Court File and Parties
COURT FILE NO.: CV-18-0160 DATE: 2018/10/16 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: KONSTANTIN KOTZEFF, STEVEN LESH, HILDY LESH, PETER KOTZEFF and ALAN LITWACK and GARY LITWACK in their capacity as estate trustees for the estate of MOSES LITWACK, Applicants
AND:
SENIORSCARE CORPORATION, THE CORPORATION OF THE COUNTY OF PRINCE EDWARD, 802779 ONTARIO INC. and KAZDIM INVESTMENTS LTD., Respondents
BEFORE: Hurley, J.
COUNSEL: Todd J. Burke, for the Applicants Konstantin Kotzeff, Steven Lesh, Hildy Lesh, and Peter Kotzeff David Wagner, for the Applicants Alan Litwack and Gary Litwack in their capacity as estate trustees of the estate of Moses Litwack Eric Lay, for the Respondents 802779 Ontario Inc. and Kazdim Investments Ltd. No one appearing for the Respondents Seniorscare Corporation and The Corporation of the County of Prince Edward
HEARD at Picton: September 28, 2018
Endorsement
Nature of the Applications
[1] The applicants were participants in a syndicated mortgage. When it went into default, they did not seek to enforce their security. Instead, they sued the lawyer who had recommended the investment to them and settled this litigation for a substantial sum of money.
[2] The municipality sold the property pursuant to the Municipal Act, 2001, S. O., c. 25 to recover tax arrears. It has paid the surplus sale proceeds into court. The applicants are seeking the payment out of court of these proceeds in accordance with their respective interests in the mortgage.
[3] The respondents 802779 Ontario Inc. and Kazdim Investments Ltd. (who I will refer to as the respondents) were also participants in the syndicated mortgage but chose not to sue the lawyer. They contend that the applicants must account to them for the settlement funds that they received in the litigation which would result in a distribution of the surplus funds different than the allocation specified in the mortgage.
[4] I find that the applicants do not have this obligation and that the funds should be paid out of court in the manner proposed by them.
The facts
[5] On the advice of Paul Bregman, six investors, Konstantin Kotzeff and his brother Peter, Hildy Lesh, Moses Litwack, and the respondents loaned money in June 2007 to Seniorscare Corporation who operated a nursing home known as the Picton Manor at 9 Hill St., Picton.
[6] At the time, Mr. Bregman was a lawyer with the firm Perley-Robertson, Hill & McDougall. He also contributed to the loan through his personal corporation Kiddy Winkles Ltd.
[7] The total amount of the loan was $3 million. It was divided into two parts, one of $2.5 million and the second $500,000. The former bore interest at 10.5% and was given the rank of “First Priority”; the latter had an interest rate of 16.5% and held the rank of “Second Priority”.
[8] The following chart accurately describes the breakdown of the investment:
| Parties | Investments | Percentage Invested based on the total mortgage of $3 million | Percentage Invested of 2.5 million first priority loans |
|---|---|---|---|
| FIRST PRIORITY LENDERS | |||
| Konstantin Kotzeff | $1,050,000 | 35% | 42% |
| Hildy Lesh/Steven Lesh | $250,000 | 8.33% | 10% |
| Peter Kotzeff | $100,000 | 3.33% | 4% |
| 802779 Ontario Inc. | $250,000 | 8.33% | 10% |
| Kasdim Investments Ltd | $250,000 | 8.33% | 10% |
| Moses Litwack | $600,000 | 20% | 24% |
| Subtotal: | $2,500,000.00 | ||
| SECOND PRIORITY LENDERS | |||
| Moses Litwack | $400,000 | 13.34% | |
| Kiddy Winkles Ltd. | $100,000 | 3.34% | |
| Subtotal | $500,000 | 16.68% | |
| TOTAL: | $3,000,000.00 |
[9] The loan was secured by a first mortgage on 9 Hill St. The mortgage was initially held by a corporation, 626688 Ontario Limited, but in 2010 the mortgage was transferred to the investors who held it as tenants in common with the same percentage interests as set out in the above chart.
[10] The mortgage did not make any distinction between the First and Second Priority lenders. It was for the global sum of $3 million with an interest rate of 11.5%. However, the payments made under the mortgage, which was administered by Mr. Bregman, followed the priority scheme.
