Court File and Parties

COURT FILE NO.: 18-1322 DATE: 20181001 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Michelle Wainman and Richard Wainman Applicants – and – Barrie Leasing Services Inc. Respondents

Counsel: Daniel J. Wyjad for the Applicants Jack R. Armstrong for the Respondent

HEARD: September 21, 2018

RULING ON Applicant to stay mortage proceedings

boswell j.

Overview

[1] Michelle Wainman is the owner of a cottage property on Kahshe Lake, which is located near Gravenhurst, Ontario. She has a mortgage with the Respondent. The mortgage is in default. On March 26, 2018, the Respondent obtained judgment on the mortgage for payment of the sum of $462,196.85 and for possession of the property. The Respondent is now attempting to sell the property by way of power of sale.

[2] Ms. Wainman seeks a variety of relief on this application, including:

(a) An injunction staying the power of sale proceedings;

(b) An order declaring the Respondent’s Notice of Sale dated February 27, 2013 invalid; and,

(c) An order that roughly $500,000 being held in two parts in the trust accounts of counsel to the Applicants and counsel to the Respondent be released to Ms. Wainman so that she might redeem the Kahshe Lake mortgage.

[3] The Respondent asks that the application be stayed or dismissed. First, it submits that the Applicants are subject to two outstanding orders for costs. It argues that the application should be stayed pending payment of those costs, pursuant to Rule 57.03(2) of the Rules of Civil Procedure. Second, if the court elects to hear the application, it should be dismissed on its merits. There is no basis, the Respondent says, to interfere with its lawful power of sale. Moreover, the funds currently held in trust are subject to an Order that they be held pending the judgment of DiTomaso J. in a trial between these parties that was heard during the May 2018 trial sittings at Barrie.

[4] Based on the parties’ respective positions, the court is called upon to determine the following issues:

(i) Are the funds presently held in trust in part by counsel to the Applicants and in part by counsel to the Respondents available for distribution prior to the release of the judgment of DiTomaso J.?

(ii) Is the Respondent’s Notice of Sale dated February 27, 2013 invalid because it does not reference an assignment of the underlying mortgage to the Respondent?

(iii) Should the sale proceedings in relation to the Kahshe Lake property be stayed?

[5] Implicit in my list of outstanding issues is the determination that I am not going to stay the application for non-payment of costs. The application was fully argued and, in my view, all parties are best served by a ruling, now, on the substantive issues on their merits.

[6] Obviously some background information is required to put the issues into perspective.

The Facts

[7] The facts, at least as they relate to this application, are not significantly contested. They involve a series of mortgages granted by the Applicants to the Respondent over two properties: the Kahshe Lake cottage and a cottage on Lake Muskoka. All went into default. The result has been protracted litigation.

[8] Ms. Wainman bought the Kahshe Lake property in August 2002. She acquired the property with the assistance of a first mortgage in favour of the Toronto Dominion Bank

[9] About six years later, in May 2008, Ms. Wainman borrowed the sum of $151,057.57 from B2B Trust. The loan was secured by a second mortgage on Kahshe Lake. B2B Trust is essentially an investment vehicle for funds in an RRSP owned and controlled by a man named James Shirley. Mr. Shirley is also the principal behind the Respondent corporation.

[10] Ms. Wainman used the funds from the second mortgage loan to develop the Lake Muskoka property. The expectation was that a cottage would be built on the property, then sold, with the proceeds being used, in part, to retire the second mortgage on Kahshe Lake.

[11] The second mortgage on Kahshe Lake went into default. Ms. Wainman managed to negotiate a forbearance agreement with Mr. Shirley. Under the forbearance agreement, dated December 8, 2009, payments were suspended under the mortgage. Interest continued to accrue and an annual forbearance fee of $5,000 was payable until the mortgage was paid out in full. It remained the case that the mortgage was expected to be paid out on the sale of the Lake Muskoka property.

[12] Notwithstanding the forbearance agreement, the Respondent initiated power of sale proceedings against the Kahshe Lake property by Notice of Sale dated February 27, 2013. The Notice referred to B2B Trust as the mortgagee. On July 10, 2013 the mortgage was transferred to the Respondent. A revised Notice of Sale was not served, nor was any form of notice that the mortgage had been transferred. At any rate, the enforcement proceedings apparently stalled. The cottage has not yet been sold. The Respondent only sued for possession in 2017. I will come back to that lawsuit momentarily. In the meantime, I will explain the relevance of the Lake Muskoka property to this proceeding.

