Court File and Parties

COURT FILE NO.: CV-15-535665 DATE: 20160803 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: CLAUDIO POSOCCO Applicant – and – FELICE BATTISTA, DOMENIC BATTISTA, CASIMIRO HOLDINGS INC. and JUSTAM HOLDINGS LIMITED Respondents

COUNSEL: R. Birken, for the Applicant A. Habas and C. Reed, for the Respondents

HEARD: June 29, 2016

S.A.Q. Akhtar J.

Introduction

[1] On 8 October 2015, this court heard Claudio Posocco’s application for a declaration that his guarantee to the Battistas in support of a mortgage had been discharged based on Battista’s postponement of that mortgage without his consent. On 19 October 2015, I dismissed that application: see Posocco v. Battista et al, 2015 ONSC 6398 (“the postponement decision”). Posocco appealed to the Court of Appeal for Ontario who dismissed the appeal relating to the postponement decision but ordered a new hearing on the basis of fresh evidence filed by Posocco.

[2] Posocco argues that the fresh evidence, a foreclosure judgment, results in the discharge of his guarantee and applies for a declaration that the said guarantee is void and unenforceable. He also asks for a declaration setting aside the judgment of Master Hawkins dated 21 February 2014 ordering payment of $794,471.41 pursuant to the guarantee. Finally he asks that all Writs of Seizure and Sale filed pursuant to the order be set aside.

[3] For the reasons set out below, the application is dismissed.

Background and Fresh Evidence

[4] Posocco is the principal of Sedona Lifestyles (Dixie) Inc, a corporation that guaranteed a $700,000 vendor take-back mortgage granted to the respondents, Felice and Domenic Battista (“the Guarantee”).

[5] By May 2015, Battista had postponed its first mortgage to two junior mortgages. The result was that the new first and second mortgages became those held by Casmiro Holdings Inc. In April 2014, the beneficial ownership of part of the Battista Mortgage, along with the security held in relation to that debt, was transferred to Justam Holdings Inc. who became holders of the third mortgage.

[6] There is a factual dispute between the parties: they disagree on whether Casmiro Holdings also owned Justam Holdings. If that were the case, Casmiro Holdings would possess all three mortgages. Mr. Reed, counsel for both Casmiro Holdings and Justam Holdings, denies joint ownership, insisting that the only link between Casmiro and Justam is that both employ the same signing officer, Jose Casmiro. For the purposes of this application, I am prepared to assume, without deciding, that Casmiro Holdings did hold all three mortgages.

[7] On 18 June 2015, Casmiro Holdings issued a Statement of Claim for foreclosure under the first two mortgages. Posocco was not named as a party in the action. The foreclosure judgment was not registered until 15 December 2015 and its impact on the postponement decision was not raised in argument in the 8 October 2015 hearing.

[8] At the Court of Appeal for Ontario, however, Possoco argued that Casmiro Holding’s foreclosure of its first mortgage also extinguished the Guarantee with respect to the third mortgage (transferred to Casmiro Holding from Battista). Posocco’s argument is based upon the rule that a foreclosure judgment prevents re-conveyance of the mortgaged property upon payment of the debt.

[9] The parties agree on the legal principle that a first mortgagee who obtains a judgment for foreclosure and disposes of the secured property is prevented from pursuing a covenant claim for payment. The rule operates in this fashion because the property cannot be re-conveyed to the guarantor. Casmiro Holdings, as first mortgagee was therefore barred from recovery on the mortgage covenant. The question for this court is: what happens when the party who obtained the foreclosure is, in addition, a junior mortgagee?

Was the Guarantee Extinguished by Foreclosure?

[10] Foreclosure on a secured property does not bar recovery under the mortgage covenant if the property is still available for reconveyance upon payment of the debt. Moreover, foreclosure by a first mortgagee does not prevent a junior mortgagee from suing on the mortgage covenant even if the mortgaged property can no longer be re-conveyed.

[11] Posocco, however, takes the position that since Casmiro Holdings held all three mortgages, its actions in obtaining foreclosure under the first two mortgages led to the loss of right of recovery on the third mortgage.

