Court File and Parties
COURT FILE NO.: CV-16-390 DATE: 2018/09/10
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
J.P. GRACI & ASSOCIATES LTD., in its capacity as the Bankruptcy Trustee of Jela Smoljan aka Helen Smoljan Plaintiff – and – RYSZARD MUSIALA and GRZEGORZ PIETRYKOWSKI Defendants
Counsel: Dennis Touesnard, for the Plaintiff Michael N. Freeman, for the Defendant, Ryszard Musiala No One Appearing for Grzegorz Pietrykowski, having been noted in default
HEARD: April 10, 2018 at Brantford and by Written Submissions
REASONS FOR DECISION
SHEARD J.
Introduction
[1] The defendant, Ryszard Musiala, moves for summary judgment dismissing the plaintiff’s claim, lifting the Certificate of Pending Litigation against 63 Woodhouse Avenue, Ancaster Ontario [1] , (the “Property”), which is the subject of this litigation, and declaring that neither Helen Smoljan, nor the plaintiff, her Bankruptcy Trustee (the “Trustee”), has any legal, equitable or beneficial interest in the Property.
[2] At the hearing, the Trustee submitted that Musiala’s motion should be dismissed because a trial is required to determine the interests, if any, of Smoljan, Musiala, and of Grzegorz Pietrykowski, to whom Smoljan purported to assign her interest in the Property.
[3] At the conclusion of the hearing, it appeared that it might be possible for the parties to come to an agreement in principle, and that any dispute over amounts could be resolved on a reference. In fact, subsequent to the hearing, counsel for the parties asked me not to render a decision in order to allow them an opportunity to canvass resolution.
[4] Counsel later advised that a resolution could not be reached and requested a conference call with me to address the impasse. The conference call was held on May 31, 2018 following which I issued an endorsement confirming that:
(a) counsel now wished me to decide Musiala’s motion; (b) my decision should also address the impact upon the rights of the parties of the payment made by Musiala to reduce the mortgage on the Property, which payment was made after Musiala was served with the Trustee’s statement of claim and Certificate of Pending Litigation registered against the Property (the “CPL”); (c) counsel were invited to file written submissions on this new issue; (d) the parties anticipated a need for a reference, which I agreed to conduct; and (e) the issue of costs was to be reserved until after a final determination of the motion and the reference, if one was conducted.
Issues on this Motion:
(i) Should Musiala’s motion for summary judgment be granted dismissing the claim and discharging the CPL against the Property or, if not, should the Court grant such other relief as it may deem just and appropriate?
(ii) What is the impact to the rights of the parties of the payment by Musiala to reduce the mortgage on the Property, made after Musiala was served with the Trustee’s Claim and the CPL?
The Evidence
[5] The essential facts leading up to the agreements respecting the Property are not in dispute and are summarized below.
[6] Between 2010 and 2012 Musiala lent Smoljan a total of $175,000.00, secured by way of Promissory Notes. As security for this debt, in May 2012, Smoljan promised to give Musiala a mortgage on a property that she was planning to buy. In June 2012, Smoljan admitted that she could not complete the purchase because she did not qualify for a mortgage. Fearing the loss of the proposed security, Musiala agreed to take title to the Property in his own name and to apply for the mortgage that was required to finance the purchase.
[7] On June 4, 2012, Musiala signed a Declaration of Trust (the “2012 Agreement”). Under the 2012 Agreement, Musiala was to hold the Property in trust for Smoljan. She agreed to indemnify and save Musiala harmless from any and all demands, claims, charges, debts or actions whatsoever respecting the Property and to provide Musiala with sufficient funds to pay the mortgage, taxes and fire insurance. Smoljan also acknowledged that she owed Musiala $175,000.00 and that upon the sale of the Property, Musiala would receive the first $175,000.00 from the net proceeds of sale.
[8] The purchase of the Property was completed on October 18, 2012 and was funded in large part by way of a mortgage in the principal amount of $526,696.78 (the “TD Mortgage”). Musiala is the sole owner and mortgagor on title.
