development project, he tied up the lands under an agreement of purchase and sale with a long closing date. Mr. Rego did not have access to sufficient funds to close the purchase or to start on the construction project, so he borrowed the funds from Realty Growth. Realty Growth’s loans were secured by mortgages. As loans funding the equity and start-up costs of an inexperienced builder, the loans bore high interests rates.

[6] Realty Growth’s advance of the purchase price was repaid by Bloorwood from the proceeds of construction financing later provided by MCAP Financial Corporation. Realty Growth subordinated its remaining mortgage security to MCAP as well as to the insurer defendants who required security in the ordinary course. MCAP became the first mortgagee. The insurers were in second place. Realty Growth’s mortgage securing its advances for soft costs stood in third place.

[7] Mr. Rego sought to secure his shareholders’ interests by granting a mortgage to Marketpoint, a company owned by himself and the shareholders of Bloorwood. That mortgage stood in fourth position behind MCAP, the insurers, and Realty Growth. Marketpoint’s mortgage was not supported by any advance from Marketpoint to Bloorwood. However, as a condition of approving Bloorwood as a builder for new home warranty purposes, Tarion required Bloorwood to post security for approximate $1.2 million. Bloorwood entered into an agreement with Joe Maio to have his company, 1189875 Ontario Limited, provide support for that security. In return, Marketpoint assigned its fourth mortgage to 1189875.

[8] The parties agree that the first lien arose on the first supply of services to the project in February, 2000. Therefore, under subsection 78(5) of the statute, the mortgagees are all subject to the priority of liens to the extent of any deficiencies in the holdbacks required to be retained by Bloorwood. Mr. Handler concedes that the liens of the eight lien claimants listed as valid liens in the chart at paragraph 133 of the Master’s reasons have priority over the mortgagees to the extent of the aggregate of their holdback deficiencies listed in the third column of the chart of $278,662.43. While in his factum Mr. Handler would limit the claims of three lien claimants to 10% of their respective lien claims, Realty Growth has abandoned its challenge to the quantification by the Master of the holdback deficiencies in relation to those claims.

[9] Bloorwood acted as its own contractor. It is common ground that the lien claimants all contracted directly with Bloorwood. They are all contractors under the statute (and not, for example, sub-contractors claiming up through a general contractor).

[10] Things did not go well for Bloorwood on the project. By May, 2004, Bloorwood had built and sold 49 of 61 planned townhouses. But it had also run out of money. Its available credit facilities were exhausted. Fourteen claims for liens were delivered by the 11 lien claimants in this consolidated action alone. The registered claim for lien of RSG Mechanical Incorporated, to whom the Master assigned carriage of this consolidated action, was for work completed by April 23, 2004. The registered claim for lien of Quality Rugs of Canada Limited, who brought a cross-motion that is discussed below, was for work completed by May 7, 2004. The last day of work claimed by any lien claimant whom the Master found to have a valid lien was October 15, 2004.

[11] On June 2, 2004, Bloorwood’s registration with Tarion expired. By that point, it had no ability to pay for new home warranty work on the 49 townhouses that Bloorwood had sold. In discussions with Tarion, Bloorwood’s registration was allowed to lapse. That meant that Bloorwood could no longer sell new homes. In the summer of 2004, some work was being finished up by some of Bloorwood’s trades on site. But from May to September, 2004, Bloorwood’s superintendent’s office at the site was not staffed.

[12] There remained another 12 of the 61 townhouses to be finished and sold. There was also another portion of the land that had always been slated for a potential high-rise development at the site. According to the 13th Report of Helyar Limited, a quantity surveyor employed at the project, Bloorwood’s net holdback obligation for the whole project remaining as of March 18, 2004 was approximately $425,000. That number could be increased by further work conducted at the site after that time.

[13] In August, 2004, Mr. Maio, whose company 1189875 held the fourth ranking mortgage, took action. He bought out MCAP’s first mortgage and was in the practical position to control the progress of the development. Bloorwood advised that of the remaining 12 townhouses, seven had already been sold and were awaiting closing. Four of those were near ready to close and would produce proceeds of over $1 million.

[14] In September, Tarion started carrying out warranty work on some of the 49 townhouses that had closed. It was using its own trades and was not involved in the remaining 12 townhouses.

[15] The Master found in subparagraph 56(73) of his reasons that by October, Mr. Maio’s company, 1189875 as first mortgagee, “stepped into the Owner’s shoes” and took steps to complete the final 12 houses. It used its own construction forces through a related company called Maystar. The work of Maystar commenced on November 1, 2004 using its own subcontractors. There was no challenge to Mr. Manzo’s evidence in this regard.

