2308537 Ontario Inc. et al. v. 1233121 Ontario Inc., 2015 ONSC 2630
CITATION: 2308537 Ontario Inc. et al. v. 1233121 Ontario Inc., 2015 ONSC 2630 COURT FILE NO.: 132-2014 DATE: 2015/04/21
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
2308537 Ontario Inc., Lini Yan and Huan Ping Yu
Applicants
- and -
1233121 Ontario Inc.
Respondent
COUNSEL: Lawrence Wong, for the applicants M. Armstrong, for the respondent
HEARD: January 21, 2015
REASONS FOR JUDGMENT
MITCHELL J.:
[1] The applicant mortgagors seek declaratory relief against the respondent mortgagee and a permanent injunction restraining the respondent from enforcing its security against the assets of the applicant, 2308537 Ontario Inc. (“230” or the “Mortgagor”). In addition, the applicants seek damages, including punitive damages, from the respondent totaling $55,000, from its alleged unlawful seizure of 230’s assets.
Procedural History
[2] The applicants commenced this proceeding by notice of application issued July 31, 2014.
[3] Earlier in these proceedings, the applicants brought a motion returnable August 12, 2014 seeking an interim injunction restraining the respondent from enforcing its security in the form of a chattel mortgage dated December 16, 2011 and a general security agreement dated December 19, 2011 (collectively, the “Security”).
[4] By order dated August 12, 2014, Korpan J. adjourned the motion to August 20, 2014 and granted the injunction on an interim–interim basis pending a return of the applicants’ motion.
[5] On the return of the motion on August 20, 2014, I made an order continuing the interim-interim injunction on an interim basis pending a determination of the issues on the application subject to the applicants undertaking not to remove or dispose of any of the assets of 230 covered by the Security other than in the ordinary course of business. The applicants further undertook to pay any damages suffered by the respondent if it was ultimately found that the interim injunction should not have been granted subject to the applicants’ right to set off against such proven damages all damages, as proven, arising from any unlawful seizure of the assets subject to the Security.
[6] This application was argued on January 21, 2015. Following argument, I reserved my decision on the application. These are my reasons for judgment.
Factual Background
(i) Purchase of the Restaurant Business
[7] 230 carries on business as a Chinese restaurant under the name of “Great China House Restaurant” (the “Restaurant Business”). The Restaurant Business is carried on from the ground floor unit of premises municipally known as 292 Josephine Street, Wingham, Ontario (the “Property”).
[8] The applicant, Lini Yan (“Yan”), is the sole director, officer and shareholder of 230. The applicant, Huan Ping Yu (“Yu”) is the husband of Yan and the sole owner of the Property.
[9] Yan, Yu and their child reside in an apartment located on the second floor of the Property.
[10] On December 16, 2011, 230 purchased the Restaurant Business including all of the assets and other goodwill used in the Restaurant Business (collectively, the “Business Assets”), from the respondent, 1233121 Ontario Inc. (“123” or the “Mortgagee” or the “respondent”).
[11] The officers, directors and shareholders of 123 are Hi Ping Ho (“Ho”) and Nai Sum Ho (“Nai”). Ho and Nai are spouses of one another.
[12] The purchase price paid for the Business Assets was $80,000 with $50,000 payable on closing and the balance payable in annual instalments of $10,000 each with the first instalment due and payable June 30, 2013.
[13] As security for payment of the balance of the purchase price, 230 executed a chattel mortgage in the amount of $30,000 on December 16, 2011 (the “Chattel Mortgage”) and granted a general security agreement dated December 19, 2011 (the “GSA”) in favour of 123. The security interests granted pursuant to the Security were properly perfected pursuant to the provisions of the Personal Property Security Act, R.S.O. 1990, c. P-10 (the “PPSA”).
[14] Each of Yan and Yu gave 123 their personal guarantee with respect to the obligations of 230 pursuant to the Security.
[15] On the same date, Yu, together with Xinwen Wong (“Wong”), purchased the Property from Ho. The purchase price for the Property was $340,000 with $50,000 payable on closing and the balance in the amount of $290,000, payable in annual instalments of $100,000, $60,000, $60,000 and $70,000 commencing June 30, 2012.
[16] The balance of the purchase price for the Property was secured by a first mortgage registered against the Property (the “Mortgage”).
[17] After closing, Wong sold her interests in 230 and the Property to Yan and Yu, respectively.