[13] Mr. Shirley, through B2B Trust and/or the Respondent, held three mortgages on the Lake Muskoka Property. By 2015 the mortgages had been in default for a number of years. The Respondent sued for payment and possession. On February 14, 2017 I heard a summary judgment motion on the Respondent’s claim. I granted judgment for possession, but I stayed the judgment pending a resolution of the issue of the balance owing on the three outstanding mortgages.

[14] The Wainmans had the right, in my view, to redeem the mortgages on Lake Muskoka but could do so only if the sum required to do so could be ascertained.

[15] There was a live dispute between the parties as to the balances outstanding on each of the three mortgages. The disputes with respect to the first two mortgages were minor. But there was a substantial dispute with respect to the balance owing on the third mortgage. The dispute centered on whether the Respondent was entitled to add to the third mortgage the sum of about $400,000 advanced to Mr. Wainman’s construction company for further construction on the Lake Muskoka cottage. Ms. Wainman said she never agreed to that arrangement and asserted that she is not responsible for the construction loan.

[16] All issues regarding the balances owing on the outstanding Lake Muskoka mortgages were deferred to a trial (the “Lake Muskoka trial”).

[17] On July 11, 2017 the Applicants moved before McCarthy J. for an order permitting them to sell the Lake Muskoka property pending resolution of the mortgage issues. Justice McCarthy permitted them to do so, on the following terms:

(a) The sale price was to be no less than $1.25 million;

(b) The Applicants were to pay $50,000 in trust to the Respondent’s solicitor pending the sale;

(c) When the sale was concluded, the solicitor acting for the Applicants was to pay $883,5050.63 to the Respondent’s solicitor to be added to the $50,000 already held in trust;

(d) From the total funds held in trust, the Respondent’s solicitor was authorized to release the sum of $555,494.96 to the Respondent. This was an amount agreed as the minimum owing on the three Lake Muskoka mortgages;

(e) The balance of funds, after the costs of sale and payment of a CRA lien were to be paid into court, pending determination of the issues in this consolidated action . (Emphasis mine).

[18] The Wainmans sold the Lake Muskoka property for $1.25 million on July 12, 2017. The proceeds were dealt with in accordance with Justice McCarthy’s order, save that the net proceeds were not paid into court, but rather into the trust account of the Applicants’ solicitor. There is now roughly $378,000 held in trust by the Respondent’s solicitor and $124,000 held in trust by the Applicants’ solicitor by way of the sale proceeds of Lake Muskoka.

[19] The Lake Muskoka trial proceeded in the spring 2018 civil trial sittings at Barrie before DiTomaso J., whose decision is currently on reserve. Justice DiTomaso will determine in his ruling, who is entitled to the funds presently held in trust.

[20] In the meantime, the Respondent commenced an action against the Applicants for payment and possession of the Kahshe Lake cottage. It brought a motion for summary judgment before DiTomaso J. on February 15, 2018. His decision was released on March 26, 2018. He granted the Respondent judgment on the mortgage in the amount of $462,196.85 plus interest accruing at 15%, compounded monthly, from and after January 31, 2018. He also granted judgment for $35,000 due and owing on the forbearance agreement. He subsequently ordered costs payable by the Applicants to the Respondent of $20,544.34. The total amount due and owing in respect to the Kahshe Lake property is now in excess of $517,000 and may be considerably higher given interest accumulated since January 31, 2018.

[21] The Applicants appealed the summary judgment ruling of DiTomaso J. to the Court of Appeal. They failed to perfect their appeal and it was dismissed on June 22, 2018 by the Registrar, with costs of $750 payable to the Respondent. Those costs have not been paid.

Positions of the Parties

[22] The Applicants want to redeem the Kahshe Lake mortgage and prevent the sale of that property by the Respondent.

[23] Ms. Wainman deposed that, in her view, the balance of the net proceeds of Lake Muskoka were held in trust as security for payment of any balance that might be found owing on the three mortgages against that property, over and above the $555,494.96 already paid. She says that during the trial before DiTomaso J. the outstanding balances were agreed upon. She claims that she owes only $27,000 or so on top of what has already been paid.

[24] Ms. Wainman asks that the $27,000 be paid immediately to the Respondent in satisfaction of his mortgages on the Lake Muskoka property. The balance of the funds held in trust from the sale of that property, roughly $475,000, should be paid out to her immediately. She then intends to add funds to that amount and redeem the mortgage on Kahshe Lake.

[25] She submits that, in the meantime, the Respondent’s Notice of Sale should be deemed invalid due to the failure of the Respondent to serve notice that the mortgage had been transferred from B2B Trust to the Respondent.