[16] On December 1, 2004, Mr. Rego met with the representatives of the mortgage lenders. There was approximately $300,000 of work being done by Mr. Maio’s companies to get the sales of the first six of the 12 remaining houses closed. (There were seven that were ready to go but one purchaser apparently backed away.) The lenders wanted these closings to happen to realize the proceeds of sale. They agreed (or representatives agreed to get instructions that were then obtained) that Realty Growth would post security under s.44 of the statute to “bond off” all registered liens to allow the closings to occur. To that end, Mr. Maio’s company, 1189875 as first mortgagee, agreed to provide the $425,000 referable to holdback deficiencies as identified by Helyar. A total of over $975,000 was required to be posted under s.44 because the section provides for the full claims of lien claimants to be secured by payment into court and not just the portion referable to deficiencies in holdbacks. Realty Growth agreed to fund the balance of the security required. Mr. Maio also agreed to have his first mortgagee company fund his contractor company Maystar for the $300,000 of work being done to ready the first six units for sale. The payment was made by an advance from the first mortgagee so that it could be repaid from the sale proceeds. Tarion was content to allow these sales to close as sales from Bloorwood under pre-existing agreements of purchase and sale with new home warranty protection.

[17] By letter dated December 23, 2014, the solicitor for the first mortgagee, 1189875, provided Realty Growth’s lawyers, in escrow, the funds they needed to post the holdback portion of the security with the Court. It is not clear in the Master’s reasons when 1189875 sent the $300,000 to its affiliate, Maystar, to pay it for construction on the first six remaining townhouses. The Master found that since the liability had been incurred and the lenders agreed that it would be paid by the first mortgagee, the payment, whenever made, was an advance that fell behind the priority of the liens. These facts will become relevant in dealing with the Master’s findings under subsection 78(6) of the statute below.

[18] Realty Growth obtained an order of the Court allowing it to pay almost $1 million security into Court on December 30, 2004. The security was posted that day. The order was registered on title on January 5, 2005. The effect was to clear the liens from title and give the lien claimants charge over the money posted with the Court. As a result, the first six townhouse sales could close and they did.

[19] There is little left to the story. In 2005, the insurers, as second mortgagees, delivered notices of sale by power of sale. Shortly thereafter Realty Growth bought the second mortgage. In addition, it bought out Mr. Maio’s first mortgage position from 1189875. It also had work performed by Maystar to ready the last six townhouses for sale and sold them and the remaining high-rise land by power of sale through an affiliate.

The Issues

[20] The Master held that the claims of the eight lien claimants who proved valid liens are to be paid in full from the security in Court ahead of the claims of the mortgagees. Rather than just providing each claimant with the deficiency referable to its own holdback, he found that they are to be paid the full principal amount of their lien claims under s.44 of Act. He also found that under subsection 70(2) of the Act, the amounts available for holdbacks should be based on the pro rata share of the pooled amounts of all unreleased holdbacks of all contractors who did work as listed in the Helyar Report as of March, 2004, rather than just work referable to the claims for lien of those found to have valid liens. As the aggregate amounts of the deficiencies in the holdbacks calculated on this basis exceeded the claims for liens in their entirety, this was another reason to pay the lien claimants in full ahead of the claims of the mortgagees.

[21] As an alternative, the Master would have found that Realty Growth became an “owner” as defined in the act. As he explained in his supplemental reasons, he did not actually make the finding. He found the issue to be “moot” because he had already found for the lien claimants under s.44.

[22] In the final alternative, the Master also found that the two amounts that 1189875 agreed to pay on December 1, 2004 – the (approximately) $425,000 to be paid into Court by Realty Growth to secure holdbacks and the (approximately) $300,000 for Maystar – amounted to “advances” made while prior liens were outstanding and therefore the repayment of those advances is subject to the priority of the liens under subsection 78(6) of the Act regardless of any other holdings made by the Master.

[23] Realty Growth, as mortgagee and assignee of the other mortgagees, challenges each of these legal grounds and it must win on each to succeed on this motion. It will always be liable for the holdback deficiencies of each of the lien claimants. But, as noted above, it says that properly calculated, that amounts to approximately $278,000 plus amounts for work done after March, 2004 but before October 15, 2004.

Security Posted Under Section 44

[24] The Master purported to undertake an analysis of the statute and recited the primary rule of statutory interpretation from Bell Expressvu Limited Partnership v. Rex, [2002] 2 SCC 42 that requires statutes to be interpreted “in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”. What then follows is a highly technical review of the statute in which the Master seeks to pigeon-hole three categories of enforcement into neat, mutually exclusive compartments. The Master found that there are three and only three things that a mortgagee can do when confronted with a failing debtor: sell the property by power of sale under s. 78; appoint a trustee to complete the project under s.68; or post security under s.44. Each is discrete with its own purpose, rules and results.

