Court File and Parties

Oshawa Court File No.: CV-94730-16 Date: 2016-04-14 Ontario Superior Court of Justice

Between: 2179548 Ontario Inc. Applicant – and – 2467925 Ontario Inc. and 2153823 Ontario Inc. Respondents

Counsel: Enzo Di Iorio, for the Applicant Oscar Wong, for the Respondents

Heard: April 1, 2016

Reasons for Decision

Charney J.:

Introduction

[1] This application is brought under Rule 14.05 (3) (e) and (f) of the Rules of Civil Procedure and s. 12(8) of the Mortgages Act, R.S.O. 1990, c. M.40, for an order discharging a mortgage on the ground that all money due under the mortgage has been paid in full.

[2] This application relates to a mortgage on a multi-phase condominium development project called “Four Seasons Gardens” in Richmond Hill, Ontario. The applicant, 2179548 Ontario Inc., was a registered owner of a number of properties affiliated with the condominium project.

[3] The mortgage at issue was granted in December 2011 by the applicant to Swisscan Asset Management Inc. (Swisscan) securing the principle sum of $4 million on title to all five phases of the condominium project.

[4] Pursuant to an agreement of purchase and sale that was executed on June 4, 2015, the first respondent 2467925 Ontario Inc. (246 Inc.) purchased the applicant’s beneficial interest in the lands compromising phase 3 of the condominium project. 246 Inc. agreed to pay $12 million under the agreement of purchase and sale in which part of the purchase price was to be used to pay the applicant’s outstanding debts to Swisscan pursuant to the mortgage.

[5] Swisscan received the money in two instalments and has been paid in full for all the amounts that were outstanding pursuant to the Swisscan mortgage.

[6] The applicant takes the position that these instalments were paid pursuant to the June 4, 2015 agreement of purchase and sale and there is now no money owing under the mortgage. The applicant’s position is that as a matter of law a mortgage must be discharged if the underlying debt secured by the mortgage has been paid. Accordingly, the applicant argues that it is entitled to have the mortgage discharged regardless of who holds the mortgage.

[7] 246 Inc. did not discharge the mortgage. Rather, 246 Inc. takes the position that the agreement of purchase and sale was amended by an oral agreement between the principals of the applicant and 246 Inc. This new agreement provided that the second instalment would be used by 246 Inc. to purchase the mortgage from Swisscan so it could hold the mortgage as security to ensure that the applicant meets the other terms and conditions of the agreement of purchase and sale.

[8] To this end, 246 Inc. asked for an assignment of the Swisscan mortgage to the second respondent, 2153823 Ontario Inc. (215 Inc.), prior to the time of the payment of the second instalment. The directors and officers of the 246 Inc. and 215 Inc. are the same persons: Samuel Wu and Sherry Ng. While the mortgage was transferred from Swisscan to 215 Inc, the parties disagree as to why and when this transfer took place.

[9] The applicant claims that the respondents are refusing to discharge the mortgage so as to use it as leverage in order to force a sale of the applicant’s interest in Phase 2 of the condominium project.

[10] The respondents take the position that the applicant has failed to meet other terms of the agreement of purchase and sale, and that under the terms of the oral agreement between the parties, the respondents do not have to discharge the mortgage until the applicant has met all of the conditions precedent in that agreement.

[11] For the reasons given below, I conclude that the application must be dismissed. Since the transfer of charge from Swisscan to 215 Inc. predated the payment of the second instalment, the mortgage that was transferred to 215 Inc. was not a mortgage with a nil balance. That is the only legal issue that I can decide on this application. The other legal issues raised in this notice of application (most notably whether the refusal to discharge the mortgage is a violation of the terms of the June 4, 2015 agreement of purchase and sale and whether that agreement was amended or replaced by a later oral agreement) do not fall within the terms of Rule 14.05(3) (e) and (f) and cannot be resolved on an application. They may, however, proceed by way of Statement of Claim, and this decision is without prejudice to the applicant bringing a claim in relation to those issues.

Facts

[12] The applicant was the registered owner of lands and premises comprising the Four Seasons condominium project (the condominium project). The applicant granted a mortgage in favour of Swisscan, which, on December 9, 2011, was registered against title to the condominium project lands to secure the principal sum of $4 million lent by Swisscan to the applicant.