[26] The Respondent’s position is quite simple and has three parts. First, the application should be stayed because the Applicants have failed to pay the costs ordered by DiTomaso J. and the Court of Appeal. I have already addressed this issue. Second, the funds being held in trust are subject to the Order of McCarthy J. that expressly ordered that they be held in trust until judgment was rendered in the Lake Muskoka action. Third, the failure to give notice about the assignment of the mortgage is a minor irregularity. The reality is that the Applicants have always known that the payee, for redemption purposes, is Mr. Shirley.

Discussion

[27] A disproportionate portion of this ruling has been taken up in explaining the background to these proceedings. It was unavoidably lengthy because of the substantial history.

[28] The resolution of the outstanding issues is otherwise quite straightforward in my view.

(i) Are the Lake Muskoka trust funds to remain in trust pending judgment on the Lake Muskoka action?

[29] The short answer to this question is yes. In my view, the wording of Justice McCarthy’s July 11, 2017 order is clear in this regard. The trust funds are to remain in trust “pending determination of the issues in the consolidated action.”

[30] To be clear, the Respondent initially sued on the three Lake Muskoka mortgages. In this first lawsuit it included the outstanding balance on the construction loan as part of the third mortgage, which is a matter of significant contention. The Respondent subsequently started a second action claiming the outstanding balance of the construction loan as against the Applicants, as an amount separate from the third mortgage. The two actions were consolidated.

[31] One of the issues in the consolidated action is, accordingly, the balance owing on the construction loan. A second, related issue is who is responsible for repayment. Until all of the issues in the consolidated actions are disposed of, including the two I just identified, the trust funds are to remain in trust.

(ii) Is the Notice of Sale Invalid?

[32] The Notice of Sale dated February 27, 2013 refers to B2B Trust as the mortgagee. As at the date the Notice was issued, it was correct. In July of 2013, however, B2B Trust transferred its interest in the mortgage to the Respondent. No notice of that transfer was given to the Applicants.

[33] The Applicants rely on the decision of Pattillo J. in Re 2272045 Ontario Inc., 2011 ONSC 3051, as authority for the proposition that in order to comply with s. 31(1) of the Mortgages Act, R.S.O. 1990 c. M.40, which governs the content of a Notice of Sale, an assignee of the mortgagee’s rights must give the mortgagor reasonable notice of the assignment in writing.

[34] I do not disagree with the ruling of Justice Pattillo. I note, however, that the reason for the requirement to give notice of an assignment is that “it is imperative that the mortgagor have notice of the identity of the person exercising the power of sale.” See Lee v. Korea Exchange Bank of Canada (1999), 44 O.R. (3d) 366 (S.C.J.), at para. 14. Knowing the identity of the party exercising the right of sale is important because of the mortgagor’s right of redemption. In this case, the assignment was from one entity controlled by Mr. Shirley to another entity controlled by Mr. Shirley. In my view, the Applicants, as mortgagors, are not prejudiced in any way by the lack of notice of the assignment.

[35] Ultimately, however, I need not decide whether the failure to give reasonable notice of the assignment in this case is fatal to the Notice of Sale. I find that the Notice of Sale is invalid because it was issued in breach of the forbearance agreement.

[36] No explanation was offered as to how B2B Trust or the Respondent might be entitled to take mortgage enforcement proceedings in the face of a forbearance agreement that expressly provided it would not do so. The Respondent obviously continued to rely on that forbearance agreement up to the time of the summary judgment motion before DiTomaso J. earlier this year, when they obtained judgment on that agreement for $35,000.

[37] I conclude that the February 27, 2013 Notice of Sale is invalid. That said, now that judgment for payment and possession on the Kahshe Lake mortgage has been granted, the Respondent is free, in my view, to issue a new Notice of Sale.

(iii) Should the sale of the Kahshe Lake cottage be stayed?

[38] Other than the requirement that a new Notice of Sale must be served in compliance with s. 31(1) of the Mortgages Act, I see no reason why the enforcement proceedings on Kahshe Lake should be stayed.

[39] The mortgage on Kahshe Lake and the mortgages on Lake Muskoka are entirely distinct. The Respondent need not wait until the resolution of the disputed issues in the Lake Muskoka action to take enforcement measures on the Kahshe Lake property.

[40] In the result, the application is dismissed, other than with respect to the finding that the Respondent’s Notice of Sale is invalid.

Costs

[41] If the parties cannot agree on the issue of costs, they may make written submissions, not to exceed two pages in length, on a fourteen day turnaround. The Applicants’ submissions shall be served and filed by October 15, 2018 and the Respondent’s by October 29, 2018. Submissions should be filed electronically with my assistant, Diane Massey, to her email account, Diane.Massey@ontario.ca.

Boswell J.

Released: October 1, 2018