COURT FILE NO.: CV-14-10585-00CL
DATE: 20150821
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Stanbarr Services Limited, Janodee Investments Ltd., Meadowshire Investments Ltd., Regard Investments Ltd., 1563503 Ontario Limited, Beaver Pond Investments Ltd., The Canada Trust Company, Rita Rosenberg and 527540 Ontario Limited
Applicants
– and –
Metropolis Properties Inc., Ginkgo Mortgage Investment Corporation, Canada Investment Corporation, 2413913 Ontario Limited, 2421955 Ontario Inc. and Sai Mohammed
Respondents
Stephen Schwartz and Doug Bourassa, for the Applicants
Richard Quance for the Respondent Canada Investment Corporation
Mark Veneziano and Jaclyn Greenberg for the Respondent 2413913 Ontario Limited
Philip Polster for the Respondent Ginkgo Mortgage Investment Corporation
Salma Sheikh for the Respondents 2421955 Ontario Inc. and Sai Mohammed
No one appearing for Metropolis Properties Inc.
HEARD: June 29 and 30, July 2 and 3, 2015
REASONS FOR JUDGMENT
JUSTICE W. MATHESON
[1] At the center of this dispute is the sale, under power of sale, of a commercial/residential property known as 91-93 Scollard Street, Toronto. The impugned sale closed on June 6, 2014. The applicants submit that they were never served with the required notice of sale and the sale is therefore invalid.
[2] This matter began as a receivership application, but, pursuant to the order of Penny J. dated October 3, 2014, the following issues were ordered to be determined in a hybrid trial:
(1) Is the November 28, 2013 Notice of Sale valid?
(2) If not, is the purchaser, 2413913 Ontario Inc. a bona fide purchaser for value without notice of the invalidity of the sale? If so, can it obtain title to the property?
(3) If the answer to question #2 is no, are the mortgages registered subsequent to the purchase valid?
(4) If the answer to question #3 is no, do the mortgagees have an equitable subrogated interest if they advanced funds?
[3] Justice Penny left open the issue of quantification of the first mortgage subsequent to the impugned sale, specifically the Ginkgo Mortgage Investment Corporation mortgage. That amount is not to be determined in this trial.
[4] As well, at the outset of trial an issue was raised about the extent to which the quantification of the amount owing under the Canadian Investment Corporation (“CIC”) mortgage was properly part of the hybrid trial. CIC held the first mortgage prior to the sale, and it was CIC that purported to sell the property under power of sale.
[5] The applicants viewed the quantification of the amount owing under the CIC mortgage as part of question #1, arguing that the amount claimed as owing set out in the Notice of Sale was grossly inflated. After discussion, the parties agreed that the following issue could be determined in the hybrid trial as part of question #1:
Is the amount of the [CIC] mortgage set out in the Notice of Sale dated November 28, 2013, overstated by the inclusion of those expenses set out in Exhibits A and B of the Supplemental Affidavit of George Safarion sworn August 10, 2014, excluding those expenses incurred after August 2013?
[6] Other issues regarding the quantification of the CIC mortgage, and other matters raised in the application, are not being determined at this time. The sale of a property at 65 Malmo Court, Vaughan, forms part of the materials, but it is not the subject of any of the specific questions to be answered in this hybrid trial.
[7] In accordance with the order of Penny J., the trial evidence included written evidence by way of affidavits, transcripts and other documents, as well as viva voce evidence from certain witnesses.
Overview of impugned transaction
[8] Before the impugned sale, the Scollard property was owned by the respondent Metropolis Properties Inc. Metropolis did not appear at trial.
[9] There were numerous encumbrances on the property. At the time of sale, the first mortgage was held by CIC. There then followed twelve more mortgages, held by various of the applicants either as sole mortgagee or along with other applicants. At time of the sale, the applicants’ mortgages secured the aggregate principal sum of approximately $4,165,000.
[10] The main witness for the applicants was Harvey Margel. He is a real estate lawyer who was counsel to the mortgagees on eleven of the twelve subsequent mortgages held by the applicants. He also had an indirect personal interest in two of the mortgagees, specifically Regard Investment Ltd. and Beaver Investments Pond Ltd., and those companies were mortgagees on seven of the mortgages. He did not act for the applicant/mortgagee 527540 Ontario Limited. There was also one further mortgagee for a period of time, 2329916 Ontario Limited; however, it did not have a charge at the time of the impugned sale and did not participate in this trial.
