Jade-Kennedy Development Corporation (Re), 2016 ONSC 7125

CITATION: Jade-Kennedy Development Corporation (Re), 2016 ONSC 7125

COURT FILE NO.: CV-15-10882-00CL

DATE: 2016-12-06

SUPERIOR COURT OF JUSTICE - ONTARIO

IN THE MATTER OF THE CONSTRUCTION LIEN ACT, R.S.O. 1990, c. C.30, AS AMENDED

AND IN THE MATTER OF AN APPLICATION MADE BY JADE-KENNEDY DEVELOPMENT CORPORATION FOR THE APPOINTMENT OF A TRUSTEE UNDER SECTON 68(1) OF THE CONSTRUCTION LIEN ACT, R.S.O. 1990, c. C.30, AS AMENDED

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: Sam Rappos, for Collins Borrow Toronto Limited, Trustee Asim Iqbal and Deborah Palter, for the Laurentian Bank of Canada, Mortgagee R.B. Moldaver, Q.C., for Am-Stat Corporation, Mortgagee C. Mills, for Marshall Zehr Group Inc., Mortgagee Kevin Sherkin and Jeremy Sacks, for Dircam, Procan and Great Pyramid, Lien Claimants Christian Piersanti, for Guest Tile Inc., Lien Claimant Adam Grossi, for Imperial Kitchens, Frendal Kitchens, Sereen Painting, 2050491 Ontario, Global Precast, Lien Claimants

HEARD: October 7 and 11, 2016

ENDORSEMENT

[1] The purpose of this proceeding is to determine the relative priorities of the lien claimants and mortgagees asserting interests in the lands of Jade-Kennedy Development Corporation (the "Borrower").

Background

[2] The Borrower was incorporated for the purpose of owning and developing a condominium project referred to as the "South Unionville Square Project" (the "Project").

[3] The Project was comprised of two completed phases and a further development on lands to the south of the Project which was not completed.

[4] Phase I of the Project consisted of residential townhomes and a commercial condominium. Phase II was built on adjacent, but separate, lands and consisted of a residential condominium and a commercial condominium (the "Phase II Commercial Project"). As mentioned, a further development was planned for certain lands located across the road to the south of the lands upon which Phase I and Phase II were constructed (the "Vacant Lands").

[5] Collins Barrow Toronto Limited (the "Trustee") was appointed trustee pursuant to section 68(1) of the Construction Lien Act, R.S.O. 1990, c. C.30 (the "CLA") pursuant to an order of Pattillo J. dated February 11, 2015.

[6] The Trustee obtained an order of the Court dated June 30, 2016 (the "Procedure Order") establishing a summary procedure for the determination of the priority, if any, of the claims of eighteen construction lien claimants (herein, collectively, the "Lien Claimants"). The procedure was intended to determine the Lien Claimants' priority relative to the claims of the Laurentian Mortgage and the Am-Stat Mortgage (in each case, as defined below) regarding amounts received by the Trustee on the sale of the remaining interests of the Borrower in the Project in excess of the ten percent (10%) holdback deficiency under the CLA.

[7] In paragraphs 2 and 3, the Procedure Order provided, among other things, for the following actions by parties claiming an interest in the Project:

2. …

(a) on or before July 11, 2016, the [Laurentian] Bank shall serve an affidavit (the "Bank Affidavit") from a representative of the Bank (the "Bank Representative") addressing, among others, whether the Bank advanced any funds to [the Borrower] after the Bank had received a written notice of lien;

(b) any Lien Claimant claiming entitlement to the [proceeds of the sale of the lands and premises owned by Borrower] by asserting priority over the Bank's mortgage and/or the Am-Stat mortgage (a "Disputing Lien Claimant") for an amount in excess of the basic ten per cent (10%) holdback (the "Basic Holdback") shall, on or before August 3, 2016 (the "Bar Date"), serve a responding affidavit describing with sufficient particularity and supporting documentation, the factual and legal basis upon which the lien claimant asserts such priority over the Bank's mortgage and/or AmStat's mortgage (the "Responding Affidavit"); …

3. THIS COURT ORDERS that if a Lien Claimant does not deliver a Responding Affidavit on or before the Bar Date, it shall be forever barred from asserting a claim against the Property in priority to the Bank's mortgage and Am-'Stat's mortgage in these proceedings or any other proceedings for an amount in excess of the Basic Holdback in respect of such Lien Claimant's construction lien.

[8] The Procedure Order further provided that, absent a consensual resolution, the priority dispute would be determined by a judge presiding over the Commercial List after cross-examinations on any affidavits filed in this proceeding, including an affidavit sworn June 13, 2016 by Philip Meretksy on behalf of Am-Stat (the "Meretksy Affidavit"). As there was no consensual resolution, the matter was heard by the Court on October 7, 2016.