[9] Smoljan took possession of the Property, but failed to make the payments to Musiala as per the 2012 Agreement. Musiala used his own funds to maintain the TD Mortgage and to pay other associated Property expenses.
[10] By April 2013, Smoljan had repaid $15,000.00 of the $175,000.00 she owed Musiala, but continued to default on her monthly payments to Musiala. Musiala and Smoljan entered into an agreement dated May 26 and June 11, 2013 (the “New Agreement”).
The New Agreement
[11] The New Agreement was not drawn by a lawyer and the parties do not agree on its effect.
[12] The New Agreement states that its purpose is to amend the terms of the loans advanced by Musiala and evidenced in a promissory note dated May 8, 2012 and to define the terms of occupancy of the Property occupied by Smoljan. The New Agreement makes no reference to the 2012 Agreement.
[13] Musiala asserts that it rendered the 2012 Agreement null and void leaving him the sole legal and beneficial owner of the Property. The Trustee does not accept that position.
[14] Among other things, in the New Agreement Smoljan confirms that her debt to Musiala is $160,000.00 and that she would now pay interest on it. Smoljan also agrees to pay all costs associated with the Property and that, if in default for three months, to vacate the Property upon request.
[15] Paragraph 11 of the New Agreement gives Smoljan the right to buy the Property after payment of amounts owing to Musiala. Paragraph 12 states that if Smoljan has not bought the Property at the end of five years, it will be sold, Musiala will be paid what he is owed, and the remaining equity will belong to Smoljan. These paragraphs conflict with Musiala’s assertion that he owns the Property outright but are consistent with a finding he has an equitable mortgage on the Property.
Smoljan Defaults and Musiala Takes Possession
[16] Smoljan defaulted on the payments required by the New Agreement. Ultimately, Musiala obtained eviction orders from the Landlord and Tenant Board. Smoljan and/or her tenants vacated the Property on December 22, 2016. In April 2017 Musiala moved into the Property, where he continues to live. Musiala does not wish to sell the Property.
The Evidence on the Motion
[17] The evidence before me includes the affidavits sworn by Musiala on August 15, 2016 in his application against Smoljan seeking, in part, an order for partition and sale of the Property, a declaration that he held an equitable mortgage for the value of amounts owed to him by Smoljan and his contributions to the Property and for an order allowing him to sell the property and to be paid from the proceeds of sale. [2] Musiala’s affidavit was sworn in support of his application to obtain control and possession of the Property in order to sell it and to divide the proceeds as determined by the court. Nowhere in the 2016 Affidavit does Musiala assert that he is the beneficial owner of the Property.
[18] On this motion and in his affidavit sworn on November 9, 2017 Musiala asserts that by virtue of the New Agreement, and her breaches of it and the 2012 Agreement, Smoljan gave up any right or interest that she might otherwise have had in the Property. Musiala was cross-examined on February 26, 2018 on his two affidavits. He confirmed that his 2016 affidavit was true and later in the cross-examination Musiala admitted that he changed his position in his 2017 affidavit because he had by then discovered that he had been misled by Smoljan and that she was bankrupt.
[19] There are significant and irreconcilable inconsistencies between the 2016 Affidavit and the 2017 Affidavit on which Musiala was cross-examined. Musiala’s counsel submitted that his client’s position would have been different if he had been properly represented by counsel. While that may be true, those submissions speak to litigation strategy and do little to reconcile the inconsistencies between the two affidavits.
[20] Musiala has been consistent in his position that the New Agreement operated to rescind the 2012 Agreement. Even if that position were to be accepted, Musiala’s assertion that, as a result, Smoljan no longer has a beneficial or any interest in the Property is impossible to reconcile with paragraph 13 of the New Agreement which provides that:
If she [Smoljan] has not purchased the [P]roperty by the end of the term then 63 Woodhouse will be sold with any equity paid to her. Equity is defined as sale price less any encumbrances, taxes, transactions, costs, accrued utilities and 5K due to Richard [Musiala].
