CITATION: 1806700 Ontario Inc. v. Dmuchowski, 2017 ONSC 2817

COURT FILE NO.: CV-12-5383SR

DATE: 20170508

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 1806700 Ontario Inc.

AND:

Marian Dmuchowski and Leonila Fajardo

BEFORE: Ricchetti J.

COUNSEL: S. Hussain, Counsel for the original third mortgagee, F. Miain

R. Glass, Counsel for Mr. Johal

J. Chahal, Counsel for the plaintiff

M. Khan, personally represented for the current third mortgagee

HEARD: April 27, 2017

ENDORSEMENT

Contents

ENDORSEMENT. 1

BACKGROUND.. 2

ISSUES TO BE DECIDED.. 5

1. Costs of the Rule 30.10 Motion. 6

2. Costs of this Proceeding/Reference. 6

3. Costs of the April 27, 2017 hearing (the Second Mortgagee) 9

4. Costs of the April 27, 2017 Hearing (Mr. Johal) 10

5. The Validity of the Third Mortgage. 10

BACKGROUND

[1] This action was commenced on December 24, 2012.

[2] The action involves a property which was owned (prior to sale) by the defendants. The plaintiff was the second mortgagee. The defendants were the mortgagors.

[3] The second mortgage had been in default for some time prior to the action being commenced.

[4] The second mortgagee’s claim in this proceeding is for possession and personal judgment on the second mortgage.

[5] On January 21, 2013, Mr. Khan, as solicitor, registered a third mortgage. This was several months after this action had been commenced.

[6] Default Judgment was granted on February 13, 2013.

[7] The second mortgagee wanted to sell the property under a Power of Sale. Any such sale would be subject to the first mortgage on the property.

[8] In order to sell the property, the plaintiff needed possession. Possession was granted by court order in July, 2013.

[9] The property was listed for sale in July 2013. The property was sold the same month.

[10] There is no issue regarding the first mortgage or the amount needed to discharge the first mortgage to permit the sale to close.

[11] The net proceeds were held in trust.

[12] As far as the second mortgagee was concerned, the only outstanding issue was the determination of the amount owing under the second mortgage and the distribution of the net proceeds of sale.

[13] Somehow and despite the sale of the property, Mr. Khan, as solicitor, registered an assignment of the third mortgage to Bibi (Mr. Khan’s spouse). Then there appears to be another assignment to a company of which Mr. Khan is a director. To make a long story short, the third mortgage was eventually assigned to Mr. Khan personally. There is little doubt that the circumstances surrounding the dealings with the third mortgage raise reasonable questions about its validity and quantum but, whether those are questions which need to be decided in this proceeding becomes an issue to be decided by this court.

[14] Subsequent to the sale of the property, the third mortgagee sought to set aside the Default Judgment. On July 16, 2014, a consent order was made by Donohue J. fixing the amount owed to the second mortgagee. The consent order also called for a reference.

[15] Subsequently, the second mortgagee alleged it learned information that the third mortgage was a sham and, on this basis, sought to set aside the consent order by Donohue J. The second mortgagee sought leave to appeal Donohue J.’s order of July 16, 2014 despite the fact it was a consent order and a lengthy period of about two years had elapsed.

[16] The reference was to proceed.

[17] A Rule 30.10 motion was brought by the second mortgagee requiring Mr. Khan to produce records relating to the third mortgage. This motion was opposed by Mr. Khan. It is entirely unclear why the second mortgagee had any interest in the third mortgagee’s validity or quantum owing under the alleged third mortgage. The second mortgagee was entitled to the amounts under its second mortgage. Any remaining proceeds of sale would belong to either the mortgagors or the third mortgagee. It mattered not to the second mortgagee which party received the surplus.

[18] Nevertheless, the Rule 30.10 motion was heard on June 22 and 23, 2016 by Snowie J. On July 20, 2016 Snowie J. ordered production by Mr. Khan of various documents related to the third mortgage and awarded costs on a substantial indemnity basis against Mr. Khan. The quantum of costs was reserved by Snowie J. pending written submissions.

[19] Mr. Khan appealed Snowie J.’s order of July 20, 2016.