[12] Possoco relies on the case of Rushton v. Industrial Development Bank, 1973 SCC 12, [1973] S.C.R. 552, where a married couple, Paul and Norma Rushton, obtained a loan of $40,000.00 and joined in one mortgage of their land their lending bank (IDB). The case had a unique circumstance because even though there was a single mortgage, the land was divided into parcels owned separately by the Rushtons. Paul’s property consisted of 18 lots which were subject to a first mortgage in favour of a separate mortgagee: the Lymbird Lumber Company. Norma’s share of the land, however, was subject to a first mortgage in favour of a different private lender, Mabel Esson. IDB was in the position of a second mortgagee on the entire property subordinate to both the Lymbyrd and Esson mortgages. Lymbird subsequently fell into default and in the ensuing financial chaos IDB became the position of first mortgagee in arrears on Paul’s property. IDB moved for and obtained a foreclosure judgment on Paul’s property after which it sold 11 of Paul’s 18 lots. IDB then sought to recover the mortgage debt on Norma’s property. The Supreme Court of Canada held that IDB was unable to sue on the covenant because it had sold part of Paul’s property and was therefore unable to convey all of the property to the guarantor or borrower upon payment of the outstanding IDB mortgage debt.

[13] At paragraph 27, the court explained its reasoning by stating:

[14] There has been recognition of the mortgagee’s right to proceed on the covenant despite previous foreclosure where he is unable to return the mortgaged security without fault of his own, as, for example, where it is a leasehold and the leasehold term has expired or where the freehold owner has properly retaken possession: [citation omitted]. Self-induced incapacity to return the mortgaged security, which is the case here, is another matter. [emphasis added]

[15] Although the application of Rushton to the facts of this case seems superficially attractive, there is an important distinction. In Rushton, the IDB mortgage was a single mortgage encompassing two parcels of land. It makes sense, therefore, that IDB was precluded from pursuing the covenant. As mortgagee of the entire plot of land its actions in foreclosing, taking title and disposing of several of the lots prevented the entire parcel of land from being re-conveyed. In the case at bar, the position is very different: Casmiro Holdings is the holder of three distinct mortgages. Even if it were true that Casmiro Holdings owned the first, second and third mortgages, those mortgages would be entitled to be treated separately because they were created that way. The same was not true in Rushton where the mortgage was an individual entity created under the aegis of a single instrument.

[16] The more pertinent precedent is Isman v. Sinnott, 1920 SCC 318, [1920] 61 S.C.R. 1, where the holder of a first and third mortgage foreclosed on the first mortgage and disposed of the land. He then claimed a discharge of the third mortgage. The Supreme Court of Canada decided that notwithstanding the foreclosure of the first mortgage and the sale of the foreclosed property, the respondent could still recover under the appellant's covenant for payment contained in the third mortgage and the appellant was not entitled to the discharge of the collateral mortgage until the payment of the third mortgage.

[17] Anglin J., writing for the majority explained its reasoning, at page 8:

As Mr. Locke pointed out in his admirable argument after the foreclosure of the first mortgage all that the mortgagor could claim on payment of the amount of the third mortgage would have been a release of his covenant in that mortgage. By the foreclosure brought about by the mortgagor's own default any equitable interest of the respondent as third mortgagee as well as the mortgagor's own interest in the land had been foreclosed. There was nothing left to a reconveyance of which the mortgagor would be entitled on payment of the amount of the third mortgage. But that foreclosure did not extinguish the mortgagor's liability on his covenant in the third mortgage any more than it did his liability on his covenant in the first mortgage. It was the subsequent sale that prevented the mortgagee from reconveying the mortgaged property to the mortgagor on payment of the amount due on the first mortgage and thus precluded recovery on the covenant in that mortgage. If it did not actually extinguish the debt, that was practically the result. But it was not the sale that prevented the mortgagor from obtaining anything which, but for it, he might have required the mortgagee to transfer to him on payment of the third mortgage. Any right he had to a reconveyance had already been effectually barred by the foreclosure of the first mortgage.

The theory on which an action by the mortgagee on the covenant is restrained after foreclosure and sale under the mortgage in which the covenant is contained proceeds is therefore not applicable. That theory I had occasion to consider fully in the recent case of Sayre v. The Securities Trust Co. [citation omitted]. The distinction between the effect of foreclosure of the first mortgage followed by sale on the mortgagor's liability on his covenant in that mortgage and its effect on his liability on the covenant in the third mortgage is no doubt subtle yet I think it is substantial. The mortgagor's position under the third mortgage was of course affected by the foreclosure. But it was not the foreclosure which had the practical effect of extinguishing his liability on the covenant under the first mortgage. It was the subsequent sale; and that, as already pointed out, had no effect whatever on the mortgagor's rights or position under the third mortgage.