[13] On June 4, 2015, the applicant sold its beneficial interest in the lands comprising Phase 3 of the condominium project to the respondent 246 Inc. The second respondent, 215 Inc., was not a party to this agreement.

[14] 246 Inc. agreed to pay the purchase price of $12 million to the applicant under the terms of the agreement of purchase and sale. Part of the purchase price was directed by the applicant to be paid to Swisscan (represented by the law firm Mitchell, Robinson & Phelan) in order to discharge the mortgage debt. The parties agreed that the amount owing under the Swisscan mortgage at the time of closing was $2,400,000. Article 3 of the agreement expressly provided that the balance owed under the Swisscan mortgage was to be paid in two instalments by 246 Inc. as follows:

a. $1,100,000.00 to Miller Thomson LLP by wire transfer in trust on account of Swisscan Asset Management Inc. (“Swisscan”); b. Within 90 days after Closing, $1,300,000.00 directed to Mitchell, Robinson & Phelan, in trust, (the “Swisscan 2 Funds”)

[15] The Swisscan mortgage is also referenced in Article 8.1 of the agreement which provides:

Notwithstanding anything herein to the contrary, including delivery of same on Closing, the Swisscan Discharge shall not be registered until Notice is received by the Purchaser and the Purchaser’s Solicitor from Mitchell, Robinson & Phelan that it is in receipt of the Swisscan 2 Funds in negotiable form, in accordance with the terms of the undertaking to which the Swisscan Discharge will be held, which undertaking shall be substantially in the form of the letter from Mitchell Robinson and Phelan to the Vendor’s Solicitors and the Purchaser’s Solicitors dated May 22, 2015, but reflecting the total payment of $2,400,000 rather than $2,600,000. The provisions of this Section shall survive and not merge on Closing.

[16] The applicant’s position is that it was the understanding of all parties involved in the transaction that the Swisscan mortgage was to be discharged once Swisscan received the outstanding amounts owed to it under the mortgage. I accept this evidence as consistent with the terms of the agreement of purchase and sale dated, June 4, 2015.

[17] While there is nothing in that agreement to suggest otherwise, events did not unfold as contemplated by the terms of the agreement.

[18] On June 26, 2015 the transaction closed. In accordance with the agreement the first instalment was paid to Swisscan from the closing proceeds on June 30, 2015.

[19] The second instalment (or “Swisscan 2 Funds”) was paid to Swisscan on October 23, 2015. The payment was made by certified cheque dated October 21, 2015, in the amount of $1,300,000.00. It is significant that the cheque was held in escrow until October 23, 2015 (the same date as the transfer of charge to 215 Inc.). As of October 23, 2015, no further monies are due and owing to Swisscan.

Mortgage Transfer to 215 Inc.

[20] That is not, however, the end of the enquiry. For the purposes of this application much turns on the sequence of events. On October 23, 2015, immediately prior to the payment of the second instalment, the mortgage was transferred from Swisscan to 215 Inc. The reasons for this transfer are contested by the parties.

[21] The applicant claims not to know why the transfer was requested or agreed to. The affidavit of Hassan Tehranchi, an officer in the applicant corporation, explains the transfer as follows:

For reasons not clear to me at the time, on or around mid-to-late October 2015, my lawyers at MT [Miller Thomson] advised me that 246 requested that the Swisscan Mortgage be transferred to 215 (the “Assignee”) wherein the latter would subsequently discharge the transfer of charge once Swisscan received the Second Instalment (the “Arrangement”)

[22] This is an odd arrangement. Why would 246 Inc. want to transfer the mortgage from Swisscan to 215 Inc. prior to the payment of the second instalment to Swisscan? Why should 215 Inc., which has no contractual relationship with the applicant, discharge the transfer of charge? Why did the applicant’s lawyer not explain to him the reason for this transfer?

[23] The respondents do have an explanation: The payment of the $1.3 million (the second instalment) to Swisscan was not intended to discharge the mortgage, but to purchase the mortgage as security.

[24] The respondents’ position is that the applicant was and continues to be in breach of its obligations under the agreement of purchase and sale including payment of debts owed to the Canada Revenue Agency. If the applicants do not fulfil these obligations the respondents will be on the hook for these payments if they want to sell the condominium units. The respondents understood that the applicant’s fulfilment and performance of those conditions was a condition precedent to the respondent’s fulfilment of its obligation to discharge the mortgage.