Preliminary Matters

[9] At the outset, the Court addressed three preliminary matters.

[10] First, certain parties took the position in their facta that a Lien Claimant who failed to file an affidavit in the proceeding would be denied its claim even if such claim was validly registered and perfected, and notwithstanding the provisions of section 80 of the CLA. The Court advised the parties that this was not the intention of the Court and that the Court was proposing to amend the Procedure Order to clarify the Court's intention before any further steps occurred in this proceeding. Specifically, the Court did not intend to require a Lien Claimant to file an affidavit unless it asserted a priority over other Lien Claimants with whom it would otherwise be in the same class for the purposes of section 80 of the CLA. On this basis, a Lien Claimant who did not assert such a claim was nevertheless at liberty to participate in the proceedings contemplated by the Procedure Order, including attending cross-examinations and filing a factum, to the extent it wished to do so.

[11] The Court further indicated that it was only prepared to proceed to a determination of the issues in this proceeding if it was satisfied that none of the parties would be relying on the absence of an affidavit from any Lien Claimant to assert a priority over such Lien Claimant for that reason alone. All parties present at the hearing indicated that they would not do so to the extent they had done so in their respective facta or would otherwise have done so. On this basis, the Court indicated that it was prepared to determine the issues in this proceeding as contemplated by the Procedure Order.

[12] Second, counsel for Am-Stat Corporation ("Am-Stat") raised the issue of whether all parties to this proceeding were prepared to determine the issues on the summary procedure contemplated by the Procedure Order. In particular, Am-Stat referred to the procedure's reliance solely on the record before the Court without a trial of the issues involved and any further evidence by viva voce testimony or otherwise. All parties at the hearing, including Am-Stat, confirmed that they were prepared to proceed on that basis. In addition, none of the parties served with the Procedure Order but not present at the hearing had raised any objection to the Procedure Order. On this basis, the Court concluded that it had jurisdiction to determine the issues before it.

[13] Lastly, counsel for Guest Tile Inc. ("Guest") raised an issue regarding the admissibility of an affidavit of Shaun Parekh sworn September 30, 2016 and filed by Marshall Zehr Group Inc. ("MarshallZehr"). The Procedure Order did not contemplate an affidavit of MarshallZehr. Accordingly, the Court concluded that it did not fall outside the timeline for filing an affidavit contemplated by the Procedure Order. In addition, the affidavit addressed matters clearly relevant to the Collateral Mortgage (as defined below), which was originally granted by the Borrower in favour of Laurentian Bank but has since been assigned to MarshallZehr (as described below). The parties also require a determination of the priority of the Collateral Mortgage before any distribution can be made to the Lien Claimants. The Court advised the parties that it was therefore prepared to accept the affidavit as evidence in the record for this motion.

[14] As the affidavit was only filed on September 30, 2016, however, the Court also stated that the other parties were entitled to cross-examine on the affidavit, and, if any party chose to do so, the Court would adjourn this hearing until after such cross-examination was completed. The Court canvassed the extent to which any party had such intention. The parties advised that none of them, including Guest, sought an adjournment of the hearing for the purpose of cross-examination on the affidavit.

Laurentian Mortgage

[15] The Borrower granted a first mortgage in the principal amount of $45 million in favour of the Laurentian Bank of Canada ("Laurentian") which was registered on title to the Phase II Lands and the Vacant Lands on December 23, 2011 (the "Laurentian Mortgage"). The Laurentian Mortgage secured advances under a construction loan (the "Construction Loan"), a letters of credit facility (the "Letters of Credit Facility"), and an operating line of credit (collectively, the "Credit Facilities").

[16] The Credit Facilities were established pursuant to a commitment letter of the Laurentian Bank, the Equitable Trust Company and Pacific & Western Bank of Canada dated August 4, 2011 as amended by an amending agreement dated March 8, 2012 (collectively, the "Commitment Letter"). I note that the Commitment Letter contemplates that Jade-Kennedy Development Corporation is the Borrower under the Credit Facilities, but the letter identifies the "Beneficial Owner" as "Mady-Jade Corporation and Jolie-Jade Corporation ("Jolie-Jade") carrying on business as the Jade-Kennedy Co-Tenancy".

[17] It is not disputed that all advances under the Construction Loan were made prior to the registration and perfection of any construction liens and in the absence of any written notice of a lien to Laurentian Bank.

[18] At the present time, all amounts owing under the Credit Facilities have been paid in full and the outstanding letters of credit issued under the Letters of Credit Facility have been replaced by letters of credit of another bank by order of Conway J. dated March 22, 2016 (the "Conway Order"). The only remaining amounts owed by the Borrower in respect of the Laurentian Mortgage are approximately $50,000 of professional fees.