On the third mortgage covenant, however, the mortgagee is still entitled to recover the sum actually due and owing in respect of the debt by it secured and on payment of that amount the plaintiff will be entitled to a discharge of the Kamsack Hotel property from the collateral second mortgage upon it.

[18] The Supreme Court of Canada recognised that separate mortgages, even if held by one party, were to be treated distinctly. Foreclosure of the first mortgage did not affect the rights held under the third mortgage notwithstanding that foreclosure had been obtained by the same party.

[19] Accordingly, even if Casmiro Holdings was the third mortgagee, the court’s decision in Isman permits it to pursue the Guarantee.

[20] For the above reasons, I reject Posocco’s arguments on this ground.

The Contractual Clause

[21] Even if I were to decide that Rushton did apply to the case at bar, this would not assist Posocco as the wording of the Guarantee indicates that in the event of foreclosure by a prior mortgagee, Posocco intended to remain liable as a principal debtor.

[22] Paragraphs 2(iii) and (iv) of the Guarantee read as follows:

(iii) The Creditor, in its absolute discretion and without diminishing the liability of the Guarantor, may grant time or other indulgences to the Borrower or any other person or persons liable to the Creditor in respect of the principal sum and interest and may give up, modify, vary, exchange, renew or abstaining from, perfecting or taking advantage of any Promissory Note, or any security in whole or in part, and may discharge any part or parts or accept any composition or arrangement or realize upon the Promissory Note or any security when and in such manner as the Creditor or any officer thereof may think expedient, and in no case shall the Creditor be responsible for any neglect or omission with respect to any such security. Any accounts settled or stated by or between the Creditor and the Borrower or admitted by or on behalf of the Borrower may be adduced by the Creditor and shall in that case be accepted by the Guarantor as conclusive evidence that the balance or amount thereof thereby appearing is due by the Borrower to the Creditor;

(iv) The Guarantor will not at any time claime to be subrogated in any manner to the position of the Creditor and will not claim the benefit of any security at any time held by the Creditor; provided, however that if the Guarantor pays to the Creditor all the money remaining unpaid, then the Guarantor shall be entitled, on demand made by it in writing to the Creditor, to the assignment of such of the security as remains in the Creditor at the time such notice is received by it;

[23] The language of the Guarantee, in my view, clearly indicates that Posocco willingly contracted out of any protection granted to him by the equitable principles contained in the case law.

The Potential for Reconveyance

[24] The third reason that the Possoco’s argument fails is that even if I were to treat the first and the third mortgage as being held by a single legal entity and applied Rushton, a mortgagee could still sue on the covenant if it was able to re-convey the property to the covenantor: Rushton, at paragraph 21; Oakley v. Montreal Trust Company, [2001] O.J. No. 3827 (S.C.J.), at para. 13; L-Jalco Holdings Inc. v. Marino, 2011 ONSC 710, at paras 66-9.

[25] In the circumstances of this case, I understand that Casmiro Holdings has not yet disposed of the property that was foreclosed. It may therefore still be re-conveyed if Casmiro re-opens the foreclosure proceedings, sets aside the judgment and proceeds by power of sale. In other words, there has not yet been a “self-induced incapacity to return the mortgaged security.”

Conclusion and Costs

[26] For the above reasons, Posocco’s application is dismissed.

[27] At the conclusion, of the hearing the issue of costs was agreed upon by the parties.

[28] Accordingly, Possoco shall pay $4000 to each of the respective respondents. Those costs are to be paid forthwith.

S.A.Q. Akhtar J.

Released: 3 August 2016

COURT FILE NO.: CV-15-535665 DATE: 20160803 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: CLAUDIO POSOCCO Applicant – and – FELICE BATTISTA, DOMENIC BATTISTA, CASIMIRO HOLDINGS INC. and JUSTAM HOLDINGS LIMITED Respondents

REASONS FOR JUDGMENT S.A.Q. Akhtar J.