The Toronto-Dominion Bank v. Danko Yousefie, 2016 ONSC 5991

COURT FILE NO.: 3739/12 DATE: 2016-09-22 AMENDED DATE: 2016-11-10 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: THE TORONTO-DOMINION BANK, Plaintiff AND: DANKO YOUSEFIE, Defendant

BEFORE: Trimble J.

COUNSEL: Jeffrey Kukla for the Plaintiff: Toronto Dominion Bank Jame Pedro for the Applicant: SBMB Law Ralph Swaine for the Creditor: 2233586 Ontario Inc. Zoe Thoms for the Creditor: Maxims Holdings Inc. David Dolson for the Creditor: Ronstar Homes No one appearing for the Defendant

HEARD: September 15, 2016

Corrigendum Respecting Endorsement of September 22, 2016

[1] T.D. held a first mortgage on a property owned by Mr. Yousefie and his spouse. It sold the property under power of sale and seeks to pay into Court the surplus of $539,513.78.

[2] The Firm seeks an order that it is subrogated to TD’s interest as first mortgagee as it paid part of Yousefie’s and his spouse’s obligation under TD’s first mortgage, and to the extent of its payment, the Firm is subrogated to TD’s interest and adopts its priority in its first mortgage. Hence, it has priority over TD’s equitable mortgage, and the remaining three mortgages.

[3] If the Firm is subrogated to the TD’s first mortgage, there will be little to pay TD on account of its equitable mortgage and nothing to satisfy the other three mortgages. If the Firm is not subrogated to TD’s first mortgage, there will be little left to satisfy the Firm’s interests.

The Issue

[4] Is the Firm entitled to stand in the shoes of TD’s first mortgage, ahead of the other mortgagees, based on the principle of equitable subrogation?

Background [1]

[5] Yousefie and his spouse gave a mortgage to TD of $569,900 to finance purchase of 30 Addison Street, Richmond Hill. As well, TD provided as borrowed bridge financing of $234.000 until Yousefie and his wife sold their existing property. One of the terms was that the bridge loan would become a charge against the Addison property. Yousefie retained a lawyer to represent him on the sale of his property. TD advanced the bridge financing and the mortgage loan. TD retained the same lawyer to act for it on the bridge loan. Yousefie’s purchase of the new property closed, but sale of his existing home did not. The bridge financing was not repaid. Yousefie re-listed his existing property. It later sold. Yousefie said that he had received only $15,000 in net proceeds from the sale of his existing property.

[6] The mortgage on the Addison property was registered on May 4, 2010. The bridge financing for the sale of Yousefie’s existing property, which was an equitable mortgage on the Addison property next in priority to TD’s first mortgage, was registered on May 15, 2015. In 2011, the following mortgages were added in the following order: Ronstar for $50,000, Maxims Holdings Inc. for $40,000 and 2233 Ont. Inc.’s for $25,000.

[7] Yousefie and his spouse defaulted on the TD first mortgage. TD began power of sale proceedings. The property was sold on August 11, 2015 for $750,000. TD’s first mortgage was satisfied following the sale.

[8] To complicate matters, the Addison property was damaged, substantially, by fire in September, 2011. Yousefie and his spouse retained Mr. Bohm of the Firm to act on his behalf in their claim with the property insurer, Unifund. The claim was settled and on September 14, 2012, the insurer paid to the Firm $473,506.16 for the property damage claim. The insurer paid the funds to the Firm on the instruction that they be paid to Yousefie, his spouse and TD, as co-payees. This was required by the insurance contract since there was a standard mortgage payee endorsement on the policy.

[9] On September 14, 2012, the solicitor drew a trust cheque for the insurance proceeds payable to Yousefie, his spouse and TD.

[10] On March 19, 2013, Mr. Yousefie advised Mr. Bohm that he was having difficulty with the insurer, and that the trust cheque had become stale-dated. He requested a replacement cheque, and requested that TD be removed as payee. Mr. Bohm advised Mr. Yousefie that he could not delete TD as a co-payee as that would violate his instructions from TD. The cheque was re-issued with TD as a co-payee.

[11] On May 30, 2013, Mr. Yousefie told Mr. Bohm’s assistant (Mr. Bohm was not in the office) that Mr. Yousefie’s name had been misspelled. There was no discussion about removing TD as co-payee. The cheque was reissued in the names of Mr. Yousefie (spelling corrected) and his spouse. TD was not listed as a co-payee. One of Mr. Bohm’s partners signed the trust cheque.

[12] Not surprisingly, Mr. Yousefie and his spouse cashed the cheque. The money disappeared.