[11] The mortgage went into default in January 2012 after Seniorscare Corporation ran into some regulatory issues that adversely affected its revenue from the Picton Manor.
[12] As of that date, all of the investors had been paid the amounts due to them under the mortgage and accordingly were in an equal position.
[13] In April 2013, Alan and Gary Litwack, in their capacity as litigation guardians for their father Moses, sued Mr. Bregman, Perley-Robertson, Hill & McDougall LLP and Kiddy Winkles Ltd. for $1 million for negligence and breach of fiduciary duty. They also alleged that Mr. Bregman had engaged in fraudulent conduct. The law firm delivered a statement of defence and crossclaim as did Mr. Bregman and Kiddy Winkles Ltd.
[14] The next month, the Kotzeffs and the Leshes sued Mr. Bregman, his law firm and 626688 Ontario Limited for $3 million for breach of contract, negligence, negligent misrepresentation and breach of fiduciary duty. The law firm delivered a statement of defence and crossclaim as did Mr. Bregman and 626688 Ontario Limited. [^1]
[15] The respondents did not sue. Nor have they explained why they did not do so.
[16] The lawsuits were settled. The settlement agreements contain confidentiality clauses. At the hearing of the applications, I directed Mr. Burke and Mr. Wagner to disclose the settlement amounts to Mr. Lay which they did. Following their discussion, the parties agreed through counsel that the amounts could be described as substantial but that the applicants still lost money on their investment.
[17] No mortgage enforcement proceedings were taken by any of the investors nor did they receive any money from the mortgagor after the mortgage went into default.
[18] In 2016, the Corporation of the County of Prince Edward commenced the process authorized by the Municipal Act, 2001 to sell 9 Hill St. for non-payment of property taxes. The municipality sent final notices to the mortgagees in November of that year.
[19] By letter dated November 7, 2017, Edward Park, a lawyer with the Department of Justice, advised all the parties who had an interest in the property that the Canada Revenue Agency would be making a claim for a portion of the surplus funds from the municipal tax sale. The municipality had deposited $231,799.25 with the Accountant of the Superior Court of Justice. The CRA initially claimed a tax lien in the amount of $141,548.76 but later reduced that claim to $13,292.13 which all parties agreed could be paid out to it. As a result, the balance of the surplus funds is $218,507.12.
[20] On June 11, 2018 the Kotzeffs and Leshes commenced an application for payment out of court of the balance of the surplus funds. The Litwacks commenced a similar application on August 31, 2018. The respondents have not commenced an application for payment out of court but it was agreed that any order which I make for payment of the funds would include them.
The positions of the parties
[21] The applicants initially disagreed over the distribution of the funds based on the First and Second Priority ranking because, although the mortgage payments were made on that basis, the arrangement was not formally reflected in the mortgage documents. However, by the time of the hearing of the applications, they were ad idem on this issue and now agree that the surplus funds should be paid out in accordance with the respective interests of the First Priority lenders.
[22] The respondents submit that a fair and equitable distribution of the surplus funds must take into account the money which the applicants received in settlement of the litigation. They acknowledge that there is no authority directly on point but liken the situation to a mortgagee or tenant in common who has an obligation to account for funds derived from the sale of the property or any other dealings with it that enured to their pecuniary advantage. Such an accounting would recognize that the applicants incurred costs in the litigation and these would be deducted from the settlement funds.
[23] The applicants point out that section 380 of the Municipal Act, 2001 does not refer to or require an accounting but only stipulates that the surplus funds be paid in concordance with the “priority at law”; to introduce such a requirement would be contrary to the statutory objective which is a simple and inexpensive process to dole out what will usually be a modest amount of money. The applicants also argue that what the respondents submit are analogous situations are not that at all – they did not receive any money on account of the mortgage or the land but damages in lawsuits against third parties based on negligent investment advice they had received.
Analysis
[24] The relevant statutory provisions are subsections 380 (1), (4) and (7) of the Municipal Act, 2001 which state:
(1) The proceeds of a sale under section 379 shall, (a) firstly, be applied to pay the cancellation price; (b) secondly, be paid to all persons having an interest in the land according to their priority at law, except the person who immediately before the registration of the tax deed was the owner of land; and (c) thirdly, be paid to the person who immediately before the registration of the tax deed was the owner of the land.
