Sheppard v. Carvalho, 2015 ONSC 3266

Court File and Parties

BARRIE COURT FILE NO.: 15-0159

DATE: 20150521

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Roberta Sheppard, Applicant

AND:

Krista Carvalho and Joseph Carvalho, Respondents

BEFORE: THE HON. MR. JUSTICE G.M. MULLIGAN

COUNSEL: R. Chown, Counsel for the Applicant

J. Amourgis, Counsel for the Respondent, Krista Carvalho

M. Teitel, Counsel for the Respondent, Joseph Carvalho

HEARD: April 24, 2015

ENDORSEMENT

[1] The applicant, Roberta Sheppard (Ms. Sheppard) brings an application seeking a charge in the amount of $200,000 against a property owned by the respondents, her daughter Krista Carvalho (Krista) and he son-in-law, Joseph Carvalho (Joseph). The security request arises from a promissory note entered into by the parties. Significantly, Krista does not oppose the application request, however, it is opposed by Joseph. He and Krista are involved in ongoing matrimonial proceedings involving this residential property, their matrimonial home.

Background

[2] The following background facts will provide context for the reasons that follow. In September of 2011, Joseph and Krista purchased a residence known as 3375 8th Line, in the Town of Bradford West-Gwillimbury. The property had a granny flat. Ms. Sheppard provided $200,000 towards the purchase price and occupied the granny flat in this dwelling. She raised these funds by bridge financing through her own bank and repaid her bank shortly thereafter when she sold her own principal residence. Substantially all of the rest of the funds for the residential purchase were raised by Krista and Joseph entering into a first mortgage. Ms. Sheppard was not registered on title.

[3] In order to facilitate the first mortgage, Ms. Sheppard provided a gift letter to Joseph and Krista’s bank to indicate this $200,000 advance was a gift, not a loan.

[4] Clearly, this was not the intention between the parties. About four months later, in January of 2012, the parties entered into an agreement and a promissory note. Ms. Sheppard was described as the lender, and Krista and Joseph were described as borrowers. The agreement acknowledged the indebtedness of $200,000 and provided terms as to living accommodation at the residence for Ms. Sheppard, particulars about when and how she could make a demand for repayment, and terms upon which Ms. Sheppard could be asked to vacate the premises. Ms. Sheppard was entitled to live in the premises rent-free, and she could not demand repayment within the first two years of the agreement. Repayment after that had to be on ninety days’ notice and vacant possession by her. Similarly, Krista and Joseph could not request vacant possession by her within the first two-year period, and thereafter only on ninety days’ notice to her.

[5] As part of the agreement, the parties entered into a promissory note for $200,000 without interest. Significantly, the promissory note provided, “At the request of the holder, the maker shall cause to be performed such acts as are necessary in order to grant security for the repayment of this note, provided that the security requested is reasonable, given the indebtedness to be secured.

[6] The note and agreement were both dated the 14th day of January, 2012. The parties had legal assistance to prepare these documents.

[7] Ms. Sheppard has not made a demand on the promissory note, but is simply seeking to obtain security on the property which was the subject matter of the agreement between the parties.

[8] In connection with this application, the parties filed numerous affidavits. There are significant disputes about why the parties agreed to purchase this property together, the financial circumstances of Ms. Sheppard, and the current state of the matrimonial litigation between Krista and Joseph. In my view, a dispute about collateral facts is not germane to the principle issue, which is, can Ms. Sheppard have security (a second mortgage) on the subject property based on the wording of the promissory note? In my view, for reasons that follow, I am satisfied that Ms. Sheppard can have such security.

Position of Ms. Sheppard

[9] Roberta Sheppard did not immediately seek to obtain security for the promissory note. Instead, she brought this application when her daughter, Krista and her son-in-law separated and became embroiled in divorce proceedings. As she stated at para. 25:

Based on the foregoing, and since the relationship between Joe and my daughter, and Joe and me has broken down, I am now concerned that the property might be sold without me being repaid my $200,000 loan. I am concerned that Joe will receive his share of the sale proceeds, and I will not be repaid by Joe. Since Joe agreed to grant security for the repayment of the promissory note, and since he has now refused or failed to provide it, I have instructed my lawyers to bring this application to obtain security in accordance with the second paragraph of the promissory note.

Position of Joseph

[10] As noted previously, Krista consents to the relief sought by her mother, Ms. Sheppard. This is not a case where Joseph denies that a loan agreement exists between the respondents and Ms. Sheppard. The following paragraphs of Joseph’s affidavit are significant:

[26] For the purpose of this application but without prejudice to my position I am taking in the matrimonial action, I am not taking the position that the $200,000 was a gift.

[34] Indeed, I would be willing to consent to an order (not that one is needed) that if the matrimonial home is sold, the proceeds not be disbursed to the respondents without Roberta’s consent, subject to any of the three parties having the right to apply in the matrimonial action with respect to any matter involving the release of the sale proceeds.