The Am-Stat Mortgage

[19] Am-Stat is the holder of a second mortgage registered on September 4, 2013 in the principal amount of $10 million granted by the Borrower on the Phase II Commercial Project and the Vacant Lands (the "Am-Stat Mortgage"). The Am-Stat Mortgage secured an advance on September 5, 2013 in the principal amount of $10 million (the "Am-Stat Advance") pursuant to a commitment letter dated August 6, 2013 (the "Am-Stat Commitment Letter").

[20] In the Meretksy Affidavit, Am-Stat produced an incomplete extract of the Am-Stat Commitment Letter, a funding direction in respect of the Am-Stat Advance, a pay-out statement dated January 12, 2015, and an extract from a mortgage apparently given by Milliken Development Corporation ("Milliken") in respect of the Am-Stat Advance (the "Milliken Mortgage").

[21] From this incomplete documentation, it is possible to conclude that the Am-Stat Advance was made jointly to the Borrower and Milliken, who were jointly and severally liable for repayment. It is also possible to establish that the Am-Stat Advance was secured by mortgages granted by each of the Borrower and Milliken on properties owned by them, being the Am-Stat Mortgage and the Milliken Mortgage, respectively, which secured their respective joint and several obligations in respect of the Advance. The Am-Stat Commitment Letter expresses the purpose of the loan facility provided thereunder to be "to provide the Borrower with financing to repay equity and to complete buy-out of joint venture co-owner". For this purpose, it appears that the "Borrower" means Jade-Kennedy Development Corporation and Milliken Development Corporation, jointly. The Am-Stat Commitment Letter expressly states that this is not a construction loan and that funds will not be used for payment of construction accounts.

[22] The funding direction for the Am-Stat Advance indicates that the proceeds were to be used as follows:

(1) to Jolie-Jade, the amount of $5,457,399.20 by way of repayment of a debt obligation evidenced by a promissory note which was apparently secured by mortgages of each of the Borrower and Milliken on properties owned by them. The promissory note is not in evidence;

(2) to Jade-Jolie's solicitors, legal fees in the amount of $1,650;

(3) to Am-Stat, a finder's fee of $200,000 plus HST;

(4) to Am-Stat's solicitors, legal fees in the amount of $33,000 plus disbursements and HST; and

(5) to D. Mady Investments Inc., the balance.

[23] It is not disputed that the Am-Stat Advance was made prior to the registration or perfection of any construction liens and in the absence of any written notice of any lien to Am-Stat.

Collateral Mortgage

[24] In addition to the Credit Facilities described above, the Borrowers granted a charge on the Phase I Lands in the principal amount of $3.6 million in favour of Laurentian Bank which was registered on October 1, 2014 (the "Collateral Mortgage"). The Collateral Mortgage secured a guarantee of the Borrower to Laurentian of credit facilities made available by Laurentian to 144 Park Ltd. ("144 Park"). 144 Park also granted a mortgage on all of its lands to Laurentian to secure the loan which was approximately $39 million.

[25] It is understood that 144 Park is, or was, the owner of a property located in Waterloo, Ontario on which a residential condominium has been constructed. Collins Barrow Toronto Limited has also been appointed as a trustee under the CLA with respect to the lands owned by 144 Park for the purpose, among other things, of resolving issues pertaining to lien claimants in respect of such lands.

[26] Pursuant to an assignment agreement dated January 23, 2015, MarshallZehr acquired the entire loan position of Laurentian in respect of 144 Park, including the security granted to the Bank. Accordingly, MarshallZehr is currently the holder of the Collateral Mortgage.

[27] MarshallZehr has provided a certificate of advance dated October 27, 2014 provided by Charles Mady to Laurentian. In it, Mr. Mady purports to certify, as an officer or director of 144 Park, the amount and date of each advance under the credit facilities established by Laurentian Bank in favour of 144 Park Ltd. The first advance was made on May 25, 2012. Of relevance for the present proceeding, the advances include an advance of $3.6 million on October 8, 2014, shortly after registration of the Collateral Mortgage, as well as a further advance dated October 24, 2014.

[28] It is not disputed that the advances to 144 Park Ltd. in October 24, 2014 were made prior to the registration and perfection of any construction liens on the lands subject to the Collateral Mortgage and in the absence of any written notice of any lien to Laurentian.

The Common Legal Issues

[29] The Lien Claimants make two submissions that raise common legal issues in respect of each of the Laurentian Mortgage, the Am-Stat Mortgage and the Collateral Mortgage (collectively, the "Mortgages").