[20] On September 26, 2016, the second mortgagee’s motion to set aside Donohue J.’s order of July 16, 2014 was scheduled to be heard. It came before this court. It was apparent to this court that the real issue was a reference to determine the amount owing under the second mortgage. The multiplicity of motions, leave to appeal and appeal were disproportionate to the amounts at issue or the reasonable and just determination of the issues. The reference would determine what amounts, if any, remained after payment of the second mortgage.

[21] On September 26, 2016, all the parties agreed to a consent order which included:

1. setting aside Donohue J.’s order of July 16, 2014;

2. “the motion for leave to appeal J. Donohue’s order is hereby abandoned w/o costs”;

3. “Justice Snowie’s order of July 20, 2016 shall be complied with (para 85) within two weeks of today’s date”;

4. “the motion for leave to appeal J. Snowie’s order is hereby abandoned w/i [without] costs”;

5. “the reference as to the amount outstanding indebtedness on the second mortgage to be heard by me based on the evidence before me.”; and

6. “costs of the proceeding reserved to me after the conclusion of the Reference”

[22] The reference was scheduled and took place on December 5, 2016. All parties were served. The reference took place.

[23] This court found that $512,250.25 was properly due to the second mortgage (which included the payout to the first mortgagee). This left a total surplus of $17,300.29 from the net proceeds of sale of the property. This court’s endorsement on that date went on to:

1. address how costs submissions were to be dealt with; and

2. “if after the costs have been decided, if this court needs to determine the validity of the third mortgage (and it is properly before this court) then either party may schedule an attendance before me.”

[24] Costs submissions were received in January 2017. In his submissions, Mr. Khan sought costs against Mr. Johal (the plaintiff's initial lawyer) personally.

[25] The court declined to deal with costs by way of the written submissions in order to provide Mr. Johal the opportunity to retain counsel and make submissions with respect to Mr. Khan’s claim for costs against him personally.

[26] Before this matter could be rescheduled for a hearing date, an issue arose in a Toronto proceeding involving some of these parties and the third mortgagee. Examinations were taking place in the Toronto proceeding. There was an outstanding motion in the Toronto proceeding scheduled for March 7, 2017. This court was asked to and did adjourn the costs hearing until after the motion in the Toronto proceeding had been decided. Eventually, Matheson J. decided the motion.

[27] At a scheduling conference on March 29, 2017, this court imposed a timetable and scheduled a costs hearing on April 27, 2017.

[28] Several things occurred before the hearing date:

1. Justice Snowie awarded costs of $14,672.58 against Mr. Khan for the Rule 30.10 motion. Justice Snowie’s endorsement was released on April 21, 2017; and

2. Matheson J. awarded costs of $15,000 against Mr. Khan for the motion in the Toronto action.

[29] Mr. Johal retained counsel. Mr. Johal’s counsel brought a motion to intervene on the issue of costs AND the validity of the third mortgage.

[30] Factums were filed.

[31] On April 27, 2017, at the beginning of the motion, Mr. Khan withdrew his opposition to Mr. Johal’s motion to intervene on costs. Mr. Johal's motion to intervene on the validity of the third mortgage remained open.

[32] Mr. Khan also withdrew his claim for costs against Mr. Johal personally in this proceeding.

ISSUES TO BE DECIDED

[33] As a result, the following issues needed to be decided:

1. Costs of the Rule 30.10 motion;

2. Costs of this “proceeding”;

3. Costs of the April 27, 2017 hearing;

4. Costs of Mr. Johal’s counsel's motion; and

5. Whether this court should decide the validity of the third mortgage.

[34] With respect to the costs submissions, all parties were content to rely on their previously filed cost submissions.

[35] Mr. Khan chose to serve additional submissions on May 2, 2017. Much of Mr. Khan’s submissions continue to be inappropriate and unnecessary attacks on Mr. Johal. Mr. Khan also challenges the findings of Snowie J. Many of Mr. Khan’s submissions are irrelevant and unnecessarily inflammatory. Mr. Khan’s submissions repeat his position on various proceedings rather than focus on the issue of costs.

[36] I accept and will consider Mr. Khan’s submissions in paragraph 23 as his reasons for opposing any order of costs against him on the motion before Snowie J.