(ii) Terms of the Security
[18] The Chattel Mortgage contains the following payment provisions:
“The Mortgagor agrees to pay the Mortgagee the said sum of $30,000 upon the following terms and conditions and the repayments shall be as follows:
(a) the [Mortgagor] agrees to repay the principal sum of $10,000 on June 30, 2013 to the [Mortgagee] by certified cheque or bank draft without interest;
(b) the [Mortgagor] agrees to repay the principal sum of $10,000 on June 30, 2014 to the [Mortgagee] by certified cheque or bank draft without interest;
(c) the [Mortgagor] agrees to repay the principal sum of $10,000 on June 30, 2015 to the [Mortgagee] by certified cheque or bank draft without interest;
If the [Mortgagor] fails to make the repayment of the principal sum on the due dates above provided, the [Mortgagor] shall pay interest on the principal sum due and payable at the due dates at the interest of six percent (6.00%) per annum, calculated semi-yearly, such interests shall be paid in monthly until the said principal sum is fully repaid.”
[19] In the event of default in payment as required by the terms of the Chattel Mortgage, 123, as Mortgagee, is permitted to enter upon the Property for the purpose of taking possession of and removing the Business Assets and to sell the Business Assets in order to satisfy the balance of the purchase price.
[20] As additional security, 230 executed the GSA in favour of 123. Pursuant to the terms of the GSA, 230 granted an all-encompassing security interest over all of its personal property including the Business Assets, as security for the indebtedness owing by 230 under the Chattel Mortgage.
[21] Pursuant to article 5.01 of the GSA, upon default under the Chattel Mortgage 123, as secured creditor, is permitted to declare all monies owing under the Chattel Mortgage immediately due and payable.
[22] In addition, 123 is entitled to appoint a receiver of the collateral, take possession of the collateral, sell, lease or otherwise dispose of the collateral and/or foreclose upon the collateral in satisfaction of the indebtedness.
[23] The GSA contains an “entire agreement” clause. Clause 6.01 states as follows:
Entire Agreement. There are no understandings and agreements between the parties concerning the subject matter of this Agreement, except as set forth in this Agreement and the other documents related to the Loan. There are no representations, warranties, terms, conditions, undertakings or collateral agreements, express, implied or statutory, between the [Mortgagee] and the [Mortgagor] concerning the subject matter hereof except as expressly set forth in this Agreement or in the other documents related to the Loan.
[24] Clause 6.02 reads as follows:
Amendments and Waivers. No amendment to this Agreement will be valid or binding unless set forth in writing and duly executed by all of the parties hereto. No waiver of any breach of any provision of this agreement will be effective or binding unless made in writing and signed by the party purporting to give the same and unless otherwise provided in the written waiver, will be limited to the specific breach waived. No delay or failure by the [Mortgagee] in the exercise of any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude the other or further exercise thereof or the exercise of any other right.
[25] Pursuant to the various remedies triggered by a default in payment, clause 5.01 of the GSA provides:
The [Mortgagee] may grant extensions of time, take and perfect or abstain from taking and perfecting security, give up securities, accept compositions or compromises, grant releases and discharges, and release any part of the Collateral or otherwise deal with the [Mortgagor], debtors of the [Mortgagor], sureties and others and with the Collateral and other security as the [Mortgagee] sees fit without prejudice to the liability to the [Mortgagor] to the [Mortgagee] or the [Mortgagee’s] rights hereunder…
[26] The GSA was also executed by Yan, Yu and Wong as guarantors of the obligations of 230.
(iii) Default Under the Security
[27] On June 30, 2013, the first $10,000 instalment was due and payable under the Chattel Mortgage. In addition, the second instalment in the amount of $60,000 was due and payable under the Mortgage.
[28] 230 and Yu were unable to make the instalments due June 30, 2013 and asked Ho if they could pay interest only on the principal payments due under the Chattel Mortgage and the Mortgage until such time as 230 was able to sell the Property and the Restaurant Business. Once the assets were sold, the balance of the purchase price for the Restaurant Business and the Property would be repaid in full.
[29] 123 and Ho agreed to this request and twelve post-dated cheques in the amount of $350 each, representing the interest payable on the principal amounts due under the Chattel Mortgage and the Mortgage, were provided to Ho.
[30] In July 2013, Yan and Yu listed the Restaurant Business and the Property for sale.
[31] Over the ensuing twelve months, these cheques were cashed by Ho. Yu and Yan had no further discussions with Ho regarding their respective payment obligations under the Chattel Mortgage and the Mortgage. No principal payments were made.
[32] On June 30, 2014 the second instalment of $10,000 became due and payable under the Chattel Mortgage and the third instalment in the amount of $60,000 became due and payable under the Mortgage.