[21] Musiala’s conflicting evidence on his position requires a credibility finding.
Assignment to Pietrykowski
[22] Unbeknownst to Musiala, on November 14, 2012 Smoljan executed a Declaration of Trust by which she purported to assign the 2012 Agreement to Grzegorz Pietrykowski (the “Assignment”). The Assignment purports to assign Smoljan’s “beneficiary rights” in the Property to Pietrykowski as well as her $175,000.00 debt to Musiala.
[23] Pietrykowski was noted in default in February 2017. He did not participate in this motion and has not filed a proof of claim in the bankruptcy proceedings. Pursuant to rule 19 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 [3] , Pietrykowski is deemed to have admitted the allegations in the Trustee’s claim and is not entitled to notice of any further steps in these proceedings.
[24] The evidence before me respecting the Assignment is limited. The record contains some evidence that Pietrykowski claimed to be the landlord in one of Musiala’s landlord and tenant proceedings to evict Smoljan, which claim was rejected by the Landlord and Tenant Board.
[25] Reference to the Assignment is also found in Smoljan’s affidavit sworn May 9, 2016 in support of her request for a stay of Musiala’s eviction order: At paragraph 5, Smoljan states that she assigned her interest in the 2012 Agreement to Pietrykowski, which was the reason for the New Agreement. Smoljan’s claim to have assigned her “beneficiary rights” in the Property is contradicted by her motion to stay an earlier eviction order.
[26] Smoljan’s apparent lack of candour in her dealings with Musiala and with the Trustee, the lack of any participation by Pietrykowski in any dealings or proceedings respecting the Property, and the Trustee’s evidence that Smoljan knew herself to be insolvent at the time she signed the 2012 Agreement and the New Agreement all give rise to serious questions as to the validity of the Assignment.
[27] Even if the Assignment is assumed to be valid, by its terms, Pietrykowski assumes Smoljan’s obligations to Musiala. Therefore, I conclude that a determination of Musiala’s rights as against the Property, including a finding that he has an equitable mortgage, without the involvement of Pietrykowski would not create any unfairness or prejudice to Pietrykowski.
The Trustee’s Position
[28] The Trustee’s statement of claim recognizes that Smoljan’s interest in the Property is subject to the respective interest of Musiala and Pietrykowski as determined by this Court [4] . Further, in oral submissions, the Trustee agreed that, although Musiala has not advanced a counterclaim, it was open to a Court to determine the amount of Smoljan’s equity in the Property and/or the extent of Musiala’s interest in the Property.
[29] The Trustee well understands its obligation on a motion for summary judgment to put its best foot forward and to lead trump or risk losing. Indeed, in oral submissions, counsel for the Trustee acknowledged both points and further acknowledged that on a motion for summary judgment the Court is entitled to assume that the evidence at trial would be similar to the evidence before the Court on the motion.
[30] The Trustee’s evidence is found in the affidavit sworn by Joseph Paul Graci, the president of the plaintiff corporation. It is based mainly upon documents between the parties and pleadings in this and the other court proceedings. The Trustee’s materials do not include an affidavit from Smoljan, who did not attend the First Meeting of Creditors and was not examined as a witness on this motion.
[31] The Trustee submits that, based on the paper record and without having heard from Smoljan or Pietrykowski, a finding by this Court that Musiala is the sole beneficial owner of the Property would not be a fair and just result. The Trustee’s submissions suggest that there could be evidence from Smoljan or Pietrykowski at trial.
[32] Without accepting all of its submissions, I do agree with the Trustee that the evidence on this motion does not allow me to find that Musiala is the sole beneficial owner of the Property.
The Lump-sum Payment: New Issue Raised on May 31, 2018
[33] In the conference call and the subsequent written submissions received from counsel, the issue of Musiala’s payment toward the TD Mortgage was raised. This payment had not been addressed in oral argument.