[13] TD brought an Application for an order that the Firm pay to TD the insurance proceeds. Mme. Justice Carpenter-Gunn ordered the firm to pay the insurance proceeds to TD, and Mr. Yousefie to repay the insurance proceeds to the Firm. The Firm paid TD the insurance proceeds.

[14] Mr. Yousefie has not repaid the Firm, nor has he responded to a Notice of Examination in aid of Execution. Mr. Justice Arrell found him in contempt. Since the judgment of Mme. Justice Carpenter-Gunn was against Mr. Yousefie, alone, the Firm obtained Judgment against his spouse in separate proceedings.

[15] The Firm has received nothing from Mr. Youesefie or his spouse. It insists that it is subrogated to TD’s first mortgage, stands in its shoes, and assumes its priority to TD’s equitable mortgage and the other 3 mortgagees.

Decision

[16] The Firm is not subrogated to the rights and interests of TD’s first mortgage. The Firm is an unsecured creditor. TD’s equitable mortgage and the other three mortgagees are to be paid in order of their priority and according to their mortgage documents. The Firm shares in any undistributed proceeds thereafter along with any other unsecured creditors.

The Positions of the Parties

[17] The Firm says that by making the payment to TD as ordered by Mme. Justice Carpenter-Gunn, it has paid part of Yousefie’s debt to TD, and, to the extent of that payment, is equitably subrogated to TD’s interest. As the subrogatee of TD’s first mortgage interest, it stands in TD’s shoes. In standing in TD’s shoes, the Firm also has the benefit of TD’s first mortgage priority in the surplus funds.

[18] The Firm relies, heavily on the decision of Toronto Dominion Bank v. Ndem, 2012 ONSC 2885. In particular, the Firm relies on para. 19 of that decision in which Pollack, J. says:

The parties agree that the following statement from Mutual Trust Co. v. Creditview Estate Homes Ltd. (1997), 34 O.R. (3d) 583 (C.A.) is applicable:

The fundamental principle underlying the equitable doctrine of subrogation is one of fairness in light of all the circumstances. Within this principle is an understanding that no injustice is done by the appropriate subrogation of a party to the rights of original mortgagees.

[19] The Mortgagees advances several arguments:

a. The Firm is the entity that caused the loss. Having done so, it is not equitable that it should be given TD’s priority. b. The Firm has not met the requirements of equitable subrogation. c. The Firm is not entitled to be subrogated to TD’s interest until it has fully satisfied the debtor’s obligation to TD. The Firm only paid part of the debtor’s obligation to TD. d. If the Firm has met the requirements of equitable subrogation, giving it TD’s priority will prejudice the Mortgagees.

Analysis

The Doctrine of Equitable Subrogation

[20] The doctrine of equitable subrogation, generally, is a discretionary equitable remedy invoked when a person discharges the obligation of another, but having done so, has no right of action against the debtor to enforce the debt the person has paid. It is a principle of fairness, invoked where it is prejudicial not to do so, and in doing so there is no prejudice to others.

[21] The principle of equitable subrogation began with two cases. The first is Brooks Wharf & Bull Wharf, Ltd. v. Goodman Brothers, [1936] 3 All E.R. 696, a case of bailment. Lord Wright put the principle succinctly when he said:

Where the plaintiff has been compelled by law to pay, or, being compellable by law, has paid money which the defendant was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liability; under such circumstances the defendant is held indebted to the plaintiff in the amount. [2]

[22] In real estate transactions, the principle arose from Crosbie-Hill v. Sayer, [1908] 1 Ch. 866, in which Parker, J. said at p. 877:

… where a third party, at the request of a mortgagor pays off a first mortgage with a view to becoming himself a first mortgage of the property, he becomes, in default of evidence of intention to the contrary, entitled in equity to stand, as against the property, in the shoes of the first mortgagee.

[23] The seminal case in Ontario considering equitable subrogation in a real estate transaction is Midland Mortgage Corp. v. 784401 Ontario Ltd. et al., [1997] O.J. No. 3257 (C.A.), 34 O.R (3d) 594. In that case, Midland advanced a mortgage but required a postponement agreement from two existing mortgagees which was given. Midland later advanced further funds, on condition of another postponement agreement. This agreement was not done. When Midland discovered that it did not have priority, it moved for a declaration.

[24] The Court of Appeal applied the Crosbie-Hill principle, expanding it to apply not only to third parties, but to a first mortgagee who renews, replaces, refinances, amends or increases his mortgage. In a decision released concurrently, the Court of Appeal applied the principle to properties in land titles: see Mutual Trust Co. v. Creditview Estate Homes Ltd., (1997), 34 O.R. (3d) 583 (C.A.).