[30] In each case, the Mortgages are "subsequent mortgages" for the purposes of section 78 of the CLA. As such, the applicable provisions of section 78 of the CLA for present purposes are sections 78(1) and 78(6), which read as follows:

78. (1) Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner's interest in the premises. …

(6) Subject to subsections (2) and (5), a conveyance, mortgage or other agreement affecting the owner's interest in the premises that is registered after the time when the first lien arose in respect to the improvement, has priority over the liens arising from the improvement to the extent of any advance made in respect of that conveyance, mortgage or other agreement, unless,

(a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or

(b) prior to the time when the advance was made, the person making the advance had received written notice of a lien.

[31] The Lien Claimants assert that, in each case, (1) the mortgagees failed to conduct appropriate due diligence; and (2) the monies secured by the Mortgages do not constitute an "advance made in respect of that mortgage". I will address each issue in turn.

The Alleged Due Diligence Obligation

[32] As mentioned, there is no dispute that there were no registered or perfected liens against the lands secured by the Mortgages at the time that the advances at issue were made thereunder.

[33] However, Guest argues that, notwithstanding the language of section 78(6) of the CLA, the mortgagees, to protect their priority, had an obligation to do more than sub-search title to the premises prior to making an advance. Guest argues that the mortgagees were aware of the fact that construction was underway on the Project at the time of such advances and therefore the mortgagees had an obligation to make inquiries to determine if any work was unpaid at that time.

[34] There is no basis for such an obligation in the provisions of section 78(6). It provides for the very situation presented in this case – the registration of a mortgage after construction has commenced on a property. In such circumstances, there is a high likelihood of knowledge of any construction on the property on the part of the mortgagee. Section 78(6) provides for priority of a mortgage provided the conditions in paragraphs 78(6)(a) and (b) are satisfied. There is no basis for implying a further condition, particularly a condition which would render paragraphs (a) and (b) redundant.

[35] Accordingly, this submission is dismissed.

Advances Made in Respect of the Mortgages

[36] The Lien Claimants also submit that the monies secured under the Mortgages do not, in each case, constitute an "advance also made in respect of that mortgage" for the purposes of section 78(6). Their submissions on this point raise an issue of law which is common to their claims in respect of each of the Mortgages and issues of fact which are specific to each Mortgage. I propose to discuss the common legal issue in this section and then to address the application of the relevant legal principles to the factual circumstances pertaining to each Mortgage separately below.

[37] There is little case law on the principles that determine whether monies advanced or otherwise paid in respect of a mortgage constitute an "advance made in respect of that mortgage". The parties have referred to two particular decisions that are of some relevance.

[38] In Penniac Construction & Management Ltd. v. 1291126 Ontario Ltd., 2008 NBQB 159, 332 N.B.R. (2d) 201, the court addressed the extent to which professional fees and other costs in respect of a mortgage, including fees incurred in enforcement proceedings, were entitled to priority under the Mechanics Lien Act of New Brunswick. Section 9(2) of that statute provided for priority in favour of a mortgage in respect of "a payment or advance made on account of the…mortgage…before the filing of a claim of lien or before notice in writing of the lien…"

[39] The trial judge in Penniac reached his decision by applying the principle in M. Sullivan & Son Ltd. v. Rideau Carleton Raceway Holdings Ltd., 1970 CanLII 21 (SCC), [1971] S.C.R. 2, which he considered, at para. 65, was also applicable to "properly recoverable costs owed under the mortgage". The relevant portion of the judgment of the Supreme Court, at paras. 5-6, relied upon by the trial judge reads as follows:

This legislation has been in force for a long time. Until the issue was raised in these proceedings, there was no case which drew any distinction between the rights of the mortgagee to priority for principal and his rights to priority for interest.

Both the trial judge and the Court of Appeal, in this case have rejected any such distinction and I agree with them. Principal and interest are equally secured under the mortgage. The right to interest is an essential, inseparable, constituent part of the advance made on account of the mortgage. Without such a right no building loans would ever be made in a commercial way. The registration of a claim for lien or notice in writing of such a claim cannot stop the running of interest or affect the mortgagee's priority for continuing interest on advances validly made under s. 13(1) of The Mechanics' Lien Act.

[40] I note that the decision in M. Sullivan Son Ltd. addressed section 13(1) of the Mechanics' Lien Act, R.S.O. 1960, c. 233 in which, for present purposes, the operative language was "all payments or advances made on account of any mortgage…"

[41] The second relevant decision is XDG Ltd. v. 1099606 Ontario Ltd. (2002), 2002 CanLII 22043 (ON SC), 41 C.B.R. (4th) 294 (Ont. S.C.) aff'd (2004), 2004 CanLII 15997 (ON SCDC), 1 C.B.R. (5th) 159 (Ont. Div. Ct.). In XDG, the court addressed the operation of section 78(6) of the CLA in respect of a collateral mortgage given to secure the obligations of a guarantor pursuant to a guarantee of a loan given to a borrower. The loan was secured by a mortgage on the assets of the borrower. The collateral mortgage was secured on assets of the guarantor and was given after advances had been made under the loan.