[25] The respondents rely on an affidavit sworn by Samuel Wu, the director of both respondent corporations. He claims that he entered into an oral agreement with Hossein Safari, who is one of the principals of the applicant corporation, as follows:

We agreed that funds would have to be advanced to SwissCan so that they would not enforce their mortgage, and to ensure that the development of the 4 Seasons Project could continue unhindered. However, I specifically told Hossein Safari that 246 could not make any payment, unless there was an assignment of the SwissCan Mortgage to one of my companies. Hossein Safari assured me that as a security for the 1.3 million paid by 246, 217 [the applicant] would assign the SwissCan Mortgage to one of my companies, in order to secure the performance of the Vendors’ obligations under the Conditions Precedents of the APS [agreement of purchase and sale].

[26] In other words, the respondents claim that subsequent to signing of the agreement of purchase and sale in June 2015, the parties made an oral agreement in October 2015 that the Swisscan mortgage would be transferred to 215 Inc. as security for the applicant’s performance of the conditions precedent set out in Article 5 of the Agreement.

[27] The respondents rely on an email from their previous lawyer (David Slan) to the applicant’s lawyer dated October 23, 2015. This email confirms that Swisscan will accept $1.3 million dollars and that the payment of $1.3 million to Swisscan should be held in escrow by the applicant’s lawyer until the transfer of charge to 215 Inc. was registered. The email states: “If for any reason the Transfer of Charge is not registered today, October 23, 2015, you will return the cheque to us on Monday October 26, 2015”.

[28] It is clear from Mr. Slan’s email that the release of the cheque to Swisscan was conditional on the transfer of the mortgage to 215 Inc., and that the transfer was to be registered before the cheque was released to Swisscan. While this cryptic email confirms that the transfer of the mortgage to 215 Inc. was part of some arrangement or deal, it is silent with regard to the terms of such deal or the intentions of any of the parties in this regard. Nonetheless, it does raise the question as to why counsel for all parties would go to such lengths to transfer a mortgage if the balance of the transferred mortgage was nil. Most importantly, this letter makes no reference to the discharge of the mortgage. It raises the question of why the respondent insisted that the mortgage be transferred prior to the payment of funds to Swisscan. And it raises the question of why the applicant agreed to this transfer if it was not in the agreement of purchase and sale. There is something going on here.

[29] In a reply affidavit Mr. Tehranchi states that he is advised by Mr. Safari that Mr. Safari had no such conversation with Mr. Wu regarding the transfer of the Swisscan Mortgage to 215 Inc. as security for the performance of the applicant’s obligations under the agreement of purchase and sale.

[30] Mr. Safari did not file his own affidavit, and the respondent objects to Mr. Tehranchi’s evidence on the ground that it is hearsay with respect to facts that are contentious and therefore precluded by Rule 39.01(5) which provides:

An affidavit for use on an application may contain statements of the deponent’s information and belief with respect to facts that are not contentious, if the source of the information and the fact of the belief are specified in the affidavit.

[31] This is a valid point – if the applicant elects to proceed by way of application it must comply with the rules of evidence for applications. The existence of this oral agreement is the major point of contention in this application.

[32] The applicant also takes the position that if there had been any such discussion the applicant corporation never consented to any oral amendment of the agreement of purchase and sale, and finally, there is no contemporaneous correspondence or documentation to support the alleged oral agreement.

[33] In this regard Mr. Tehranchi relies on Article 9.7 of the Agreement of Purchase and Sale that provides:

No supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the parties hereto in the same manner as the execution of this Agreement.

Procedure

[34] This proceeding is brought by way of notice of application under Rule 14.05 of the Rules of Civil Procedure. The applicant takes the position that the relief claimed falls within Rules 14.05 (3) (e) and (f). These subsections provide that a proceeding may be brought by application where the relief claimed is:

(e) the declaration of an interest in or charge on land, including the nature and extent of the interest or charge or the boundaries of the land, or the settling of the priority of interests or charges; (f) the approval of an arrangement or compromise or the approval of a purchase, sale, mortgage, lease or variation of trust;

[35] The applicant also relies on s. 12(8) of the Mortgages Act, which provides:

[W]here…it appears that all money due upon the mortgage has been paid and for any reason a discharge or reconveyance cannot be obtained without undue delay and expense the court may make an order discharging the mortgage.

[36] The respondents object to proceeding by way of application, arguing that a trial is necessary to resolve the factual disputes between the parties. The respondents ask that the application be converted into an action.