[25] From Midland, citing the passage from Crosbie Hill, equitable subrogation requires that the claimant satisfy five criteria:

a. At the request of the first mortgagor, b. The claimant pays off the first mortgage, c. With a view to becoming himself a first mortgagor of the property, d. Absent any contrary intention, e. He stands in the shoes of the first mortgagor.

[26] The second Midland criterion deserves further discussion. It says that the third party, in making its payment, “pays off” the existing first mortgage. This is in keeping with the law of subrogation, generally, which arises in the insurance context. At common law, absent specific wording in a policy of insurance, before the doctrine of subrogation arises, the insurer must fully indemnify the insured, thereby discharging the obligation of the tortfeasor. Until the insured is completely indemnified, the insurer is not subrogated to the insured’s interest. [3] The same principle applies to equitable subrogation in the context of a real estate transaction. [4]

[27] Equitable subrogation, like any other principle of equity is a discretionary remedy. It is not mandatory. A party seeking it must have clean hands. Therefore, where a lender caused the loss through its own negligence, equitable subrogation will not be granted. Where the loss arose because of the conduct or negligence of the lender’s solicitors, the lender’s hands are not unclean. [5]

[28] Finally, equitable subrogation is a remedy imposed in equity to prevent unjust enrichment. It is not a right of action. Where the party seeking equitable subrogation has an alternate remedy, such as a claim in contract or in tort against the wrongdoer, equitable subrogation will not be granted. [6]

Application to This Case

[29] In this case the Firm is not subrogated to TD’s position as first mortgagee, for several reasons. First, the Midland criteria are not satisfied:

a. TD did not ask the Firm to pay the first mortgage out. The Firm was directed by the mortgagor’s property insurer and the mortgagor to pay the insurance proceeds to TD and the insureds. This was a matter of contract between the mortgagee and mortgagor, and, pursuant to a mortgage payment endorsement under the insurance policy, the property insurer. b. The payment was made by the property insurer, not the Firm. The Firm was merely the conduit for the funds, between the insurer on the one hand and the insured and TD on the other. c. The payment was an indemnity payment by the property insurer to those with an interest in the property. TD’s interest arose through the mortgage payment clause under the property policy, required by the mortgage agreement. d. The Firm made the payment only when ordered, and only then because it improperly made the payment to the mortgagors and without making TD the co-payee, a condition of which the Firm was aware. e. There was never any intention that the insurer or the Firm would become first mortgagees on making the payment. f. Even if the other Midland criteria are met, the Firm’s payment did not fully discharge the mortgagors’ obligation to TD. TD’s interest had been discharged by the sale. Therefore, the Firm’s right of subrogation, if it existed otherwise, did not arise as it did not discharge the Yousefies’ mortgage obligations to TD.

[30] Second, TD was not unjustly enriched by the Firm’s payment. It received only what it was entitled to from Yousefie and his spouse.

[31] Third, the Firm caused the loss by paying the insurance proceeds to Yousefie and his spouse, without making TD a co-payee. The Firm is caught by the application of the clean hands doctrine in Mutual Trust.

[32] Fourth, the Firm has alternate remedies and has exercised them. It obtained judgment against both Yousefie and his spouse, and Yousefie has been found in contempt for failing to appear at an Examination in Aid of Execution. The Firm has not been able to enforce against them.

[33] I have been shown no authority for the proposition that equitable subrogation should be applied where a judgment creditor cannot enforce against a judgment debtor.

[34] The Firm says that this case stands on all fours with the TD v. Ndem case, which involved a solicitor paying out a lender’s funds without registering a mortgage. I disagree.

[35] In Ndem, the wrongdoing lawyer that caused the loss did not seek subrogation; it was TD, the victim. The lawyer acted for the purchaser. TD approved a mortgage to fund the purchase of the home, and paid the funds to the lawyer. The vendor had three mortgages registered on title. Unbeknownst to the purchaser or TD, the lawyer was also acting for the vendor. Unbeknownst to the purchaser or TD, the lawyer paid off the vendor’s first mortgage, leaving two mortgages on title. The transaction did not close. The two mortgagees still on title remained on title. Two years later, the former second mortgagee (now first mortgagee) sold the property under power of sale. The proceeds from the sale were paid into Court pending agreement or adjudication of the priority issue. TD claimed that since its money was used to discharge the vendor’s first mortgage, it became the first mortgagee.

