COURT FILE NO.: 4946/13
DATE: 2015-10-13
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
HJLJ Investments Limited
Plaintiff
Doug Bourassa for the Plaintiff
- and -
2305106 Ontario Ltd.
Defendant
David Fogel for the Defendant
HEARD: June 5 and September 21, 2015
at Milton, Ontario
FIZPATRICK J.
ENDORSEMENT
Nature of Motion
[1] This was a motion to determine how proceeds should be distributed that were realized on a power of sale.
[2] The Plaintiff, HJLJ Investments Limited (“HJLJ”) held second and third ranking mortgages securing the principal amount of $320,000.
[3] The Responding party 2294105 Ontario Inc. (“229”) held a first ranking mortgage in the face amount of $45,000.00.
[4] The issue on this motion is whether the mortgage asserted by 229 secures only the $45,000.00 face amount as HJLJ alleges or whether it secures the approximately $514,000.00 that 229 seeks. This latter amount exceeds the sale proceeds realized when 229 as mortgagee sold the property through power of sale.
[5] The determination of this motion depends on how this Court characterizes a prior payment made by 229 to settle a claim of an execution creditor, MCAP Service Corporation (“MCAP”). It is this settlement payment that 229 argues it is entitled to add to the $45,000.00 face amount of its mortgage.
Background facts
[6] This matter involves a property located at 1713 Echo Point Court, Pickering, Ontario (the “Pickering Property”).
[7] The Pickering Property had been the subject of two previous actions. Allegations were made in those two actions that the property was sold under power of sale to a related party with the first mortgage debt inflated by design to absorb the proceeds otherwise available to subsequent encumbrancers and creditors.
[8] Initially 229 took an assignment of a first ranking mortgage for the amount of $49,990 on October 24, 2011. There were no other registered mortgages on the property at that time. However, the Pickering Property was then encumbered by MCAP as an execution creditor of the registered owner, Carlo Esposito.
[9] Two weeks after taking the assignment of the mortgage, 229 sold the property by way of a power of sale to a related company, 2305106 Ontario Inc. (“230”) on November 10, 2011. 229 and 230 are managed and controlled by the same principal, Arash Missaghi (“Missaghi”).
[10] In the course of its power of sale proceeding, 229 delivered a discharge statement alleging that the $49,900.00 mortgage assigned to it 15 days prior secured the sum of $441,493.32. If this were correct there would have been no surplus funds available to execution creditor, MCAP.
[11] Three mortgages were registered on title as of November 16, 2011 following the sale by 229 to 230. The first mortgage was held in favour of 229 as a vendor-take-back mortgage in the amount of $45,000. A second and third mortgage were held in the amount of $275,000 and $45,000 respectively in favour of HJLJ.
[12] 229 next assigned its $45,000 vendor-take-back mortgage to Canada Finance Corp (“CFC”) on February 17, 2012. CFC is also managed and controlled by Missaghi.
[13] By Amended Statement of Claim dated March 14, 2012, MCAP commenced an action naming 229, 230, Canada Finance Corporation and HJLJ as defendants. MCAP claimed the Pickering Property had been wrongfully transferred and sought various forms of relief. MCAP also registered a Restriction against the property on March 14, 2012.
[14] In March, 2012, 229 paid $230,000 in settlement funds to MCAP to settle the action. In return MCAP signed a release granting a release of all claims connected to the settlement.
[15] In March, 2013 HJLJ’s Mortgages were deleted resulting from another power of sale this time initiated by CFC. CFC sold the property to 2339545 Ontario Inc. (“233”).
[16] In response, HJLJ commenced an Application in June, 2013 to rectify title, reverse the power of sale and restore its mortgages to the Pickering Property.
[17] A rectifying judgment on consent was issued by Justice Murray on July 23, 2013 (the “Judgment”). The effect of the Judgment was to undo the sale of the Pickering Property by CFC to 233.
[18] The Judgment declared 230 was the registered owner of the Pickering Property.