[42] In finding that the lien claimants on the property secured by the collateral mortgage had priority over the collateral mortgage, the trial judge stated the following at paras. 94-96:

As previously stated, the mortgage was provided as collateral security with respect to the prior indebtedness of Euro United. No advance was made to 109 nor did 109 benefit in any manner whatsoever. The statutory provisions refer to amounts advanced, not amounts secured: See 561861 Ontario Ltd. v. 1085043 Ontario Inc. (1998), Kirsh's C.L.C.F. 78.50 (Gen. Div.)

In Marsil Mechanical v. A Reissing-Reissing Enterprise Ltd. (1996), Kirsh's C.L.C.F. 78.40 (Gen. Div.), Klowak J. said:

In considering the definition of 'advance' it seems to me that, for purposes of the Construction Lien Act…it must mean when the owner, or the owner's delegate, acquires actual control of the money.

Accordingly, I find there was no advance under the mortgage from 109 to GECC and, therefore, the lien claimants have priority pursuant to section 78 of the Construction Lien Act.

[43] The trial decision in XDG Ltd. was affirmed by the Divisional Court which, at para. 29, also relied on a distinction between advances made under the credit agreement and advances made under the mortgage:

The CLA is to be interpreted liberally in favour of lien claimants. The overarching principle of the CLA is that lien claimants have priority over other interests. It is necessary for a mortgagee to persuade the court that it falls within one of the exceptions to the general priority of lien claimants. (XDG's Factum, para. 58)

GECC failed to demonstrate that its Mortgage should take precedence over the lien claimants. The Mortgage was registered after the first lien arose. As such, GECC's priority was limited to the extent of any advance made in respect of the Mortgage. GECC did not advance any amount in respect of the Mortgage. Any advances made were made to Euro, not to "109", and they were made in respect of the Credit Agreement, not in respect of the Mortgage. (XDG's Factum, paras. 59-61; David Schaeffer Engineering Ltd. v. D.T.A. Investments Inc. (1998), 37 C.L.R. (2d) 26). The courts have held that where a mortgage was registered to secure a pre-existing debt for the purposes of the CLA, no monies were advanced. (561861 Ontario Ltd. v.1085043 Ontario Inc. (1998), Kirsh's C.L.C.F. 78.50 at 78.166-167 and 169). [italics added]

[44] The Lien Claimants in the present action assert that XDG Ltd. stands for the proposition that the language in section 78(6) – "advance made in respect of that mortgage" – requires demonstration not only that monies advanced have been advanced to the mortgagor, but also that they have been applied toward the improvement of the lands under construction. I do not accept this interpretation of section 78(6) for the following reasons.

[45] The language of section 78(6) does not provide any support for such an interpretation of the statute. Section 78(6) provides for a priority in favour of a mortgage "to the extent of any advance made in respect of that … mortgage". XDG Ltd. did not go any further. The decision is based on the requirement in section 78(6) that monies be "advanced" in respect of the mortgage, rather than merely secured. It was not necessary to go further to address whether or not the monies advanced under the mortgage benefitted the guarantor and I do not read the decision as doing so. Insofar as the trial judge and the Divisional Court considered that the language under section 78(6) requires demonstration of a benefit, they limited that requirement to demonstration that the borrower received the proceeds of the advance. Neither the trial court judge nor the Divisional Court required the mortgagee to demonstrate that the proceeds of the advance were actually applied to improve the lands under construction against which the lien claimants asserted their claims.

[46] There is no other case law cited to the Court that would support such an interpretation of the requirement in section 78(6). Insofar as the Lien Claimants rely on language of the trial judge in Marsil Mechanical v A. Reissing-Reissing Enterprise Ltd. (1996), 26 C.L.R. (2d) 148 (Ont. C.J. (Gen. Div.)), I do not think their position is supportable. Marsil addresses a very different issue – being the timing for the purposes of the commencement of the accrual of interest under a mortgage. Marsil did not address, or imply, a requirement that an advance benefit the mortgagor's property. On its own language, Marsil merely addressed when a mortgagor is to be regarded as having received monies advanced under a mortgage.

[47] I note that, by implication, any issues pertaining to the circumstances in which a mortgagor uses the proceeds of an advance for purposes unrelated to the lands upon which construction is proceeding are left to be dealt with under fraudulent conveyance and similar legislation, to the extent applicable.

Analysis of the Applicable Legal Principles

[48] As mentioned, the issues in the present case involve the interpretation of the phrase "any advance made in respect of that…mortgage" and, in particular, the meanings of the word "advance" and the phrase "in respect of". From the cases cited above, although they are based on somewhat different language, three principles are clear.

