COURT FILE NO.: 31-2303814 ESTATE FILE NO.: 31-2303814 DATE: 2018/10/10
SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST
RE: IN THE MATTER OF THE PROPOSAL OF 1482241 ONTARIO LIMITED, OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO
BEFORE: Hainey J.
COUNSEL: Emily Y. Fan, Domenico Magisano for the Petitioners, Janodee Investments Ltd. and Meadowshire Investments Ltd. Lea Nebel for the Respondent, 1482241 Ontario Ltd. Miranda Spence, for the Proposal Trustee
HEARD: September 20, 2018
ENDORSEMENT
OVERVIEW
1Janodee Investments Ltd. (“Janodee”) and Meadowshire Investments Ltd. (“Meadowshire”) move for an order requiring 1482241 Ontario Limited (“148”) to pay to them an over-holding fee of $63,900.
FACTS
2The moving parties are the second mortgagees (“Second Mortgagees”) of a property at 240 Duncan Mill Road, Toronto (“Property”). The second mortgage on the Property, which was granted by 148, the owner of the Property, was for the principal amount of $1,420,000 (“Second Mortgage”).
3The relevant terms of the Second Mortgage were as follows:
(a) It had a six-month term. (b) It provided for interest-only payments paid in monthly installments of $15,383.33. (c) The Second Mortgage matured on March 21, 2017 (“Maturity Date”) at which time the principal together with any unpaid interest and any other amounts owing were due. (d) If the Second Mortgage was not renewed on or before the Maturity Date, the Second Mortgagees could charge an over-holding fee equivalent to three months’ interest (“Over-Holding Fee”).
4The Maturity Date lapsed on March 21, 2017 and the Second Mortgage was not repaid or renewed. As a result, the Second Mortgagees claim that the Over-Holding Fee became payable;
5In October 2017, 148 filed a notice of intention to file a proposal (“NOI”) under the Bankruptcy and Insolvency Act. Crowe Soberman Inc. was appointed proposal trustee for the company (“Proposal Trustee”).
6In March 2018 the court approved the sale of the Property. The order approving the sale required the sale proceeds to be held in trust by the Proposal Trustee pending further order of the Court.
7All amounts owing under the Second Mortgage have now been paid to the Second Mortgagees except the Over-Holding fee of $63,900. 148 has not paid the Over-Holding Fee because it maintains that it is an interest penalty that is contrary to the Interest Act.
ISSUE
8Is 148 required to pay the Over-Holding Fee of $63,900 to the Second Mortgagees?
POSITION OF THE PARTIES
9The Second Mortgagees submit that the Over-Holding Fee is an independent fee that the Second Mortgage clearly indicates is payable by 148 as compensation for 148’s ability to treat the Second Mortgage as an open mortgage after the Maturity Date. The Second Mortgagees therefore submit that the Over-Holding Fee does not constitute an interest penalty and therefore it cannot offend the Interest Act.
10148 submits that the Over-Holding Fee amounts to a penalty and is therefore contrary to s. 8 of the Interest Act. Further, according to 148, the payment of the Over-Holding Fee will be detrimental to the unsecured creditors of 148 who are otherwise entitled to the proceeds from the sale of the Property.
ANALYSIS
11The Second Mortgage provides for the Over-Holding Fee as follows:
…the Chargor agrees that should the charge not be renewed or discharged on the maturity date, that the Chargee, at its option, shall be entitled to charge an additional fee equivalent to three (3) months interest.
12The Second Mortgagees submit that as a result of this clause, 148 had the option of continuing with the mortgage on a month-to-month basis for a fee. According to the Second Mortgagees, the Over-Holding Fee was “the fee payable for exercising this opportunity”. Ms. Fan, on behalf of the Second Mortgagees, described it as “compensation” for the use by 148 of the principal amount of the Second Mortgage beyond the Maturity Date.
13148’s principal submission is that the Overholding Fee is a penalty that is contrary to s. 8(1) of the Interest Act which prohibits the payment of a fine, penalty or bonus on arrears that is more than the rate of interest charged in the normal course.
14The Over-Holding Fee may be charged regardless of the costs to the Second Mortgagees of 148’s failure to discharge or renew the Second Mortgage upon its Maturity date.
15Further, there is no evidence in the record of any costs or loss to the Second Mortgagees arising from 148’s failure to discharge or renew the Second Mortgage.
16The principles that determine what constitutes a penalty are set out in the House of Lords’ decision in Dunlop Pneumatic Tyre Co. v. New Garage & Motor Co. [1915] A.C. 79 at para 3 as follows:
(a) The essence of a penalty is a payment of money stipulated interrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage. (b) The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of the breach. (c) There is a presumption that it is a penalty when a single lump sum is made payable by way of compensation, on the occurrence of one or more or several of events, some of which may occasion serious and others but trifling damages.
17I have concluded that the Over-Holding Fee is a penalty that contravenes s. 8 of the Interest Act for the following reasons:
(a) It is arbitrary and at the discretion of the Second Mortgagees; (b) On its face, the Over-Holding Fee is not a genuine pre-estimate of damage. In fact, in this case The Second Mortgagees have not suffered any loss and have been made whole from the sale proceeds; (c) The Second Mortgagees have not expended any resources or incurred any costs as a result of the Second Mortgage not being discharged or renewed upon its Maturity Date; and (d) The Over-Holding Fee has the effect of overcompensating the Second Mortgagees while depleting the assets available to the other creditors.
CONCLUSION
18For these reasons I have concluded that the Over-Holding Fee is contrary to s. 8 of the Interest Act and therefore cannot be enforced. The Second Mortgagees’ motion is dismissed.
COSTS
19If the parties cannot settle the issue of costs they may schedule a 9:30 a.m. attendance with me to determine costs.
20I thank counsel for their helpful submissions.
Hainey J.
Date: October 10, 2018