[19] The mortgages of HJLJ that had been deleted were “reinstated” by the Judgment.
[20] The Judgment also deleted the vendor-take-back mortgages that CFC had registered on the Pickering Property following from the impugned sale to 233.
[21] Notably the Judgment of Justice Murray “reinstated” the vendor-take-back mortgage 229 initially held over the Pickering Property that had been assigned to CFC.
[22] In substance the Judgment unwound a series of transactions so that the ownership and encumbrances were reflective of the parcel register as of December 29, 2011.
[23] After the transactions were unwound, HJLJ commenced enforcement proceedings on its mortgages and obtained default judgment against 230 on November 6, 2013. In the course of the enforcement proceeding, HJLJ was served with a notice of sale in respect of the vendor-take-back mortgage then held by 229 pursuant to the Judgment of Justice Murray.
[24] In accordance with the July 30, 2014 Order of Justice Murray, 229’s mortgage was discharged and the Pickering Property was sold by HJLJ under power of sale. The sale proceeds of $390,000 were paid into HJLJ’s counsel’s trust account to be distributed in accordance with a further order of this court.
ISSUES
Did the Judgment of Justice Murray have the effect of retroactively changing the ownership of the $45,000 mortgage back to 229 particularly respecting the intervening payment to MCAP despite the fact that when 229 paid MCAP it had already assigned the mortgage to CFC?
If the Judgment of Justice Murray did not retroactively change ownership, was 229 the beneficial owner of the mortgage with CFC as the trustee at the time of the MCAP payment?
If the Judgment of Justice Murray did not retroactively change ownership and 229 was not a beneficial owner of the mortgage, is 229 entitled to be subrogated to MCAP’s position flowing from the 229 settlement payment?
If it is found that 229 was the mortgagee at the time it paid MCAP then was such payment reasonable and necessary for the purposes of protecting 229’s mortgage interest?
Defendant’s Position
[25] 229 takes the position that it is entitled to recover expenses, as mortgagee, reasonably incurred to preserve the mortgaged property and/or to protect the mortgagee’s interest.
[26] Specifically 229 relies on the common law and the standard charge terms in the mortgage that allow a mortgagee to pay the amount “owing on any encumbrance, lien or charge now or hereafter existing or which may arise or be claimed against the property” and to have these disbursements included in the mortgage so long as the costs are reasonable as to amount and as to the necessity of incurring the expense to protect the mortgage (see: Falconbridge on Mortgages, eds. W.B. Rayner & R.H, McLaren 4th ed. (Aurora, ON: Canada Law Book, 1977), at pp. 31-4).
[27] 229 further submits that had it not paid to settle the MCAP action both 229 and HJLJ ran the risk of having their interest in the property encumbered and subordinated to MCAP.
[28] 229 during the course of the argument of this motion advanced two additional arguments.
[29] First, 229 additionally argues that the transfer of the mortgage from 229 to CFC occurred gratuitously with the result that the presumption of resulting trust arises. Therefore, it is submitted 229 did have a beneficial interest in the mortgage and should be able to add the amount it paid to MCAP to its mortgage principle, although the mortgage on title was not held by 229 at the time the MCAP monies were paid.
[30] Second, 229 additionally submits it is entitled to an equitable subrogation to be in MCAP’s position as an execution creditor as a result of 229 paying the settlement amount to MCAP.
Analysis
[31] For the reasons that follow I reject the Defendant’s submission that the MCAP settlement proceeds and legal costs should be allowed to be added onto and paid with the 229 $45,000.00 mortgage.
[32] The broader question on this motion pertains to the impact of Justice Murray’s Judgment that unwound 229’s assignment of its mortgage to CFC. Did this unwinding have the effect of retroactively voiding the mortgage transfer to CFC thus allowing 229 to maintain its claim that it held the mortgage at the time it advanced moneys to MCAP and, therefore, that payment was made to protect 229’s then existing mortgage interest?
[33] The answer to this question is no.