[49] First, M. Sullivan & Son and XDG Ltd. demonstrate that the concept of an "advance" is not limited to the principal amount advanced under a mortgage. It includes all amounts which the mortgagor is contractually obligated to pay in respect of any such principal amount advanced, including interest and the costs of registration, perfection and enforcement of the mortgagee's security for the advance irrespective of when incurred. As the Supreme Court noted, without such a right, building loans and other commercial loans would not be made in a commercial manner.

[50] Second, it is also clear that the phrase "in respect of" is intended to be broader than "under" insofar as "under" refers to advances made directly by a mortgagee to a mortgagor pursuant to a mortgage loan.

[51] This conclusion is based not only on the common usage of such phrase but also on the context in which construction and other loans are extended by institutional and other lenders. Such loans are not limited to traditional mortgage loans. More commonly, such loans are extended pursuant to a loan agreement which provides for security granted in separate documentation against the borrower's property to secure all monies advanced or otherwise payable under the loan agreement.

[52] Third, XDG Ltd. establishes that a collateral mortgage given to secure a guarantee of an underlying loan to another party does not give rise to "an advance made in respect of that mortgage" at least to the extent that no further advance is made after delivery of the collateral mortgage. I would note, however, that this result follows from the absence of any advance, rather than from an interpretation of the meaning of the phrase "in respect of".

[53] The issue raised by the Am-Stat Mortgage and the Collateral Mortgage is whether the phrase "in respect of" provides a priority to a collateral mortgagee in circumstances where an advance is made pursuant to the underlying loan, rather than the collateral mortgage, after delivery of the collateral mortgage. Is such a loan made "in respect of" the collateral mortgage?

[54] This is a question of statutory interpretation. In this regard, I accept the principles referred to in XDG Ltd. at paras. 82 and 83 as follows:

In Boehmers v. 794561 Ontario Inc. (1993), 1993 CanLII 8486 (ON SC), 14 O.R. (3d) 781 (Gen. Div.), affirmed (1995), 1995 CanLII 660 (ON CA), 21 O.R. 771 (O.C.A.), Killeen J. said:

Section 78(1) is the overarching principle of the regime of the Act for the determination of priorities. It is, if you will, the central interpretative principle for the adjudication of conflicts of this type before the court in this case. Surely, it necessarily implies that, in cases of conflicts, as here, the burden must be on the mortgagee to persuade the court that it somehow falls clearly within a specified exception to the generalized priority of the liens.

The comment by Rosenberg J. in 697470 Ontario Ltd. v. Presidential Developments Ltd. (1989), 1989 CanLII 4336 (ON SC), 69 O.R. (2d) 334 (Div. Ct.) is also of assistance where, at p. 337, he said:

"Accordingly, while the Act may merit a liberal interpretation with respect to the rights it confers upon those to whom it applies it must be given a strict interpretation in determining whether it does in fact apply: Clarkson Co. Ltd. v. Ace Lumber Ltd. (1963), 1963 CanLII 4 (SCC), 36 D.L.R. (2d) 554 (S.C.C.)" Essentially, the issue is whether an advance under a loan between a lender and a borrower can also be an advance in respect of a collateral mortgage given by a mortgagor to the lender to secure the mortgagor's guarantee of, or other covenant in respect of, repayment of the loan.

[55] Absent special circumstances, I am not persuaded that an advance under a mortgage loan, or a secured loan facility, constitutes an "advance made in respect of" a collateral mortgage given to secure a guarantee by a third party of a borrower's obligations under the mortgage loan or the secured loan facility. I reach this conclusion for three reasons.

[56] First, an advance is made under a particular secured loan facility or mortgage loan. When repayment of that advance is guaranteed by a third party who has provided a collateral mortgage to secure the third party's guarantee, the amount of the advance would also be secured under the collateral mortgage indirectly via the guarantee. However, I do not think that an advance to a borrower under a mortgage loan, or in favour of borrower under a secured loan facility, can also be said to be "an advance in respect of" the guarantee or any collateral mortgage that secures the guarantee. Rather, the advance is made to the borrower in each case, not the guarantor, even if the advance also increases the amount owing under the guarantee.

[57] I note that, in the italicized sentences noted above in the decision of the Divisional Court in XDG Ltd., I believe that the Divisional Court reached the same conclusion as the basis for its decision. I would suggest that, in fact, the foregoing analysis provides a more appropriate basis for the decision in XDG Ltd. than the timing of advances, which was the basis of the trial court judge in that case.