[33] On June 26, 2014, 230 and Yu made a request, through their lawyer, to pay interest only on the principal amounts due on July 30, 2014. Similar to the approach taken in June 2013, 12 post-dated cheques in the amount of $700 each were provided to 123 and Ho intending to cover the interest due on the first and second instalments under the Chattel Mortgage and the interest on the second and third instalments under the Mortgage for the twelve months commencing June 30, 2014.
[34] On July 16, 2014, 123 and Ho, through their lawyers, demanded immediate payment of the principal sum of $150,000 comprised of the entire indebtedness due and payable under the Chattel Mortgage of $30,000 and the second and third instalments in the amount of $60,000 each due and payable under the Mortgage.
[35] Six days later on July 22, 2014 while Yan and Yu were away from the Property and the Restaurant Business temporarily closed, 123 took possession of the Business Assets and that portion of Property used by the Restaurant Business by changing the locks. A bailiff acting on behalf of 123 posted a notice on the entrance to the Restaurant Business prohibiting anyone from entering the premises.
[36] Aside from the letter of July 16, 2014, no further notice was provided to 230, Yu or Yan of 123’s intent to realize on the Security and/or the Mortgage.
[37] In particular, notice as required by s. 244 of the Bankruptcy and Insolvency Act, s. 63(5) of the PPSA and s. 31 of the Mortgages Act was not provided to either 230 or Yu, as owners of the Business Assets and Property, respectively, or to Yu, Yan and Wong as guarantors.
[38] Yan was advised by his insurer that the acts of 123 taking possession of the Property and the Business Assets constitute a material change under the insurance policy thereby effectively terminating the insurance coverage in respect of the Business Assets.
[39] As at September 15, 2014, no offers had been received for the purchase of the Restaurant Business and/or the Property.
[40] As at January 21, 2015, the applicants had paid no amount towards repayment of the balance of the purchase price for the Business Assets owed to 123.
Position of the Applicants
[41] The applicants deny that 230 is in default of its payment obligations under the Chattel Mortgage and are of the view that the respondent was acting unlawfully when it took possession of the Business Assets and the Property.
[42] They say that pursuant to a verbal agreement between the parties as evidenced by the clear and unambiguous payment provisions of the Chattel Mortgage, 230, as mortgagor, is entitled to pay interest only, if it chooses, until such time as it is able to sell the Restaurant Business. The applicants argue that the parties negotiated a right to pay interest-only in the event the revenue proved to be insufficient to sustain the applicants` expenses.
[43] The applicants submit that Ho made various fraudulent representations to them both before and after closing regarding the income and revenue of the Restaurant Business upon which they relied.
[44] The applicants further submit that both the language of the Chattel Mortgage and the conduct of 123 by accepting and negotiating the cheques for the 12 months commencing June 30, 2013 is evidence of the parties’ agreement and understanding. Alternatively, Ho’s conduct amounts to acquiescence and 123 is therefore estopped from strictly enforcing the terms of the Chattel Mortgage relating to repayment of principal.
Position of the Respondent
[45] The respondent submits that the Security allows the applicants to enjoy an interest free loan provided there is no default in the repayment of principal on the dates and in the amounts set forth in the Chattel Mortgage. Once the repayment of principal goes into default, 123 is entitled to charge interest at the rate of 6%. Simply put, the Chattel Mortgage does not allow 230 as debtor to choose between two repayment options: (i) the repayment of principal without interest; and (ii) the payment of interest without repayment of principal.
[46] The respondent argues that the payment of interest is a term of the Chattel Mortgage inserted in the agreement for the exclusive benefit of 123 as lender and designed to ensure the timely payment of principal in accordance with the terms of the Chattel Mortgage.
[47] The respondent submits that even if the applicants’ claim for damages is proven, monetary; rather than injunctive, relief is the appropriate remedy. 123 argues that as a secured creditor it should not be restrained from enforcing its security when damages would be an adequate remedy.
Analysis
[48] Curiously, the issues on this application relate only to the attempted enforcement of the Security by 230. Ho, as mortgagee of the Property, is not named as a respondent in these proceedings.
[49] I disagree with the position of the applicants. The terms of the Chattel Mortgage dealing with repayment of the $30,000 loan are clear and unambiguous. The payment provisions relating to the payment of interest on the principal amount of $30,000, in particular, are clear. 123 agreed to lend the sum of $30,000 to 230 on an interest-free basis provided the principal amount was repaid in the amounts and on the dates set forth in the Chattel Mortgage. Where the intention of the parties is plainly expressed in the language of the agreement, the court should not look beyond the agreement itself, to interpret the contract: Venture Capital USA Inc. et al. v. Yorkton Securities Inc., 2005 CanLII 1578 (ON CA) at para. 26.