[34] In Musiala’s written submissions, I was informed that in October 2017, Musiala paid down the TD Mortgage by way of a one-time lump sum payment of $100,000.00 (the “Lump-sum Payment”). At the time of the conference call, I had not appreciated the very limited evidence before me on this issue. After receiving the parties’ written submissions, I reviewed the record again and found only passing reference to the Lump-sum Payment at pages 43 and 44 of the transcript of the cross-examination of Musiala, held February 26, 2018 (Trustee’s Supplementary Record, at pages 225 and 226).
[35] In his written submissions, Musiala takes the position that the equitable remedy of subrogation applies and that, having paid down the TD Mortgage, he stands in the place of the TD and is entitled to an equitable mortgage equal to the Lump-sum Payment.
[36] The Trustee disputes that the equitable remedy of subrogation applies and disagrees that the Lump-sum Payment should be added to any equitable mortgage. The Trustee submits that what Musiala did should be characterized as a post-bankruptcy extension of credit to Smoljan and that the reduction in the TD Mortgage increases Smoljan’s equity in the Property, to the benefit of Smoljan’s creditors.
Issue 1: Should Musiala’s motion for summary judgment or alternate relief be granted?
[37] Rule 20.04(2) (a) of the Rules of Civil Procedure provides:
(2) The court shall grant summary judgment if,
(f) the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence....
[38] Rule 20.04(2.1) of the Rules of Civil Procedure sets out the powers of the court on a motion for summary judgment:
(2.1) In determining under clause (2) (a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:
(1) Weighing the evidence. (2) Evaluating the credibility of a deponent. (3) Drawing any reasonable inference from the evidence.
[39] The Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, guides the court on a summary judgment motion. The governing principles can be found at paragraphs 49 and 50:
[49] There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result.
[50] These principles are interconnected and all speak to whether summary judgment will provide a fair and just adjudication. When a summary judgment motion allows the judge to find the necessary facts and resolve the dispute, proceeding to trial would generally not be proportionate, timely or cost effective. Similarly, a process that does not give a judge confidence in her conclusions can never be the proportionate way to resolve a dispute. It bears reiterating that the standard for fairness is not whether the procedure is as exhaustive as a trial, but whether it gives the judge confidence that she can find the necessary facts and apply the relevant legal principles so as to resolve the dispute.
Analysis
[40] In submissions made at the conclusion of the hearing, counsel for both parties agreed that, if the evidence before me allowed me to: i) find that Musiala had an equitable mortgage over the Property; and ii) direct a trial or reference to determine the amount of that equitable mortgage, those findings would fit within the Hryniak framework and could lead to a just and expeditious result.
[41] In its written submissions, the Trustee acknowledged that there was sufficient evidence on the record for me to conclude that Musiala has an equitable mortgage against the Property for the current value of his loan plus $5,000.00 in fixed costs, as set out in the New Agreement. While I do agree that the evidence on the motion supports a finding that Musiala has an equitable mortgage on the Property, the evidence is insufficient to allow me to determine the specific amounts to include in the equitable mortgage. Further, it has now become clear that the parties cannot reach agreement on that issue.
Does the Record permit the Court to find facts with confidence and to apply relevant legal principles?
[42] I cannot conclude that the record before me supports a finding that Smoljan lost any right she had to the equity of the Property. As noted above, Musiala’s evidence is conflicting and the 2012 Agreement and the New Agreement do not lead to an obvious result and need to be understood in context and with the benefit of a fuller record. Should he wish to pursue it, a determination of Musiala’s ownership interest in the Property, if any, requires a trial.
[43] I have similar concerns with respect to my ability to determine the issue respecting the Lump-sum Payment.
Issue #2: What is the legal impact of the Lump-sum Payment?
[44] As explained below, I cannot determine the impact of the Lump-sum Payment on the parties’ rights.
[45] Faced with an absence of evidence concerning the Lump-sum Payment, I am unable to determine what legal principles govern and apply those to the facts. The cases put forth by Musiala address the circumstances in which the discretionary and equitable remedy of subrogation may apply. They involve circumstances in which monies are advanced by a lender with the expectation that they would have a secured interest in the real property. [5] In Grahoui v. Yassine, 2017 ONSC 5108 [6] the court provides a summary of the relevant principles from the leading decisions respecting the equitable remedy of subrogation. It is apparent that the facts in each case are important to a determination of whether a court should grant the equitable remedy.