[11] The matrimonial dispute between Krista and Joseph is a significant factor in Joseph’s position. As he states in para. 31:

The mortgage would give Roberta [Ms. Sheppard] all kinds of powers never envisaged when these documents were signed, such as the ability to sell the property from under me. She would then use this to her daughter’s advantage.

Discussion

[12] This application is brought pursuant to rule 14.05(3) of the Rules of Civil Procedure. That rule provides:

(3) A proceeding may be brought by application where these rules authorize the commencement of a proceeding by application, or where the relief claim is,

(d) the determination of rights that depend on the interpretation of a deed, will, contract or other instrument, or on the interpretation of a statute, Order in Council, regulation or municipal by-law or resolution;

(d) the declaration of an interest in, or charge on land, including the nature and extent of the interest or charge, where the boundaries of the land, or the settling of the priority of interest or charges.

Rule 14.05(3)(h) further provides, “In respect of any matter where it is unlikely that there will be any material facts in dispute.”

[13] Subsection (h) cautions against applications where material facts are in dispute. I am not satisfied that there are material facts in dispute in this case, but even if there were, the decision of the Ontario Court (General Division), MacKay Estate v. Love, [1991] O.J. No. 1972, provides guidance. As Steele J. stated:

On the jurisdictional issue, counsel for Kenneth MacKay argued that the power given under all of the paragraphs in rule 14.05(3) should not be exercised where there are material facts in dispute. In my opinion, that would impose para. (h) as a condition to hear any matter under the preceding paragraphs. This would clearly be contrary to the disjunctive wording of sub (3). I believe that the court has power to hear an application under paras. (a) to (g) inclusive, even if there are material facts in dispute. This does not mean that in an appropriate case, the court may decide to direct the trial of an issue, or otherwise deal with the application. In my view, the facts in dispute are not material and a trial of an issue is not required to adjudicate this issue on a plaint reading of the written documents between the parties.

[14] Joseph argues that the agreement and promissory note arose from an illegal transaction: that is the gift letter used by Ms. Sheppard to assist Joseph and Krista to purchase this residence. In my view, the gift letter, if it was meant to deceive the mortgage lender, cannot be used as a shield by Joseph. The mortgage lender is not a party to these proceedings. All parties benefited by the gift letter and subsequently entered into an agreement and promissory note with the benefit of legal advice. Further, Joseph acknowledges the loan in these proceedings, and has offered that the money be held in trust if this matrimonial home is sold, pending matrimonial issues between Joseph and Krista.

[15] Joseph advances an argument that the contract is illegal and ought not to be enforced by the court. In Berne Development Ltd. v. Haviland et al, [1983] O.J. No. 2917, Saunders J. restated a basic principle at para. 26 that, “It is well-established that the court will not assist a party to enforce an illegal contract.” On the facts of that case, Berne, a sophisticated developer, offered a second mortgage to the buyers without full and proper disclosure to the principal lenders. However, as the court noted at para. 36:

While the action of Rockport and Berne, in attempting to deceive CMHC is reprehensible, it is not, in my opinion, a moral turpitude of such a magnitude as to call for the severe consequence of depriving the vendor of the balance of the purchase price to the benefit of the purchaser.

However, the court limited the recovery of Berne by stating at para. 36:

On the other hand, because of the illegal nature of the transaction, Berne should not be able to recover further interest or to enforce its security and other remedies under the mortgage.

Conclusion

[16] Ms. Sheppard advanced $200,000 from her own funds to assist Krista and Joseph to purchase a property. They all benefited from the transaction. The residence provided a granny flat for Ms. Sheppard and a principal residence for Krista and Joseph. They entered into an agreement between the parties, confirming their arrangements in writing. They had legal advice. Joseph and Krista agreed to grant security “provided that the security requested is reasonable”.

[17] Ms. Sheppard is not requesting security on other assets of Joseph such as a pension, business assets or other land. She is requesting security on the residence where she resides, the very property which was purchased with the benefit of her significant contribution of $200,000. I am therefore satisfied that an order be granted charging the subject property in favour of the applicant for $200,000 without interest and on demand terms mirroring the agreement between the parties dated the 14th day of January, 2012, and filed as Exhibit B to the affidavit of Roberta Sheppard. The property is more particularly described in Schedule “A” attached hereto.

Costs

[18] The parties are encouraged to resolve the issue of costs. If costs are not consented to, the applicant may make submissions as to costs within twenty days of the release of this endorsement. The respondent, Joseph Carvalho will have a further ten days to respond, and the respondent, Krista Carvalho will have a further ten days thereafter to respond.

MULLIGAN J.

Date: May 21, 2015

Schedule “A”

Part Lot 8, Concession 7, West-Gwillimbury, Part 1, 51 R1795, PIN 58034-0051 (LT)