[11] CIC was not the original first mortgagee. The first mortgage was originally held by Equitable Trust, securing the principal sum of $1,200,000. That mortgage was registered in 2004, when Metropolis purchased the property. The first mortgage was transferred to a group of individuals (the “Yermus Group”) on November 24, 2009. At that time, a notice pursuant to section 71 of the Land Titles Act, R.S.O. 1990, c. L.5, was registered against title to the property, providing notice that the terms of the mortgage were amended to reduce the principal secured by the mortgage from $1,200,000 to $710,000, among other changes. CIC took an assignment of the mortgage from the Yermus Group on August 9, 2013. At that time, the mortgage was transferred without discount, for the full value of $779,720.86.
[12] There is a family connection between Metropolis and CIC. Arash Missaghi has for many years been the manager of Metropolis. His wife is a director. At the relevant time he was an undischarged bankrupt and therefore not able to be a director. His father is Hosseingholi Missaghi, who is one of three directors of CIC and, on the trial evidence, the person in charge of the sale under power of sale.
[13] CIC is accused of fraud in these proceedings. However, the applicants submit that they need not prove fraud to succeed on the issues in this trial.
[14] There is no issue that in late 2013 the CIC mortgage was in default. Indeed, all of the mortgages on the Scollard property were in default and had been since early 2013.
[15] Numerous steps had been taken as a result of these defaults. In August 2013, two of the lower-ranking mortgagees issued notices of sale, but did not proceed with a sale. Metropolis was taking steps to sell the property. It entered into an agreement of purchase and sale dated November 19, 2013, which was to close in 2014, but ultimately that sale did not proceed. Both CIC and subsequent mortgagees also delivered notice of attornment of rents. Mr. Margel testified that he dealt with Wendy Greenspoon, external counsel to CIC, about these competing notices. They agreed that Ms. Greenspoon would collect the rents and use those funds to pay the municipal realty taxes, which were in arrears.
[16] According to CIC, it commenced power of sale proceedings in November 2013 using a Notice of Sale dated November 28, 2013. CIC submits that the notice was properly served on the applicants in early December 2013, a proposition that is highly disputed. That evidence is discussed in more detail below.
[17] The Notice of Sale stated that the amount due under the CIC mortgage totaled $3,271,947.36, including $2,988,966.14 for principal, interest and costs. Thus, according to the Notice, the amount secured under the CIC mortgage had quadrupled in the approximately five months since CIC acquired the mortgage.
[18] The property was listed in February 2014 and was ultimately purchased by 2413913 Ontario Limited for $5,875,000, by agreement of purchase and sale dated March 11, 2014, as later amended. From the standpoint of the purchaser, the transaction took place under CIC’s power of sale. The sale closed on June 6, 2014.
[19] Mr. Mohammed, a director of the purchaser, testified about how he became aware of the property. Mr. Mohammed was in the business of buying and developing properties. I found him to be a straightforward and credible witness, who testified to the process he went through to assess the property, obtain financing and facilitate 2413913’s purchase of the property. While allegations of fraud have been made against CIC in these proceedings, no allegations of fraud have been made against Mr. Mohammed or the companies involved in the purchase.
[20] I accept Mr. Mohammed’s evidence that he was introduced to the property by a real estate broker in his building who he had previously done business with, and that he had no prior connection with CIC or Metropolis. I further find that 2413193 was a bona fide purchaser for value of the Scollard property. 2413913 was independent of Metropolis, CIC and the Missaghi family. This was not seriously contested by any party in closing argument at trial. The key issue, as regards the purchaser, is whether or not the purchase was “without notice” that the sale under power of sale was defective. Mr. Mohammed had some notice of the alleged defect. That too is discussed in more detail below.
[21] The respondent Ginkgo Mortgage Investment Corporation provided financing to the purchaser of $3,650,000 and took a first mortgage on the property. In closing argument at trial, no one suggested that the first mortgagee was other than a third party encumbrancer for value without notice, and I find on the evidence that it was.
[22] There were also subsequent mortgages registered against the Scollard property as part of the purchase; however, each of those mortgagees had some connection with Mr. Mohammed, which gives rise to the question of whether or not they too had notice of a defect in the power of sale proceedings.