[25] In this case, the mortgagees posted security under s.44. Posting the security released the liens from title to the land and applied the full lien priority to the cash or security posted in Court under subsection 44(6). The Master held s.44 is a discrete remedy from the remedies provided to mortgagees in s.78 of the statute. Once the liens were removed from the land, the Master reasoned that the limitation of the priority of the liens against mortgages to holdbacks under subsection 78(2) became irrelevant because the mortgages only bound the land and not the proceeds in Court. The mortgages were already freed of the liens once the liens were bonded off title. As the mortgages have no priority to the funds in Court, he reasoned, the lien claimants have priority to the cash or security in Court under s.44 in the full amount of their claims and not just over their holdbacks under subsection 78(2).

[26] The effect of this holding is that mortgagees entitled to rely on the priority of their mortgages over lien claims other than for 10% holdbacks under subsection 78(2) cannot use s.44 without giving up their priority in favour of the entire amount of all valid lien claims. The Master felt that this was the correct holding as mortgagees should use s.78 to sell the land by power of sale or s.68 to appoint a trustee to complete work at the site. In other words, for mortgagees to maintain their priority over liens beyond the limitation to holdbacks, the mortgagees must put a failing project into receivership (a s.68 trustee by any other name) or liquidate the project under power of sale. An argument to similar effect was made in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60. In that case, the Crown argued that its priority for unremitted GST under the Excise Tax Act, R.S.C. 1985, c. E-15 ought to be preserved against insolvent debtors who restructure under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 although the priority is lost in bankruptcy under the Bankruptcy and Insolvency Act, R.S.C. 1984, c. B-4. DesChamps J. writing for the Supreme Court of Canada held:

[47] Moreover, a strange asymmetry would arise if the interpretation giving the ETA priority over the CCAA urged by the Crown is adopted here: the Crown would retain priority over GST claims during CCAA proceedings but not in bankruptcy. As courts have reflected, this can only encourage statute shopping by secured creditors in cases such as this one where the debtor’s assets cannot satisfy both the secured creditors’ and the Crown’s claims (Gauntlet, [Energy Corp., Re, 2003 ABQB 894] at para. 21). If creditors’ claims were better protected by liquidation under the BIA, creditors’ incentives would lie overwhelmingly with avoiding proceedings under the CCAA and not risking a failed reorganization. Giving a key player in any insolvency such skewed incentives against reorganizing under the CCAA can only undermine that statute’s remedial objectives and risk inviting the very social ills that it was enacted to avert. [Emphasis added]

[27] While the Master said that he was interpreting the act in accordance with its purpose, he manifestly failed to do so. No one questions the remedial purpose of the statute to protect vulnerable tradesmen and women. Faced with a failing project the trades are largely powerless to get paid. They can register liens and hope that there is sufficient money realized later to pay them. It is the lenders who have the wherewithal and incentive to act to minimize losses or to maximize recovery. Yet, the Master would require mortgagees to liquidate a failing project or put it in receivership rather than having them post funds to protect the lien claimants’ full rights to allow the project to proceed outside of formal insolvency proceedings. Receivership is not a guarantee of failure of course, but neither is it a guarantee of a good outcome. It is an expensive, cumbersome, enforcement process. Here the lenders were able to advance substantial amounts of money to see the project through. If they had to go to Court and pay a receiver and its counsel, incur the cost and delays of real time legal proceedings, not to mention obtaining only distress sale realization prices upon a receiver’s sale, there is no way to know if the outcome obtained in this case would have been achievable. The Master interpreted the statute to give a key player a skewed incentive favouring the failure of the developer – or at least limiting efforts to save the project in the best interests of all. His interpretation incentivizes the mortgagees to cause the failure of the debtor and increase the risk of non-payment of the trades – the very social ills the statute is designed to avoid.

[28] Payment into Court provides a source of liquid cash to pay the lien claimants. There is enough paid-in to pay them in full if they are later found to be entitled to payment in full as opposed to just having priority for holdback deficiencies. There are also other protections available to lien claimants. If a mortgagee becomes an “owner” under the statute, as will be discussed below, it may expose itself to liability to trades. There is no prejudice to lien claimants by recognizing mortgage priorities against funds posted under s.44 as collateral. The funds stand in the place of the land as security. Posting funds saves time, gets funds moving on the project once again, avoids the uncertainty of selling the land to realize on liens, and, most importantly, incentivizes lenders to be flexible and involved. The Master’s analysis, by contrast, provides a neat, pigeon-holed, overly technical analysis of his view of three mutually exclusive available options. The real world is somewhat more nuanced and messy.