[34] The starting point is Rule 59.01 of the Rules of Civil Procedure which states:
An order is effective from the date on which it is made, unless it provides otherwise.
[35] In Silver v Imax, 2012 ONSC 4881 Justice van Rensburg analyzed the jurisdiction and effect of a court granting an order nunc pro tunc. The Court stated at paras. 43-44:
[43] The authority to make an order nunc pro tunc is part of the court’s inherent jurisdiction, and is recognized in the Rules of Civil Procedure: Crown Zelle as being made based on his use of the word “reinstated” rbach Canada Ltd. v. British Columbia (1979), 1979 611 (BC CA), 13 B.C.L.R. 276 (C.A.). In Ontario, rule 59.01 states: “An order of the court is effective from the date on which it is made, unless it provides otherwise”. This is the authority under the Rules to antedate an order of the court, or to give the order retroactive effect.
[44] Our courts grant orders nunc pro tunc, or with retroactive effect, in a variety of circumstances, sometimes on consent, in order to do justice between the parties. Many such orders are made in motions court, where typically a time limit will have passed to take certain action, either before the motion is argued, or while the motion is pending. Without a nunc pro tunc order, a party’s rights are defeated without regard to the merits of the dispute.
[36] The Judgment was not granted nunc pro tunc (then for now). As such, Justice Murray’s Judgment took effect on the date it was made and it did not have the effect of retroactively voiding the mortgage assignment of 229 to CFC. Instead the transaction occurred but was clawed back by the Court on the date of Justice Murray’s Judgment.
[37] The Defendants argue that I should interpret the Judgment as being made nunc pro tunc based on Justice Murray’s use of the word “reinstated”.
[38] The impact of such an order is fundamental to the interests of affected parties and runs contrary to the express provisions of the Land Titles Act, which I detail below.
[39] I also note that 229, 230 and CFC were parties to the MCAP action such that those corporations had the opportunity to ensure the wording of Justice Murray’s Judgment made on consent contained the precise language required to reflect the agreement reached between the parties. In other words, 229 and the related corporations had the opportunity to incorporate retroactive/nunc pro tunc language into the consent Judgment if that was what the parties had agreed to. Clearly, the Judgment did not contain such precise language leaving 229 to argue the Court should now interpret the Judgment as being nunc pro tunc.
[40] In my view, such an order must be explicitly made for the reasons stated above and not derived through interpretation as suggested by the Defendant.
[41] I also reject 229’s argument that it is entitled to add the amount of the settlement payment to its entitlement under the mortgage.
[42] 229 paid $230,000 to MCAP in March, 2012. 229 had assigned its vendor-take-back mortgage on February 17, 2012 prior to that payment. The expenses 229 incurred for legal costs and for settlement purposes were not tied to its mortgage given its mortgage had been assigned to CFC by the time payment to MCAP was made. Any risk surrounding the enforcement or priority of the mortgage that had been assigned was not 229’s to bear and instead was that of CFC. As such, the settlement funds paid by 229 were not for the purposes of protecting its mortgage interest as none then existed.
[43] I also reject 229’s argument that the assigned mortgage to CFC was a resulting trust whereby 229 had a beneficial interest and should therefore be entitled to add the costs it incurred to pay the MPAC settlement onto the mortgage.
[44] For the purposes of rejecting 229’s claim to a beneficial interest in a mortgage which it can enforce against a third party subsequent mortgagee (HJLJ), the following provisions of the Land Titles Act (“LTA”) must be mentioned:
Sections 62(1&2), 78(4) & 93(3) state:
- (1) A notice of an express, implied or constructive trust shall not be entered on the register or received for registration. R.S.O. 1990, c. L.5, s. 62 (1).
(2) Describing the owner of freehold or leasehold land or of a charge as a trustee, whether the beneficiary or object of the trust is or is not mentioned, shall be deemed not to be a notice of a trust within the meaning of this section, nor shall such description impose upon any person dealing with the owner the duty of making any inquiry as to the power of the owner in respect of the land or charge or the money secured by the charge, or otherwise, but, subject to the registration of any caution or inhibition, the owner may deal with the land or charge as if such description had not been inserted. R.S.O. 1990, c. L.5, s. 62 (2).