[23] When CIC completed the sale, it delivered to its counsel a discharge statement claiming that about $6.01 million was outstanding under its mortgage. This represented an approximate 800% increase in the amount of the mortgage from the date it acquired the mortgage in August 2013. This amount also slightly exceeded the sale price. Accordingly, no sale proceeds were distributed to any mortgagee other than CIC. In connection with the closing of the sale, the applicants’ mortgages were all expunged from title.
[24] In the time period leading up to and after the sale closed on June 6, 2014, there was considerable activity in relation to the Scollard property that is inconsistent with the suggestion that the applicants received the November 2013 Notice of Sale. Briefly, that activity included the following steps.
[25] On February 18, 2014, 2329916 Ontario Limited issued demands, and commenced receivership proceedings against Metropolis in respect of both the Scollard property and the Malmo property.
[26] That receivership application was terminated on June 3, 2014 when counsel for Metropolis delivered a bank draft for the full payment due to 2329916. On that day, D. Brown J., as he then was, ordered that the receivership application be treated as withdrawn.
[27] On the next day, June 4, 2014, Mr. Margel issued demands on behalf of all of the mortgagees he acted for, specifically all but CIC and 527540. A second receivership application, i.e., this proceeding, was then commenced on June 9, 2014. Thus, this proceeding, seeking a receivership over the Scollard property, was commenced three days after the sale of the Scollard property.
[28] I accept the trial evidence showing that this receivership application was served on CIC, even though CIC denies receiving it. Courtesy copies were also served on Wendy Greenspoon as counsel for CIC.
[29] On June 11, 2014, Wilton-Siegel J. ordered that the receivership application would be heard on June 16, 2014. He ordered that, in the interim, Metropolis and CIC were not to encumber, sell or otherwise dispose of the Scollard property.
[30] On June 16, 2014, the matter came before D. Brown J. once again. Metropolis appeared through counsel, and advised that it did not oppose the appointment of the Receiver. Justice Brown appointed MNP as receiver of the Scollard property.
[31] At no point did Metropolis or anyone else advise the Court that CIC had issued a Notice of Sale, or that the property had already been sold. Nor did CIC (or its counsel) respond in any way to the receivership proceedings, despite being given notice.
[32] In the course of its duties as court-appointed receiver, MNP took possession of the property on June 17, 2014 and changed the locks on June 19, 2014.
[33] On June 26, 2014, the receiver attended at the property and discovered that the locks had been changed again, and a notice affixed to the door. The notice was a letter from a lawyer, Jonathan Ricci, advising that ownership of the property had been transferred to 2413913 by power of sale on June 6, 2014.
[34] According to the applicants, this was how they learned of the power of sale proceedings. The applicants moved immediately for an order setting aside the sale. The parties attended before Brown J. on July 10, 2014. Justice Brown’s endorsement made that day read, in part, as follows:
The evidence shows that some person or persons are interfering with the Receiver’s performance of its duties and, as well as, that serious questions exist about the legality of the sale of the property on June 6/14 from [CIC] to 2413913 Ontario Ltd. and the legality of the 4 mortgages registered against the Property on June 6 and 17/14…. Serious questions also exist about whether the debtor, Metropolis, through its counsel, misled this Court on June 11 and 16/14. These questions must be answered.
[35] Justice Brown ordered production of documents in relation to the Notice of Sale. The court proceedings then continued with cross-examinations and other steps, including Penny J.’s order for this hybrid trial.
[...continues verbatim through paragraph 129...]
Justice W. Matheson
Released: August 21, 2015
COURT FILE NO.: CV-14-10585-00CL
DATE: 20150821
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Stanbarr Services Limited, Janodee Investments Ltd., Meadowshire Investments Ltd., Regard Investments Ltd., 1563503 Ontario Limited, Beaver Pond Investments Ltd., The Canada Trust Company, Rita Rosenberg and 527540 Ontario Limited
Applicants
– and –
Metropolis Properties Inc., Ginkgo Mortgage Investment Corporation, Canada Investment Corporation, 2413913 Ontario Limited, 2421955 Ontario Inc. and Sai Mohammed
Respondents
REASONS FOR JUDGMENT
Justice W. Matheson
Released: August 21, 2015