[37] The existence of factual disputes is not necessarily a bar to deciding the legal issues expressly referenced in paras. (a) to (h) of Rule 14.05 by way of application (McKay Estate v. Love (1991), 6 O.R. (3d) 511, at para. 6). Often factual disputes can be readily resolved by reference to correspondence, documents or transcripts of cross-examinations on affidavits. [1]

[38] The applicant takes the position that the legal issues raised in this case can be resolved without resolving the factual disputes raised by the respondents, and, in the alternative, any factual disputes can be resolved by reference to the record filed by the parties.

Analysis

[39] The applicant’s primary position is that as a matter of law a mortgage must be discharged if the underlying debt secured by the mortgage has been paid. It relies on the following passage from 802158 Ontario Ltd. V. Ontario [2001] O.J. No. 4088 (S.C.J.) (at para. 15 and 16):

The law is clear that on payment of all money secured by a mortgage, a mortgagor is entitled to have the property restored to him free from the mortgagee’s security, and for that purpose the mortgagee must execute any discharge or reconveyance that may be appropriate. A release of the debt releases and discharges all security for the debt.

[40] The applicant argues that once full payment of the Swisscan mortgage was made, the applicant was entitled to a discharge of that mortgage. Even if the respondent 215 Inc. purchased the mortgage, it purchased a mortgage on which the underlying debt was already paid in full. As an assignee, 215 Inc. took the mortgage subject to the accounts between the mortgagor and the mortgagee. An assignee can only claim the amount that is found to be due and owing under the mortgage at the time of the assignment since the mortgagee cannot assign more than the amount due to it.

[41] In order to succeed on this argument the applicant must prove that the Transfer of Charge post-dated the full payment of the Swisscan mortgage, so that what was transferred was a mortgage with a nil balance. There is no dispute that the second instalment ($1.3 million) was paid to Swisscan on October 23, 2015 (even though the cheque was dated October 21, 2015).

[42] The question that must be answered is the date and time on which the transfer of charge was registered. If the transfer of charge was registered after the second instalment was paid, than 215 Inc. was assigned a mortgage with nothing owing and the applicant must succeed. If the transfer of charge was registered before the second instalment was paid on October 23, 2015, then 215 Inc. was assigned a mortgage with $1.3 million owing, and the applicant’s position is problematic.

[43] The applicant’s position is that the transfer of charge occurred on December 3, 2015. It relies on a letter dated February 8, 2016, from Thomas Phelan, who was counsel for Swisscan at the time of the transaction. The letter is addressed to counsel for the applicant, and was appended as an exhibit to Mr. Tehranchi’s reply affidavit.

[44] The respondent objects to the applicant’s reliance on the letter on the ground that it is hearsay with respect to facts that are contentious and therefore prohibited by Rule 39.01(5). Notwithstanding this objection, I will make reference to the letter because it exposes a fundamental flaw in the applicant’s position.

[45] The letter makes two assertions. The first is that the Swisscan mortgage was paid in full in October; the second is that the transfer of charge was not executed and registered until December. If these assertions are correct then at the time of the transfer there was a nil balance owing under the charge. This letter states:

Pursuant to agreement that was entered into at the time by the relevant parties, I was to receive the sum of $1,100,000 in closing and the sum of $1,300,000 subsequently in October in full satisfaction of the balance owing under the Swisscan mortgage. It subsequently transpired that you in fact received the final payment and pursuant to my client’s instructions you were authorized to attend to the registration of the discharge.

It further subsequently transpired that a transfer of charge was executed and delivered in December. My client’s instructions are that at the time that the transfer of charge was executed, delivered, and registered, there was a nil balance owing under said charge.

[46] The difficulty with this letter is that the record before me indicates that the Transfer of Charge from Swisscan to 215 Inc. was executed and registered on October 23, 2015 at 16:37. The December 3, 2015 registration was a Rectified Transfer of Charge. Mr. Phelan’s letter makes no reference to the registration of the transfer of charge on October 23, 2015. Given that discrepancy, I find Mr. Phelan’s letter (assuming that it is admissible) to be unhelpful in resolving the factual and legal issues in this application.