[29] Were this view mine alone, I might have been more deferential to the Master’s view. However, this Court has repeatedly decided that mortgagees can post security under s.44 and retain their priority (subject to holdbacks). So, too, has the Divisional Court. Mr. Conte fairly conceded that before the Master, while he made mention of the position that s.44 should not be available to mortgagees to maintain their priority, he acknowledged the existence of binding authority to the contrary. In his supplemental reasons, the Master even acknowledged that Realty Growth was correct in its legal submissions at the trial. It is clear that the Master was trying to change the law in face of binding authority. This he may not do.

[30] In Gilvesy Construction v. 810941 Ontario Ltd., [1994] OJ No. 4206, Carruthers J. of this Court held that lien claimants cannot obtain more than holdback deficiencies under subsection 78(2) when a mortgagee has posted security under s.44. While a decision of this Court is not binding upon it[^1], Gilvesy is the type of longstanding decision that is relied upon in commercial practice which ought to attract a high degree of deference until overruled by a senior court. I note that despite the Master’s decision in this case, Gilvesy has been relied upon recently in J.B. Aluminum Products Ltd. v. CL Commercial Inc., 2013 ONSC 5752.

[31] In declining to follow Gilvesy, the Master found that Carruthers J. had relied on a precedent that was decided under the repealed Mechanic’s Lien Act, P. Michaud Roofing Ltd. v. National Trust Co. Ltd. et al., [1978] O.J. No. 3674. The Master found that Carruthers J. had not been directed to the new statute. That was not correct. Carruthers J. considered the difference between the old and the new statutes expressly. At paras. 8 and 9 he wrote:

8. …Despite the able argument of counsel to the contrary, we can see no material change in subs. 44(9) of the current Act from its predecessor provisions subs. 29(4) of the Mechanic’s Lien Act, R.S.O. 1980, c. 261 and the earlier subs. 25(4) of the Mechanic’s Lien Act, R.S.O. 1970, c. 267, which latter provision was in effect when P. Michaud Roofing was decided. It is clear from the Report of the Attorney General’s Advisory Committee on the Draft Construction Lien Act that no change to the P. Michaud Roofing principle was intended by that part of subs. 44(9)2, which reads “and shall be distributed among all lien claimants in accordance with the priorities provided for in section 80”…

9. It was argued that subs. 78(10), an entirely new provision, now provides the practical alternative for a mortgagee that was missing under the old legislation, an absence which inspired the decision in P. Michaud Roofing Inc.… [The lien claimants’ position] as was previously held in P. Michaud Roofing Inc., is at odds with the scheme of the Act when read as a whole. A mortgagee is not a general insurer for all contractors and subcontractors on a project to which a mortgage relates [citations omitted]

[32] The Master’s reason to ignore Gilvesy was simply incorrect. The Master also had to deal with the decision of the Divisional Court in Basic Drywall Inc. v. 1539304 Ontario Inc. et al., 2012 ONSC 6391. In that case, the Divisional Court upheld the decision of Lococo J. of this Court. The Divisional Court rejected an argument by a lien claimant that its claim was not limited to its priority for the holdback deficiencies under subsection 78(2) when the mortgagee posts security under s.44. At paragraph 21 of the decision, the Divisional Court held:

[21] When a lender or other person posts security to vacate liens pursuant to s. 44(6) of the Act, the security is simply a substitute for the land. The posting of security cannot enlarge the rights of a lien claimant. See, for example, Reliance Electric Ltd. v. G.N.S. Contractors Inc. 1989 4110 (ON SC), (1989), 70 O.R. (2d) 364, [1989] O.J. No. 1815 (S.C.), at paras. 2-5. The posted bond does not become security for the full amount claimed as owing by the lien claimant, but only for the lien itself -- that portion of the full amount which an owner (or a contractor) was required to hold back. Heeney J. succinctly summed it up in Sloot Construction-Design Ltd. v. North Maple Mall Ltd., [1999] O.J. No. 4927, 50 C.L.R. (2d) 145 (S.C.J.), at para. 42:

Security posted under s. 44 simply stands in the place of the land, and can be looked to to satisfy liens as defined and limited by the provisions of the Act. Posting security does not enlarge the rights of the lienholders and give them a right of recovery that they never had against the land itself.