[36] Pollack, J. dealt predominantly with fairness in prejudice. While he said fairness is the guiding principle in exercising the Court’s discretion in allowing equitable subrogation, implicitly, he held that TD met the criteria from Midland. It advanced money with the intention of becoming the first mortgagee, and in advancing the money, the existing first mortgage was discharged. With the essential criteria from Midland having been met, Pollack, J. turned to the fairness/prejudice aspects of the analysis. I will return to the prejudice analysis.

[37] In every other case put before me in which equitable subrogation was applied, the victim of the wrongdoing was allowed to stand in the shoes of the creditor whose loan was paid by the victim’s payment.

Prejudice

[38] The Firm argues that it would be prejudiced if it were not allowed to stand in the shoes of TD as first Mortgagee. It has paid from its own pocket the amount of the insurance proceeds, thereby unjustly enriching TD.

[39] I disagree. The Firm misapplies the concept of prejudice in equitable subrogation. Allowing the Firm to stand in the priority of TD’s first mortgage, in effect says that it should be paid for its loss and the priority of the remaining registered mortgagees should be postponed to the extent of the Firm’s interest.

[40] The mortgagees all agree that after the TD’s registered first mortgage, next in priority is the other three Mortgagees. If the Firm’s payment stands with the priority of TD’s first mortgage, then it is fully indemnified, receiving about 80 per cent of the net proceeds of sale. TD would receive the balance, satisfying only about one third of the amount owing under its equitable mortgage. The remaining Mortgagees would receive nothing. If TD and the Mortgagees are correct, then each of their loans are fully paid, and a small amount may remain (depending on the Mortgagees’ enforcement costs which must be added to the total obligations) for disbursal to the Firm and other unsecured creditors, sharing pari passu.

[41] The Firm suffers no prejudice in bearing the loss it caused. TD is not unjustly enriched. It received nothing more than satisfaction of its first mortgage.

[42] On the other hand, TD and the Mortgagees will suffer great prejudice if the Firm’s payment stands with the priority of TD’s first mortgage. TD, through its equitable mortgage, and the remaining three Mortgagees bargained for and received the priority given by their registration. They are entitled to the remaining net proceeds of sale according to their registered mortgage interests. They did not bargain to have their interest postponed so that the Firm’s payment of the insurance proceeds that it improperly paid, could be funded out of the net proceeds of sale.

Order

[43] The Firm is not subrogated to the priority of TD’s first mortgage. TD and the other three mortgagees are entitled to share in the net proceeds of sale in accordance with their priority and their mortgage documents.

[44] The full amount of each mortgage indebtedness was not provided at the hearing of this motion. I expect that each of their total obligations can be determined as of the date of these reasons, and the appropriate order taken out.

Costs

[45] TD and the other three mortgagees are presumed entitled to their costs. I will entertain written submissions as to who should pay whom costs, and in what amount. Submissions are limited to four double spaced pages, excluding bills of costs, offers and cases. TD’s and the other three mortgagees are due by October 15th, and the Firm’s by October 31st.

Trimble J. Date: September 22, 2016 Amended Date: November 10, 2016

[1] For a complete recitation of most of the facts, see Toronto-Dominion Bank v. Yousefie, 2014 ONSC 2003 (S.C.J.), and Toronto-Dominion Bank v. Yousefie, 2014 ONSC 561 [2] See also Owen V. Tate, [1975] 2 All E.R. 129 (C.A.). It was first adopted in Canada by the Saskatchewan Court of Appeal in Drager v. Allison, and in Ontario in Double Diamond Bowling Supply Ltd. v. Eglinton Bowling Ltd. [3] See Commercial Union Ass. Co v. Surrey (City) (1996), 27 C.L.R. (2d) (B.C.S.C.) aff’d (1997) 32 C.L.R. (2d) 1 (B.C.C.A.), leave to appeal refused (1997) N.T. 151 (S.C.C.); National Fire Ins. Co. v. McLaren, [1886] O.J. No. 98 at para 10, 12 O.R. 682 (ONt. H.C.J.). [4] See Investors Group Trust Co. v. Crispino, 2006 CarswellOnt 2414 (H.C.J.), para. 31 to 33 where the court held that payment of mortgage arrears bringing the mortgage back into good stead did not give rise to equitable subrogation. [5] See Mutual Trust Co. v. Creditview, supra. Para. 42 to 45. [6] See Armatage Motors Ltd. v. Royal Trust Corp., [1997] O.J. No. 3259, 34 O.R. (3d) 599 (C.A.) aff’g (1995) 45 R.P.R. (2d) 204, at para. 12 (C.A.)