1. Costs of the Rule 30.10 Motion

[37] Mr. Khan submits that this court reserved to it the determination of the costs of the “proceeding” which, he submits, includes the costs relating to the Rule 30.10 motion.

[38] The second mortgagee submits that, while the motion for leave to appeal Snowie J.’s order was abandoned without costs; that did not mean the second mortgagee abandoned the costs of the Rule 30.10 motion before Snowie J.

[39] The endorsement of September 26, 2016 is clear – only the costs associated with the motion for leave to appeal were abandoned by both parties. The endorsement, when prepared by this court, was read to counsel. The parties specifically agreed that it was only the "leave to appeal" of Snowie J.'s order which was to be dismissed without costs. There was no mention of the costs of the Rule 30.10 motion. No one suggested any changes including any changes to make reference to the costs in the Rule 30.10 motion.

[40] In fact, costs for the Rule 30.10 motion had already been ordered against Mr. Khan on a substantial indemnity basis. The only issue that remained was the quantum. If Mr. Khan, an experienced counsel, wanted to set aside the entitlement to costs awarded by Snowie J., he could have and should have asked for such an order. Mr. Khan did not do so.

[41] It would be improper for this court to vary Snowie J.'s costs award which was not the subject of the consent order.

[42] Justice Snowie’s costs award for the Rule 30.10 motion remains.

2. Costs of this Proceeding/Reference

[43] Written costs submissions were received.

[44] It is clear that the second mortgagee was substantially successful on the reference and this proceeding.

[45] Mr. Khan’s submissions suggest male fides, improper steps and motivation by the second mortgagee and its counsel. This court does not find any male fides or impropriety on the part of the second mortgagee or its counsel.

[46] When carefully considered, Mr. Khan's submission is essentially speculation as to the motivation for the legal positions taken by the second mortgagee. There is no evidentiary support that the second mortgagee engaged in any improper conduct so as to deny it its costs of the proceeding and reference.

[47] There is no reason why costs should not follow the event for the reference and the proceeding.

[48] The second mortgagee seeks substantial indemnity costs (excluding the costs of the Rule 30.10 motion) in the amount of $86,612.09 all-inclusive.

[49] This court agrees with Mr. Khan’s submission that substantial indemnity costs are not appropriate or reasonable. This is not a case where Mr. Khan’s actions were reprehensible. He was entitled to have the second mortgagee prove the amount owing under the second mortgage.

[50] However, this court remains at a loss as to why the second mortgagee needed to embark upon the challenge of the validity of the third mortgage. The second mortgagee’s only interest should have been a reference to determine the amount owing to it under the second mortgage. Any surplus, whether belonging to the mortgagor/defendants and/or the third mortgagee, was not relevant to the second mortgagee after it was paid its entitlement under its second mortgage in full. A number of steps in this proceeding were unnecessary. See Rule 57.01(f).

[51] In this court’s view, the second mortgagee is only entitled to partial indemnity costs for the necessary and reasonable steps taken to enforce its second mortgage. This included the reference to determine the amount it is entitled to under the second mortgage. In my view, the second mortgagee is entitled to the legal costs for:

1. The pleadings;

2. The order for possession;

3. The reference on December 5, 2016; and

4. Costs of the Reference.

[52] I have excluded costs associated with the attendance before Donohue J. as all parties consented to setting aside that order.

[53] I have excluded the costs by the second mortgagee to set aside the Default Judgment. Having obtained a judgment as to the amount owing under its second mortgage, why would the second mortgagee care whether there was any or the amount owing under the third mortgagee? This was a power of sale. The second mortgagee is only entitled to be paid what it is owed under its second mortgage. The balance, if any, belongs to others or should be paid into court. As a result, it is unclear why the second mortgagee would have moved to set aside the Default Judgment just because it had found information regarding the third mortgage.

[54] I have excluded the costs of the Rule 30.10 motion before Snowie J. since costs have been fixed for that motion.

[55] I have excluded the costs associated with the September 26, 2016 motion to set aside Donohue J.’s order as, for the reasons set out above, there was no reasonable or logical reason for this legal step.