[33] The Court considered other priority claims that can be advanced by lien claimants and concluded at paras. 27 to 29 as follows:

[27] Sections 44(6) and 78(2) are harmonious…

[29] The motion judge did not err in characterizing the issue as a priority dispute and finding that under s. 78(2) of the Act, ICICI, as mortgagee, has priority over all but the 10 per cent holdback of $50,696.98. [Emphasis in the original]

[34] The harmonious interpretation of the relevant provisions of the statute has thus been declared by an appellate court in Ontario. The Court expressly considered the relationship of subsection 44(6) to section 78. In declining to follow the Divisional Court, the Master wrote the following at para. 198 of his decision:

The Divisional Court as well did not address the issue on the basis of my analysis as set out above nor did they address the application of section 78 by reading it along with subsection 14(1) and section 44(6), nor by considering the purpose of section 44 as compared with the purpose of section 78(10) in relation to the exercise of a power of sale by a mortgagee as opposed to posting security to keep an improvement going. On that basis I find the decision not to be binding. [Emphasis added]

[35] That is, the Master found that he was not bound by the Divisional Court because he believed that he had done a more detailed analysis of the statute and the Divisional Court had not addressed his analysis. In so finding, he ignored the fundamental rule of stare decisis or binding precedent on which our legal system is built.

[36] The Master ought to have approached the issue with the good humoured perspective of Master Funduk. In South Side Woodwork v. R.C. Contracting, 1989 3384 (AB QB) Mater Funduk explained the doctrine of stare decisis as follows:

[51] Any legal system which has a judicial appeals process inherently creates a pecking order for the judiciary regarding where judicial decisions stand on the legal ladder.

[52] I am bound by decisions of Queen’s Bench judges, by decisions of the Alberta Court of Appeal and by decisions of the Supreme Court of Canada. Very simply, Masters in Chambers of a superior trial court occupy the bottom rung of the superior courts judicial ladder.

[53] I do not overrule decisions of a judge of this court. The judicial pecking order does not permit little peckers to overrule big peckers. It is the other way around.

[37] The Master was free to question the law in obiter dictum or non-binding commentary in his decision. He was not entitled to ignore the binding precedent of a senior Court. However fervently he believed his analysis to be correct, he could not apply it in the case before him in light of the current state of the law and in doing so he committed an error of law

[38] A mortgagee can utilize s.44 to post security without loss of its entitlement to hold lien claimants to their priority as against the security posted for holdback deficiencies under subsection 78(2) of the statute.

Realty Growth Becomes an Owner

[39] It was common ground between the parties that under s.1 of the act, a person can become an owner for the purposes of the statutory scheme without actually being the holder of title to the land. A statutory “owner” is anyone with an interest in the project who both requests an improvement and, among other things, benefits from the improvement. Under the case law, the assessment of whether someone is an owner is made based on substance and not form. The requirement that the owner make a “request” has been interpreted to mean that there is some very direct involvement of the person in the project akin to the role of an owner. The Master set out the law correctly starting at para. 200 and went through an analysis on the facts thereafter. He made a clear finding at para. 214 that up to the time that Tarion became involved in the summer of 2004, Realty Growth was not acting as an owner. From paragraphs 215 to 220, the Master looked at the conduct of 1189875. He repeats his three-pronged enforcement regime and notes that 1189875 did not appoint a trustee or exercise a power of sale, but it “stepped into the shoes of the owner and contracted to complete the six townhouses subject to existing agreements of purchase and sale. This work was done at the request of 1189875, who had an interest in the premises, on 1189875 [sic] credit with its consent and for its direct benefit”.

[40] On that basis, 1189875 became an owner. But it is important to recall that the only work performed after that occurred was work performed by Maystar. The work of the plaintiffs with valid liens had all been completed before the work supplied by Maystar started November 1, 2014. Realty Growth became an owner later.

[41] At para. 204 of his decision, the Master properly cited the decision of the Divisional Court in Leyburn Electric Ltd. v. Merton Development Corp., [1998] O.J. No. 2428 for the proposition that “the correct time for determination of whether a party is a statutory owner is the date on which the lien claimant supplied services or materials to the improvement”. However, he then held that since Realty Growth had become a mortgagee in March, 2001, once it is deemed an owner because of its actions “throughout the period” Leyburn was satisfied. He looked at the date that Realty Growth first arrived on the scene instead of looking at the dates on which the lien claimants supplied. That does not make sense. The Master found that Realty Growth was not an owner due to anything done by it up to the summer of 2004. He found that 1189875 became an owner in November, 2004 and Realty Growth became an owner thereafter. They only become owners, said the Divisional Court, by reference to the date of the supply of goods or services to the improvement. There is nothing in the statute that relates the finding of ownership back to a time prior to the person becoming an owner. Nor does an owner become jointly and severally liable with the titled owner/developer. As an owner, each of 1189875 and Realty Growth would have the obligations of an owner under the statute. Their property interests would be subject to liens. They would be required to hold holdbacks under Part IV. The obligations are prospective. Lien claimants with rights against different owners would be in different classes under section 79 of the statute. As their status is to be assessed in relation to the date of supply, as stated by the Divisional Court, then neither 1189875 nor Realty Growth is an owner to these plaintiffs as none of the plaintiffs with valid liens supplied goods or services when 1189875 or Realty Growth were owners.