[58] Second, as the circumstances pertaining to the Collateral Mortgage demonstrate, there is an inherent problem in respect of a collateral mortgage granted after an initial advance under an underlying loan. Insofar as the collateral mortgage purports to secure the initial advance as well as any subsequent advances, the principle in XDG Ltd. would suggest that the collateral mortgage does not secure the initial advance. It is therefore necessary to argue, as MarshallZehr does (discussed below), that the collateral mortgage secures only advances made after delivery of the collateral mortgage.

[59] It is not feasible, however, to separate advances in this manner. Advances are essentially fungible. To approach the amount secured under a collateral mortgage in such manner, it would be necessary to establish a principle to determine, in respect of payments made on the underlying loan, how amounts are to be applied under the loan agreement in order to determine whether or not there are any advances outstanding at the time of enforcement proceedings that represent advances made after the grant of the collateral mortgage. I am not persuaded that such an approach is practical given the number of problematic scenarios that could arise depending upon the principle selected for such determination.

[60] Third, more significantly, this treatment of advances is inconsistent with the concept of the guarantor's obligations under the guarantee which are secured by the collateral mortgage. Such obligations are expressed in terms of a guarantee of the borrower's obligations in respect of the loan, not in terms of the borrower's obligations in respect of particular advances. Accordingly, a typical guarantee does not distinguish between obligations in respect of advances made before or after the delivery of any collateral mortgage given to secure the guarantor's obligations. Unless specific provision is made in the guarantee, all advances give rise to obligations under the guarantee that are thereby secured under the collateral mortgage, regardless of the timing of such advances, subject only in certain cases to a maximum liability.

[61] Based on the foregoing, I conclude that an advance made under a loan agreement between a lender and a borrower is not "an advance in respect of" a collateral mortgage given to secure the obligations of a guarantor under a guarantee of the borrower's obligation under the loan agreement.

Application of the Foregoing Legal Principles

[62] I turn then to the application of the foregoing legal principles to the particular circumstances of each Mortgage.

Laurentian Mortgage

[63] Based on the principle articulated in Penniac, I conclude that the professional fees at issue with respect to the Laurentian Mortgage are entitled to the benefit of the priority in section 78(6) to the extent they are contractual obligations under the terms of the Credit Facilities.

[64] Paragraph 37 of the Commitment Letter obligated the Borrower to pay certain costs, fees and expenses related to the Credit Facilities. Such costs, fees and expenses included "all fees and costs incurred in connection with the realization of the Lender's security".

[65] Laurentian Bank says the professional fees at issue in this proceeding related to the protection of its security under the Laurentian Mortgage in respect of any contingent claims in respect of the Letters of Credit Facility prior to the replacement of the outstanding letter of credit pursuant to the Conway Order. Such fees are consistent with the intention that all legal fees incurred by the Bank in respect of realization proceedings would be secured under the Laurentian Mortgage. As such, I think the principle in Penniac would be applicable, notwithstanding the timing of the incurring of such fees in relation to the registration of the construction liens.

[66] Accordingly, I conclude that the Laurentian Mortgage has priority over the Lien Claimants to the extent of such professional fees, subject to the advice of the Trustee that the fees claimed are limited to legal advice provided in respect of the Letters of Credit Facility in connection with this proceeding.

The Collateral Mortgage

[67] I have reached the conclusion above that, absent special circumstances, an advance under a mortgage loan, or a secured loan facility, does not constitute an "advance made in respect of" a collateral mortgage given to secure a guarantee by a third party of a borrower's obligations under a loan made to the borrower. MarshallZehr argues, however, that there are special circumstances that require a different result in the case of the Collateral Mortgage.

[68] It argues that Laurentian Bank would not have made the $3.6 million advance on May 8, 2014 but for the provision of the Collateral Mortgage in the same principal amount. It says that, in these circumstances, the Court should find that the $3.6 million advance to 144 Park on May 8, 2014 was an "advance made in respect of" the Collateral Mortgage. I do not accept this submission for two reasons.

[69] First, the special circumstances asserted by MarshallZehr are that the $3.6 million advance to 144 Park would not have been made but for the provision of the guarantee of the Borrower and the provision of the Collateral Mortgage in respect of such guarantee. That is not sufficient to establish that the $3.6 million advance was made under the Collateral Mortgage. It remains the case that the advance was made to 144 Park under the loan agreement between Laurentian Bank and 144 Park. Nor does it affect the analysis set out above that the Collateral Mortgage secures the Borrower's guarantee and, only indirectly, secures the amount of the advance. As mentioned, this conclusion is supported by the italicized sentences in the decision of the Divisional Court in XDG Ltd. set out above.

[70] Second, as a related matter and as contemplated in the discussion above, it is not possible, nor was it intended, to segregate the $3.6 million advance to 144 Park from all other advances made to that party. On its own terms, the Collateral Mortgage secured the obligation of the Borrower, as guarantor, to pay all amounts owing pursuant to its guarantee to an aggregate liability of $3.6 million. It does not purport to secure only the amount owing pursuant to the particular advance of $3.6 million.