[50] The penalty for failing to pay each instalment when due is the payment of interest. This right to call for the payment of interest is in addition to and not in replacement of any other rights and remedies of 123 under the Chattel Mortgage. The payment of interest by the applicants did not supplant those rights.
[51] I find that the term of the Chattel Mortgage requiring the payment of interest in the event of default in payment of any amount when due was included for the sole benefit of 123, as mortgagee/secured creditor.
[52] If I was to interpret this term in the manner suggested by the applicants, the result would be absurd. It would permit the term of the loan to extend in perpetuity. For example, if the Restaurant Business was not sold and so long as 230 continued to pay interest at the rate of 6% per annum, 123 could never lawfully demand payment of the $30,000 loan.
[53] The applicants’ alternative argument suffers a similar fate. Leaving aside the applicable clause of the GSA, the respondent’s acceptance and cashing of the cheques following June 30, 2013 could, at its highest, form the basis for an estoppel argument with respect, only, to the obligation to pay the first principal instalment. Once the second instalment of principal became due and owing, a fresh obligation arose. So too did a fresh entitlement to demand and enforce security. The calculation of the amount demanded makes little sense in terms of the amounts demanded under the Mortgage; however, it was proper for 123 to have accelerated payment of all principal payable under the Chattel Mortgage since the GSA contains a clause permitting the 123, as secured creditor to accelerate payment of all amounts upon default.
[54] In addition, the clauses of the GSA reproduced above prevent the applicants’ estoppel argument from succeeding.
[55] I agree with the position of the respondent insofar as the rights of secured creditors are concerned. I am guided by the comments of Sharpe J. in 967305 Ontario Limited v. North American Trust Company (1996), 1996 CanLII 11102 (ON SC), 28 O.R. (3d) 212, 219-220 (Gen. Div.). Where the collateral is an income-producing asset damages will be an adequate remedy and injunctive relief will not be appropriate. Particularly, where the debtor appears to be insolvent and the default continues.
[56] Here, 230 has admitted that the Restaurant Business generates insufficient income to satisfy its obligations as they generally become due including the principal repayments called for under the Chattel Mortgage. In essence 230 has admitted it is insolvent.
[57] The respondent sold the Business Assets to 230 greater than three years ago. No portion of the balance of the purchase price for the Business Assets has been paid. No efforts have been made by the applicants to date to arrange for payment of the balance of the purchase price. It appears that default will continue with no end in sight.
[58] In the circumstances, I am satisfied that the balance of convenience favours the respondent. Accordingly, I find that the applicants are not entitled to a permanent injunction restraining the respondent from enforcing the Security.
[59] Turning now to the issue of the applicants’ claim for damages. I wish to express my grave concerns with respect to the manner in which 123 attempted to enforce the Security. It did so surreptitiously, without notice to 230 and the guarantors as required by statute and without the consent of Yu, being the owner of the Property and the landlord. Aside from its formal demand of July 16, 2014, all of the steps taken by 123 to enforce the Security were unlawful. Its seizure of the Business Assets and changing of the locks to the Property without notice to or the consent of the applicants raise concerns of trespass and conversion. I caution 123 and Ho against attempting to enforce the security which each holds in a manner which is not lawful and is in breach of the notice provisions of the governing legislation. Any further attempt to enforce the Security and/or the Mortgage must be done on proper notice to the applicants.
[60] Notwithstanding my concerns, I am unable to consider the merits of applicants’ claims for damages as a proper evidentiary record is not before me. Issues of credibility abound. Cross-examinations of affidavits were not conducted. Viva voce evidence is required to properly assess the merits of these damage claims arising from both the respondent’s enforcement of the Security and the alleged fraudulent misrepresentations made by Ho regarding the income and revenue of the Restaurant Business.
Disposition
[61] Accordingly, the applicants’ claims for damages are dismissed without prejudice to the applicants to commence a claim by way of action for damages arising from Ho’s alleged fraudulent misrepresentation of the income and revenues of the Restaurant Business and/or for damages for trespass and conversion arising from 123’s unlawful enforcement of the Security.
[62] While the respondent was successful in opposing this application, I find that its conduct in enforcing the Security was sufficiently high-handed and egregious so as to dis-entitle it to any award of costs.
Justice A. K. Mitchell Released: April 21, 2015
CITATION: 2308537 Ontario Inc. et al. v. 1233121 Ontario Inc., 2015 ONSC 2630 COURT FILE NO.: 132-2014 DATE: 2015/04/21
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
2308537 Ontario Inc., Lini Yan and Huan Ping Yu
- and -
1233121 Ontario Inc.
REASONS FOR JUDGMENT
Justice A. K. Mitchell Released: April 21, 2015