[42] The Master also recognized this point in his refusal to allow Quality Rugs to amend its claim to plead its contract with Bloorwood for the purpose of seeking interest against Realty Growth. At para. 14 of his supplemental reasons dated April 9, 2013, the Master held that the contract was with Bloorwood and not Realty Growth so that the obligations of Bloorwood for interest had no bearing on the obligations asserted against Realty Growth. That is, even as owners, they had nothing to do with Quality Rugs whose goods and services had been supplied to Bloorwood previously. The Master failed to apply the law as set out by the Divisional Court and thereby committed an error of law in finding that 1189875 and Realty Growth could be liable to the plaintiffs as statutory owners.

The Lindsay Principle

[43] In calculating the quantum of the holdback deficiencies for which the lien claimants could assert priority under subsection 78(2) the Master started with the amount of holdbacks outstanding to all contractors in March 2004. By looking at the total including, the possible but unmade claims of other contractors, rather than just adding up the value of the holdbacks to each of the plaintiff with valid liens, Realty Growth argues that the Master confused the lien claimants’ roles and effectively treated them as subcontractors instead of contractors. There is no question that the statute calls for a pooling of claims at the same level. There are cases that allow lien claimants to share in holdbacks pooled with others as well as themselves. See: for example, 2058007 Ontario Inc. (Destiny General Construction) v. 1381794 Ontario Inc., 2009 46658 (ON SC). However, in Lindsay Brothers Construction Ltd. v. Halton Hills Development Corp. (1992), 1992 7511 (ON SC), 11 O.R. (3d) 23 (Ont. Ct. (G.D.)) Fortier J. held that holdbacks for liens of other contractors that are not preserved under s. 31 of the statute are not included in the pool. Section 31 of the statute provides that liens that are not properly preserved expire. In a much-cited reference from page 9 of the case report, Fortier J., wrote:

I, therefore, find that in the circumstances of this case, the contract of each lien claimant stands on its own and has a separate holdback to which the lien claimant may look to payment. The holdback amounts to 10% of the services or materials actually supplied under the contract and does not extend to 10% of all contracts entered into for the whole project or improvement.

[44] Of course if there is single general contractor (with any number of subcontractors) then the owner will be keeping holdbacks for 10% of the entire project or so much of it as is encompassed in the general contractor’s contract. How the subcontractors share in that holdback and the holdbacks kept by the general contractor for them specifically is different matter. But when there are individual contractors contracting directly with the owner, they each can look only to their own holdback under the Lindsay principle. The same principle was applied in Marsil Mechanical v. A. Reissing-Reissing Enterprise Ltd, [1996] O.J. No. 279 (Ont. Ct. (G.D.)) by Klowak J. at para. 32. Of greatest significance on this issue is the decision of the Divisional Court in Lansing Building Supply (Ontario) Ltd. v. Kemp (1993), 39 A.C.W.S. (3d) 565. In that case the Divisional Court overruled a decision by Master Saunders who had held that a mortgagee takes subject to 10% of all holdbacks that the owner ought to have retained for the entire improvement and not just for 10% of the contracts relating to valid liens filed. In overruling the Master, Montgomery J. for the Court held:

In our view, the Master erred in his interpretation of Section 22. The effect of his decision renders Section 31 meaningless. We adopt the reasoning of Justice Fortier in Lindsay v. Halton Hills released October 27, 1992 and believe it is correct and applicable to this issue.

[45] Accordingly the Master once again found against Realty Growth by failing to follow authority that was binding upon him and thereby committed an error of law. The amount of the holdbacks should be the total of the deficiencies found in para. 133 being $278,662.43 plus $60,796.43 that the Master found ought to have been held back in relation to the lien claimants’ supply of goods and services between the date of the Helyar Report and the date they stopped working. It follows that the Master’s conclusion at para. 225 that the total holdback deficiencies was greater than the total of the lien claims of $529,112.40 was wrong due to this error of law.