[71] Based on the foregoing, I conclude that the Lien Claimants have priority over the Collateral Mortgage to the extent they have registered and perfected liens over the Lands subject to the Collateral Mortgage.

The Am-Stat Mortgage

[72] The Am-Stat Mortgage gives rise to a more complicated issue in regard to the operation of section 78(6) based on the structure of the underlying loan.

[73] As mentioned above, Am-Stat has chosen not to provide a complete copy of the Am-Stat Commitment Letter or the mortgage documentation pertaining to the loan arrangements contemplated therein. This is relevant insofar as Am-Stat bears the onus of proving that it falls within a specified exemption to the generalized priority of liens under the CLA.

[74] As mentioned, insofar as it is possible to infer the structure of the loan, it appears that there were two borrowers, the Borrower and Milliken, who were jointly and severally liable for repayment of the Am-Stat Advance and that each mortgaged or charged its lands to Am-Stat to secure its obligations and the obligations of its co-borrower under the loan arrangements. Further, while the evidence before the Court indicates the ultimate recipients of the loan proceeds of the Am-Stat Advance, it does not indicate the actual recipient or recipients of such monies as between the Borrower and Milliken.

[75] The structure of this loan and the related security arrangements raise the question of whether the $10 million advance made under the Am-Stat Commitment Letter to the Borrower and Milliken jointly was an advance made "in respect of" the Am-Stat Mortgage.

[76] As mentioned, under the loan arrangements established by the Am-Stat Commitment Letter, each of the Borrower and Milliken charged its property to secure its own obligations and the obligations of its co-borrower. With one qualification, such an arrangement is functionally equivalent to each of the Borrower and Milliken granting a charge to secure loan advances made to it and granting a collateral charge to secure loan advances made to its co-borrower. The qualification is that, under the Am-Stat Commitment Letter, each borrower is jointly and severally liable in respect of the entirety of the Am-Stat Advance regardless of which party actually paid the loan proceeds to the third parties described above. Accordingly, each borrower is liable as a primary obligor in respect of the full amount of the Am-Stat Advance, rather than as a guarantor, with the result that defences available to a guarantor are not available to the co-borrowers.

[77] There are two possible approaches to treatment of the Am-Stat Advance given these security arrangements.

[78] The first approach would distinguish between proceeds of the Am-Stat Advance paid to the Borrower and proceeds paid to Milliken and would treat the Am-Stat Mortgage as a collateral mortgage to the extent it purports to secure the portion of the Am-Stat Advance received by Milliken. I have considerable sympathy for this position insofar as the Lien Claimants could reasonably expect that the priority in favour of mortgagees in section 78(6) should pertain to advances that were at least received by a borrower if not actually applied by the borrower to improve the lands subject to lien claims. However, for this approach to apply, it must be possible to segregate the proceeds of the Am-Stat Advance as between the Borrower and Milliken both as a legal matter and as a practical matter.

[79] In this case, however, the Am-Stat Advance was made jointly to both borrowers. As described above, in the documentation pertaining to these loan arrangements, both the Borrower and Milliken are treated as having each received the full amount of the Am-Stat Advance and as having jointly directed payment to the third party recipients described above. This approach is also reflected in the provisions of each of the Am-Stat Mortgage and the Milliken Mortgage that provide that these charges secure "one and the same Indebtedness" and that payments made under either of these charges shall constitute payments under both of the charges. It is therefore not possible, as a legal or a practical matter, to distinguish between proceeds of the Am-Stat Advance paid to the Borrower and proceeds paid to Milliken.

[80] Given these circumstances, the requirement under section 78(6) of the CLA that funds be advanced to the Borrower in respect of the Am-Stat Advance is satisfied to the extent of the full amount of such Advance. Insofar as the loan proceeds were paid to the third party recipients in satisfaction of joint obligations of the Borrower and Milliken, there can be no issue that the monies were advanced to the Borrower prior to their payment to the third parties. To the extent that any monies were jointly directed to be paid to third parties solely on behalf of Milliken, the Borrower is treated as having received the monies and then having released its interest in the monies in favour of Milliken prior to the payment of such monies by Milliken to the third party.

[81] Based on the foregoing, I conclude that Am-Stat has established, on a balance of probabilities, that all of the monies advanced under the Am-Stat Commitment Letter, being the Am-Stat Advance, represented an advance made in respect of the Am-Stat Mortgage for the purposes of section 78(6) of the CLA. On this basis, I also conclude that the Am-Stat Mortgage has priority over the Lien Claimants to the extent of the monies secured under the Am-Stat Mortgage.

Wilton-Siegel J.

Date: December 6, 2016