[56] I have excluded the costs associated with the February 12, 2015 motion for the payment out of surplus. That motion did not proceed.

[57] This court is satisfied that, to some extent, the second mortgagee unnecessarily complicated this proceeding by questioning the validity of the third mortgage which was not and is not an issue relevant to the issues in this proceeding, namely, the second mortgagee’s entitlement to have possession of the property, judgement against the defendants (mortgagors) or to permit it to sell the property.

[58] Once the amount due to the second mortgagee was decided in this reference and paid to the second mortgagee, there is nothing else to be decided in this proceeding:

• There is no property left. The property is sold. The only issue is the distribution of the net proceeds and that has been determined by this court;

• The respective entitlement and distribution of to the proceeds of sale; and

• Given this decision on costs of the proceeding and reference, there remains no further proceeds for distribution to the third mortgagee or the owners (even if the third mortgage was valid).

[59] Having reviewed the second mortgagee’s Bill of Costs and applying the above, this court is satisfied that a reasonable amount in contemplation of the parties for partial indemnity costs of the proceeding and reference would be $20,000 all-inclusive.

[60] I have determined that the appropriate scale of costs is partial indemnity because the owner (defendants) and alleged third mortgagee were entitled to require the second mortgagee to prove the amount under its mortgage.

[61] This is no basis to award a higher scale of costs against the owner (defendants) and alleged third party.

[62] The question remains: who should pay this amount?

[63] This court concludes that this amount is payable by the defendants/mortgagors and Mr. Khan jointly and severally. Both parties opposed the payment of the proceeds of sale to the second mortgagee. They lost.

[64] None of the parties have advised this court as to the current value of the remaining $17,300. These monies have now accrued interest in the past three and a half years. Noting that interest rates have been low, the amount would have increased but only marginally.

[65] Any costs incurred by the second mortgagee to enforce or protect its second mortgage are legitimate costs to be added to its second mortgage.

[66] As a result, the second mortgagee is entitled to add to its second mortgage the amount of $17,300 plus any accrued interest in full satisfaction of this portion of this costs award for the proceeding and reference.

3. Costs of the April 27, 2017 hearing (the Second Mortgagee)

[67] This attendance by the second mortgagee through new counsel (not Mr. Johal), including the preparation of factums, was caused entirely because Mr. Khan sought costs against Mr. Johal personally. Given that Mr. Khan abandoned the claim for costs against Mr. Johal personally before the motion was heard, substantial indemnity costs are appropriate.

[68] Mr. Khan caused such legal costs to be unnecessarily incurred by the second mortgagee. Despite the extensive submissions by Mr. Khan as to why Mr. Johal has acted improperly, there is nothing in the evidence in this proceeding why such costs would be or could reasonably be sought against Mr. Johal personally.

[69] A punitive costs order is appropriate.

[70] Substantial indemnity costs award of $4,500 all-inclusive is payable by Mr. Khan to the second mortgagee forthwith for the April 27, 2017 hearing.

4. Costs of the April 27, 2017 Hearing (Mr. Johal)

[71] Again, Mr. Khan caused Mr. Johal to retain counsel, review this matter, prepare motion materials, prepare for the hearing and attend to argue the costs issue only to have it abandoned at the start of the hearing.

[72] A punitive costs order is appropriate.

[73] A substantial indemnity costs award of $6,000 all-inclusive is payable by Mr. Khan to Mr. Johal forthwith.

5. The Validity of the Third Mortgage

[74] There is no reason in this proceeding to embark upon a determination of the validity of the third mortgagee or the entitlement to the owner (defendants) as there are no monies to distribute to either party from the net proceeds of sale.

[75] This action was for possession and judgment against the defendants/mortgagors. All of the claims in this proceeding are now spent.

Ricchetti J.

Date: May 8, 2017

CITATION: 1806700 Ontario Inc. v. Dmuchowski, 2017 ONSC 2817

COURT FILE NO.:CV-12-5383SR

DATE: 20170508

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

1806700 Ontario Inc.

AND:

Marian Dmuchowski and Leonila Fajardo

ENDORSEMENT

Ricchetti J.

Released: May 8, 2017