Advances

[46] As a further alternative, the Master found at paras. 56(84) and 146 that the two sums agreed to be paid among the lenders in December, 2014 were advances made under the 1189875 first mortgage before the liens had been be bonded off . As such, the liens have priority over these advances in full under subsection 78(6). The issue turns on whether the funds were “advances” and, if so, whether the advances were made while there was a preserved or perfected lien against the premises (i.e. before the liens were bonded off by payment into Court).

[47] Dealing first with the amount paid by 1189875 to Realty Growth to assist it in making the payment into Court of approximately $425,000. The amount was intended by the parties to be an advance under the first mortgage and was repaid as such from the sale proceeds. If it was a loan from 1189875 to Realty Growth, then it could not have been repaid from the proceeds and would not have made sense economically. Mr. Rego was at the meeting on December 1, 2004 when this was agreed upon. The funds were actually sent by counsel for 1189875 to counsel for Realty Growth by letter dated December 23, 2004. The letter imposed strict escrow terms on the use of the money. Realty Growth was required to “…use the holdback amount, together with other security to be posted by them, for the purpose of obtaining Court Orders vacating all liens against the property.” In Marsil, supra, Klowak J. held that an advance is made when escrow conditions are lifted so that the debtor has the use of the funds. The time at which the lender commences to charge interest is not determinative. Here, experienced counsel were working to advance money to pay the security so as to lift the liens to allow sales to close. The case law cited above is clear that mortgagees are entitled to post s.44 security. The mere act of paying the funds to post the security cannot subject the funds to the security that is being lifted by the payment of the money. That is a circularity. The Master does not make a finding of when the advance was made. He does not discuss Marsil, the timing of when the advance became available for use, or the issue of how money provided solely to be paid into Court to release charges can be said to be an advance subject to those charges. His holding in para. 146 amounted to an error of law.

[48] The Master also made no finding as to when the approximately $300,000 was advanced by 1189875 to pay for work performed by Maystar. In paragraph 56(84) the Master deems funds advanced at the time the liability to Maystar was incurred, i.e. November 1, 2004. The Master made a finding of law (or an extricable finding of law as part of a mixed finding of fact and law) by deeming an advance to be made when a liability was incurred instead of following the statute and determining, as a matter of fact, when the advance was made. I cannot send the matter back to the Master as he has retired if for no other reason. On November 1, 2004, the work had yet to be performed. It had not been invoiced let alone paid. On January 14, 2005, after the liens had been bonded off, the lawyer for 1189875 advised the lawyer for Realty Growth that the sales of units had not closed as yet but he provided a mortgage discharge statement that, at that point, sought interest on the advance from January 2, 2005. That date is after the order had been made bonding off the liens but before the order had been registered on title on January 5, 2005. Subsection 44(6) of the statute provides that the making of the order, rather than its registration on title, causes the liens to cease to attach to the premises and holdbacks and makes the liens a charge on the proceeds in court. It is also apparent from the minutes of the meeting in December 1, 2004 at which the payments were agreed upon that the payment to Maystar would only be made “once the liens have been vacated”. That is, the lawyers were alive to this issue. Apart from lawyers’ negligence, there is no reason for the advance to have been made before the parties knew that the liens had been bonded off. On balance of probabilities, I find that these funds were not advanced prior to the liens ceasing to attach to the land and holdbacks. Therefore, subsection 78(6) does not provide priority to the lien claimants ahead of the payment of the advances.

The Motion by Quality Rugs

[49] As noted above, Quality Rugs opposed the report of the Master because the Master had refused its motion seeking leave to re-open the trial to admit its contract with Bloorwood into evidence, prejudgment interest at the contract rate or under the Courts of Justice Act, and costs on a substantial indemnity basis. The Master did not call upon Mr. Handler to respond and dismissed the motion. In light of my holdings, the issue of prejudgment interest and, therefore, the relevancy of the contract with Bloorwood does not arise. There is no lien for interest on holdbacks under subsection 14(2) of the act. Moreover, in no sense could Realty Growth be said to be “wrongfully withholding” funds that are fully secured in Court.

[50] I also did not call on Mr. Handler to respond to the costs issue. The Master heard the motion and found that Mr. Harason’s request for punitive costs was “completely without merit”. It is true that the Master did not expressly deal in his reasons with the Requests to Admit served just before and during the trial by Mr. Harason. All of the parties before me were still producing documents after the trial commenced – including Quality Rugs. The Master was content that Mr. Handler conducted the proceedings reasonably and the Master knew of the Requests to Admit and the ongoing documentary difficulties (or games) on all sides. The Master also considered the Offers to Settle. I do not need to deal with the Master’s determination that Rule 49 does not apply under the statute as he properly took the offers into consideration in the exercise of his discretion in any event. Costs are among the most discretionary of decisions. Absent a clear and cogent error in principle or palpable and overriding error, I would not interfere.