[46] The Trustee asserts that the facts of the case do not support a finding of subrogation and that because the Lump-sum Payment was made while Smoljan was bankrupt, the jurisprudence concerning post-bankruptcy debts and not respecting subrogation ought to govern.
[47] On that second argument, the Trustee asserts that for the Court to find Musiala subrogated to the interests of the first mortgagee, there must be evidence that he made the payment “with a view to becoming the first mortgagee” on the Property. The Trustee says that the position taken by Musiala in his 2017 affidavit (and, indeed on this motion for summary judgment) is that Smoljan has given up any right or interest she might have in the Property and that Musiala is its sole legal and beneficial owner. The Trustee therefore submits that when Musiala made a lump sum payment against the TD Mortgage, he did not expect to take over the position of the mortgagee but did so because he owned the property and “made a payment to reduce the first mortgage which he believed he was legally obliged to pay” (at paragraph 27 of the Trustee’s submissions, dated June 15, 2018).
[48] As stated above, there is virtually no evidence in the record before me respecting the Lump-sum Payment and I am not able to determine the necessary facts to which I might properly assess the positions taken by the parties and to properly apply the law.
Disposition
[49] The record does support a finding that in 2012 Smoljan agreed that Musiala would take title to the Property to secure her debt obligations to him. However, the extent of that security is in dispute and needs a hearing. As set out above, even if a reference would serve to determine that one issue, it would not resolve the entire action; a trial would still be required to determine the legal effect of the Lump-sum Payment as well as any other issues that might flow from the finding of an equitable mortgage.
[50] Absent the issue of the Lump-sum Payment, it was tempting to make a finding that Musiala has an equitable mortgage and to direct a reference to determine such issues as, in addition to the loan, what other amounts, if any, should be added to the equitable mortgage?
[51] Further, if Musiala seeks to pursue his claim that he is the legal and beneficial owner of the Property, a finding is his favour would render moot the issue of whether he has an equitable mortgage. Even if Musiala is content to accept that he only has an equitable mortgage and is not the beneficial owner of the Property, new issues that flow from that finding may need to be determined.
[52] It is easy to envision the reference as requiring several days to conduct, delaying the final resolution of the action and leaving the parties burdened with the cost of a trial to determine the remaining issues.
[53] Of equal or perhaps greater concern is the possibility of inconsistent or conflicting decisions between those made here and in the reference and those determined at trial.
Disposition and Order
[54] For all the above reasons, I have determined that Musiala’s motion must be dismissed in its entirety. To do otherwise and to make a decision and/or to conduct a reference on some of the less contentious issues while leaving the determination of the Lump-sum Payment and other issues for trial could create a real danger of duplicative or inconsistent findings , a result that is to be avoided. [7]
[55] Musiala’s motion is dismissed.
Costs
[56] As per the request of the parties and as set out in my Endorsement of May 31, 2018, costs of this motion are reserved to the trial judge.
L. Sheard J.
Date: September 10, 2018
[1] Lot 148, plan 62M1158; Subject to an easement for entry as in WE776784; Subject to an easement for entry as in WE863065; City of Hamilton
[2] Court File No. 16-58479, commenced at Hamilton, and stayed by reason of Smoljan’s bankruptcy
[3] Rules of Civil Procedure, R.R.O. 1990, Reg. 194
[4] Statement of Claim , at paragraphs 12 and 13
[5] In Re Elias Markets Ltd ., 2006 ONCA 31904 ; Armatage Motors Ltd. v. Royal Trust Corp. of Canada , 1997 ONCA 1629 ; Midland Mortgage Corp. v. 784401 Ontario Ltd. , 1997 ONCA 1946 ; Mutual Trust Co. v. Creditview Estate Homes Ltd., 1997 ONCA 1107 ; and Grahoui v. Yassine , 2017 ONSC 5108
[6] Supra