78(4) When registered, an instrument shall be deemed to be embodied in the register and to be effective according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register.
93(3) The charge, when registered, confers upon the chargee a charge upon the interest of the chargor as appearing in the register subject to the encumbrances and qualifications to which the chargor’s interest is subject, but free from any unregistered interest in the land.
[45] In Lawrence v Maple Trust, 2007 ONCA 74, 84 O.R. (3d) 94 (C.A.), Justice Gillese explained the purpose of the Land Titles System in Ontario at para 62:
To place ss. 78(4) and 155 in context, it is useful to consider the overall purposes of the Act and the principles underlying it. In Durrani v. Augier (2000), 2000 22410 (ON SC), 50 O.R. (3d) 353, [2000] O.J. No. 2960 (S.C.J.), at paras. 40-42, Epstein J. gave this helpful summary:
The land titles system was established in Ontario in 1885, and was modeled on the English Land Transfer Act of 1875. It is currently known as the Land Titles Act, R.S.O. 1990, c. L.5. Most Canadian provinces have similar legislation.
The essential purpose of land titles legislation is to provide the public with security of title and facility of transfer: Di Castri, Registration of Title to Land, vol. 2 looseleaf (Toronto: Carswell, 1987) at p. 17-32. The notion of title registration establishes title by setting up a register and guaranteeing that a person named as the owner has perfect title, subject only to registered encumbrances and enumerated statutory exceptions.
The philosophy of a land titles system embodies three principles, namely, the mirror principle, where the register is a perfect mirror of the state of title; the curtain principle, which holds that a purchaser need not investigate the history of past dealings with the land, or search behind the title as depicted on the register; and the insurance principle, where the state guarantees the accuracy of the register and compensates any person who suffers loss as the result of an inaccuracy. These principles form the doctrine of indefeasibility of title and [are] the essence of the land titles system.
[46] In Di Michele v Di Michele, 2014 ONCA 261 the Court of Appeal stated:
[106] Third, pursuant to s. 93(3) of the Land Titles Act, the Mortgage was registered free from any unregistered interest of the beneficiaries. Section 93(3) reads as follows:
The charge, when registered, confers upon the chargee a charge upon the interest of the chargor as appearing in the register subject to the encumbrances and qualifications to which the chargor’s interest is subject, but free from any unregistered interest in the land.
[107] Under Ontario’s land titles system, the rights of a bona fide purchaser (which includes a mortgagee) for value who has registered its interest in the property trump any prior unregistered interests in the property: 719083 Ontario Limited v. 2174112 Ontario Inc., 2013 ONCA 11, 28 R.P.R. (5th) 1, at para. 12; MacIsaac v. Salo, 2013 ONCA 98, 114 O.R. (3d) 226, at para. 39.
[47] Recognizing a beneficial interest in a mortgage as claimed by 229 for the purposes of the Land Titles Act would run contrary to the express provisions of the Act and would defeat the certainty the Act was intended to create. Mortgagees should be able to rely on an assignment of a mortgage in order to determine who the mortgagee is and for what value.
[48] Although a mortgage can be held in trust the relationship is in personam. 229’s claim would strictly be against CFC as trustee.
[49] The Land Titles system does not recognize a beneficial interest in a charge as enforceable against a third party. Notice of a beneficial relationship cannot be superimposed to a third party, in this case HJLJ given the clear language of section 62 of the Land Titles Act.
[50] In addition, HJLJ as a third party is entitled to be able to rely on the description of the land and the charges on it when 229 advanced the money to MCAP to be certain that the money advanced by 229 was monies advanced not in 229’s capacity as mortgagee.
[51] Finally, I note that there was not one document produced on this motion noting that the mortgage was held in trust (i.e. none of the registered and related mortgage documents, nothing in the parcel register, nothing in any pleading etc.).