Judicial Delay

[51] The Master reserved his decision after the trial for almost four-and-one-half years. The Master was actually retired prior to the release of his decision. Realty Growth fairly raised an issue under R. v. Cunningham, 2011, ONCA 543 as a result of the delay and comments made in the Master’s supplemental reasons that lead to questions as to whether the Master was properly focused on deciding the issues between the parties. In light of the findings above, there is no reason to delve further into this issue. No matter what I might hold, it would not change the outcome.

[52] However, the parties are entitled to a comment at least in light of the delay that they have endured. There is simply no justification for a delay of four-and-one-half years to write a decision. Addressing the issue of delays in our civil justice system recently, Karakatsanis J. for the full Supreme Court of Canada wrote the following in Hryniak v. Mauldin, 2014 SCC 7:

[24] However, undue process and protracted trials, with unnecessary expense and delay, can prevent the fair and just resolution of disputes. The full trial has become largely illusory because, except where government funding is available, ordinary Canadians cannot afford to access the adjudication of civil disputes. The cost and delay associated with the traditional process means that, as counsel for the intervener the Advocates’ Society (in Bruno Appliance) stated at the hearing of this appeal, the trial process denies ordinary people the opportunity to have adjudication…

[25] Prompt judicial resolution of legal disputes allows individuals to get on with their lives. But, when court costs and delays become too great, people look for alternatives or simply give up on justice. [Emphasis added]

[53] The Master exposed all of the parties to financial loss, legal uncertainty and possibly to years of more litigation. He has also exposed his colleagues, the Court and the institution of civil justice to criticism. He has unfairly dealt a setback those who are working assiduously to make the civil justice system more timely, responsive, fair, and affordable.

Costs

[54] I heard submission on costs at the close of the hearing. I have considered the discretion to award costs under s.86 of the Act, s.131 of the Courts of Justice Act, R.S.O. 1990, c.C.43 as well as the factors set out in Rule 57.01. Costs should be a reasonable assessment of the amount which the unsuccessful party ought to have expected to pay and should be proportionate in terms of the issues and complexity in the case.

[55] I do not think that I should saddle either side with the costs of the other in respect of the reference in light of the outcome. Both sides were prejudiced.

[56] As to this proceeding, Realty Growth is entitled to its costs. Mr. Handler seeks $67,000 including over $9,000 in disbursements for transcripts of the reference. His calculations included counsel fees for the full three days that were scheduled for the hearing. Due to counsels’ efficiency, only two days were used. In all, I find the plaintiffs liable to pay to Realty Growth the sum of $50,000 and order it to be paid pro rata from the plaintiffs’ share of the security in Court.

[57] Mr. Harason asked for costs of his motion. He also asks for costs of prior hearings in which costs were not reserved to today which I therefore have no basis to grant. Mr. Handler was required to prepare for the issues asserted in the motion and spent a brief amount of the hearing responding to those issues on which I called for a response. Quality Rugs shall pay costs to Realty Growth in the amount of its $2,500 in respect of the motion from its share of the security in Court in addition to the amount referred to in the prior paragraph.

Order

[58] The Report of the Master requires revision to conform to this Endorsement. Paragraphs 1, 5, 6, 7, and 8 appear to be fine as they are. Paragraph 2 should be struck out. For Paragraph 3, Column 2 of Schedule “A” needs to be revised to substitute the pro rata shares of the eight listed lien claimants calculated in accordance with these reasons. Columns 3 should deduct the pro rata share of each lien claimant to the costs that I have ordered and the $2,500 payable by Quality Rugs. Column 4 should be the net amount to be paid out to each listed plaintiff. In paragraph 4 of the Master’s Report, the 21 words commencing with “in trust” and ending with “Column 1 of Schedule A” should be removed.

[59] I expect that Mr. Handler and Mr. Conte should be able to agree upon the content and any additional wording of the order. A draft order should be submitted to Judge’s Administration at 361 University Avenue for my signature. My preference is to deal with any matters that cannot be resolved in writing as I am more available in the near term that way. I can be reached informally by Mr. Handler or Mr. Conte to schedule submissions if necessary by email to my assistant.

[60] I express as well my appreciation for the quality of argument and the sensitivity of counsel displayed at the hearing in dealing with these complex issues.

________________________________ F.L. Myers J.

Date: June 27, 2014

[^1]: Under subsection 58(4) of the act, the Master is exercising the authority of the Court in carrying out the reference. I do not need to decide if this goes so far as to enable him to decide that he is not bound be decisions of this Court.