[47] As indicated above at para. 28, it is clear from the October 23, 2015 letter from Mr. Slan to counsel for the applicant that the release of the cheque to Swisscan was conditional on the transfer of the mortgage to 215 Inc., and that the transfer was to be registered before the cheque was released to Swisscan. Since there is no suggestion in the record that it did not happen in this sequence the applicant’s legal position is not supported by the facts of the case.

[48] The applicant’s affidavit makes some reference to the two dates: the original Transfer of Charge (October 23, 2015) and the Rectified Transfer of Charge (December 3, 2015). It states:

a. The Original Transfer of Charge was registered as against some, but not all, of the PINs underlying the five-phase Condominium Project; b. The Rectified Transfer of Charge was registered against only those PINs belonging to 217 [the applicant] under the Condominium Project, none of which were owned in any capacity by 246

[49] Regrettably I have no submissions from the applicant regarding the legal significance of the rectification. Is it the applicant’s position that the rectified transfer of charge date became the actual date of transfer of charge by some legal process? What is the legal significance of the fact that the original transfer of charge was registered as against some, but not all, of the PINs? Is there any overlap between the two charges or does the later charge relate to an entirely different subset of PINs?

[50] Given my rejection of the December 3, 2015 date as the date of transfer, these are all legal issues on which a court would need to hear submissions to go further with this case. Given the rejection of the December 3, 2015 date, the remaining issues raised in this application are not straightforward issues relating to “the declaration of an interest in or charge on land” or “the approval of a purchase, sale, mortgage” as contemplated by Rule 14.05(3) (e) and (f). The balance of the case now involves the interpretation of an agreement of purchase and sale and a disputed oral agreement.

[51] I want to make clear that my decision in this regard is restricted to the applicant’s position that the mortgage must be discharged because the underlying debt was already paid in full when the mortgage was transferred to 215 Inc. That is the only issue that I have considered under Rule 14.05(3) (e) and (f).

[52] Accordingly, the application for a declaration that the transfer of the Swisscan mortgage to 215 Inc. is void and unenforceable and for an order discharging the Swisscan mortgage and transfer of charge to 215 Inc. is dismissed, without prejudice to the applicant proceeding by way of statement of claim on any other issues raised or relief sought.

Certificate of Pending Litigation

[53] In the alternative, the applicant seeks an order for a Certificate of Pending Litigation (CPL) against the Phase 3 lands in the condominium project pursuant to s. 103 of the Courts of Justice Act, R.S.O. 1990, c. C.43. A certificate of pending litigation may issue where an interest in land is in question. In order to obtain a certificate of pending litigation the motions judge must determine that a triable issue has been raised as to whether the party registering the certificate of pending litigation has a reasonable claim to an interest in land: G.P.I. Greenfield Pioneer Inc. v. Moore (2002), 58 O.R. (3d) 87 (C.A.).

[54] The applicant argues that the effect of not discharging the Swisscan mortgage is that the purchase price under the June 4, 2015 agreement of purchase and sale has not been paid in full and title to the Phase 3 lands is arguably in dispute.

[55] The difficulty that I have with this position is that the title to Phase 3 of the condominium project is not in dispute in the notice of application. The notice of application relates only to the discharge of the mortgage/transfer of charge, not to the title to the Phase 3 lands. It may be that title to Phase 3 is put in dispute in any statement of claim commenced by the applicant following this decision, and the applicants may well be entitled to a CPL after such claim has been commenced.

[56] At this stage, however, the motion for a CPL is dismissed.

Conclusion

[57] For all of these reasons the application is dismissed without prejudice to the applicant proceeding by way of statement of claim to raise any issues not expressly dealt with in this decision. The only issue decided on this application is that the transfer of charge from Swisscan to 215 Inc. predated the payment of the second instalment to Swisscan, and therefore the mortgage that was transferred to 215 Inc. was not a mortgage with a nil balance.

[58] If the parties cannot agree on costs the respondent may file written submissions within 20 days of the date of this decision. Such submissions are limited to 3 pages not including costs outlines and any offers to settle. The applicant may file reply submissions 10 days thereafter on the same terms.

Justice R.E. Charney Released: April 14, 2016

[1] This issue may be somewhat academic given the broader powers of the court to resolve actions on the basis of a motion for summary judgment under Rule 20 of the Rules of Civil Procedure (see Hryniak v. Mauldin, 2014 SCC 7). A motion for summary judgment proceeding by way of affidavit evidence and cross-examination on affidavits is very similar to a proceeding by way of Application under Rule 14.05(3).