[52] 229’s equitable subrogation claim is easily dealt with. MCAP granted a release of all rights or claims it may have against 229, 230 or any of the other parties to that action. Even if I did accept that 229 stepped into the shoes of MCAP, the shoes of MCAP have no further remedy as all claims have been released. This argument is therefore rejected.
[53] If I am incorrect in my above analysis and it is found that 229 was the mortgagee at the time of the MCAP payment, I would still disallow 229’s claim to include the settlement amount and related legal fees.
[54] Justice Price provided a thorough analysis of when mortgagees are bona-fide in incurring expenses to protect their mortgage interest stating the following in 30724453 Nova Scotia Company v 1623242 Ontario Inc., 2015 ONSC 2105 at para. 126:
[126] A mortgagee may claim certain costs as just allowances on the mortgage. The mortgagee is entitled to be indemnified for the costs that it reasonably incurs to respond to a default by a mortgagor, and to preserve its security. The costs claimed must, of course, be reasonably and properly incurred. Mortgage jurisprudence has recognized that the standard charge terms of mortgage agreements are not a “carte blanche” for a mortgagee to incur and charge fees. The mortgagee does not have an unfettered right to incur expenses of a legal nature and to pass them on to the mortgagor simply because it is related to the mortgage. To be recovered, such expenses must be reasonably incurred to preserve the mortgaged property or to protect the security, and they must be just to all parties.
[55] The main argument advanced by 229 is that the pleadings in the MCAP action make it clear that the payment by 229 was to settle a challenge by MCAP to the mortgage. Specifically 229 directs me to MCAP’s Amended Statement of Claim dated March 14, 2012 where MCAP sought “an order declaring that the Plaintiff [MCAP] is entitled to an interest in the Property in priority to all registered interests held by any of the Defendants” [emphasis mine] among the various other heads of relief sought.
[56] 229’s pleadings based argument is easily defeated with consideration to the fact that 229 had assigned its mortgage interest to CFC a month prior to the date of the Amended Statement of Claim with the result that 229 did not have a registered interest at the date of the pleading. In other words, 229 had no mortgage and, obviously, no priority to protect at the date of the Amended Claim.
[57] The Amended Statement of Claim does not allege that 229 held the mortgage and specifically identifies CFC as the party holding the mortgage registered against the property and that the mortgage was assigned to CFC by 229.
[58] The costs incurred by 229 were not reasonably or properly incurred to protect 229’s security interest. It had none at the time of payment.
[59] MPAC’s claim as execution creditor did not otherwise impact the integrity of the mortgage. When the property was sold through power of sale the mortgagee had an obligation to pay out the surplus proceeds to the execution creditor but this did not in any way interfere with the legitimacy or protection of the mortgage interest.
[60] The settlement funds and legal fees were incurred as a result of the MCAP action commenced to address questionable mortgage assignments and property sales between related parties that appeared suspicious at best. Simply stated, a first mortgagee cannot seek to tack on costs that resulted from its own machinations unrelated to legitimate creditor rights. This is what occurred here.
[61] Given all of the above, the Plaintiff’s motion is granted.
Conclusion and Order
[62] For the above mentioned reasons, I order that 229’s claims to add the settlement amount paid to MPAC for the impugned vendor-take-back mortgage are disallowed as well as the related additional charges as set out in the CFC Notice of Sale.
[63] If the parties cannot agree on costs then I will accept brief, written submissions respecting both the costs reserved from the HJLJ Application to unwind the CFC power of sale transaction and this motion. The Plaintiff shall file its written submissions not exceeding three pages exclusive of Bill of Costs and any relevant Offer(s) to Settle within 15 days of this decision. The Defendant shall file its written submissions not exceeding three pages exclusive of Bill of Costs and any relevant Offer(s) to Settle within 25 days of this decision. The Plaintiff shall file any Reply not to exceed two pages within 30 days of this decision
Fitzpatrick J.
Released: October 13, 2015