(4) Any person claiming entitlement under clause (1) (b) or (c) may apply to the Superior Court of Justice for payment out of court of the amount to which the person is entitled.
(7) On application under subsection (4), the court shall determine all of the entitlements to receive payments out of the proceeds of sale.
[25] The municipality has been paid the cancellation price and the CRA has received its share of the surplus funds. The applicants and respondents, as mortgagees, clearly have an interest in the land and, because they hold the first mortgage, have priority over any subsequent encumbrancer. The remaining surplus funds would not pay out the first mortgage in full so there are no other persons who would have a valid claim to the funds.
[26] This is a case of first impression. Section 380 appears to give me a broad discretion in determining “the entitlements” to the surplus proceeds. That said, I agree with the applicants’ position that the objective of the statutory scheme is to provide an uncomplicated and inexpensive procedure to obtain the money left over from a municipal tax sale. The respondents’ claim for an accounting would defeat this purpose.
[27] Moreover, this would be neither fair nor equitable in the circumstances of this case. The respondents gave no explanation for why they chose not to commence litigation against Mr. Bregman or his law firm but one reasonable inference is that they did not want to incur the financial risk in doing so. They now want to, in effect, obtain a financial benefit because the applicants took that risk and, fortunately for them, it paid off.
[28] If it had not, would the applicants be entitled to a greater share of the surplus proceeds because they incurred substantial costs in unsuccessful litigation? The respondents could justifiably say no because it would be unfair to, in effect, impose a financial burden upon them because the applicants took a risk that they should not have.
[29] If I was to accept the respondents’ argument, I would have to schedule another hearing in relation to the accounting. The respondents’ position is that the accounting would be a simple arithmetical exercise: the applicants would be entitled only to a deduction for the actual legal costs incurred by them, the settlement funds would be credited to them and the surplus would be distributed in some manner proportionate to the parties’ individual losses on the investment.
[30] I do not see this as a fair method. The risk that the applicants took in commencing costly litigation without any guarantee of recovery would also have to be given a value in the proposed accounting. Although I am not privy to the details of that litigation, I can conclude, based on the pleadings, that a favourable result was far from certain (the applicants were sophisticated investors, they signed documentation acknowledging the investment risk and it was a syndicated mortgage with a high interest rate). The assessment of the risk and the value that should be ascribed to it, would make the accounting potentially lengthy, complicated and expensive.
[31] I also agree with the applicants’ position that the respondents are not in the same situation as a co-mortgagee or co-tenant who is asserting an interest in funds that were obtained through the enforcement of the mortgage or the sale of the property. The applicants sued for, and recovered, damages from third parties in relation to their investment, not the mortgage.
[32] It may be that, if a mortgagee is fully indemnified, it no longer has an entitlement under section 380 to any of the surplus funds but I do not have to answer that question in this case. If the surplus proceeds are distributed in the manner requested by the applicants, they will have still lost money on their investment.
Disposition
[34] The applications are granted. The surplus funds are to be paid out of court in accordance with the respective interests of the applicants and the respondents as First Priority lenders. If there is any disagreement over the specific amounts, the parties can arrange a telephone conference with me through the Belleville trial coordinator. At the conclusion of the hearing, I received cost outlines from counsel for the Kotzeffs and Leshes and the respondents. I have not yet received a costs outline from counsel for the Litwacks. As the successful parties, the applicants are presumptively entitled to costs which I will fix on a partial indemnity basis. I consider a fair and reasonable amount for the Kotzeffs and Leshes to be $7,500 inclusive of HST and disbursements. This amount relates solely to the additional work that had to be done in replying to the argument advanced by the respondents. I will leave it to counsel to try and reach an agreement on the Litwacks’ claim for costs but, to assist them in those discussions, I am inclined to restrict the costs to Mr. Wagner’s preparation for and attendance at the hearing. If for some reason an agreement cannot be reached on the amount of these costs, counsel can make very brief written submissions. The costs are to be paid by the respondents within 30 days or, subject to the parties’ agreement, be deducted from the funds paid out of court to the respondents.
Hurley, J. Date: October 16, 2018
[^1]: It is not clear to me why both Steven and Hildy Lesh were plaintiffs in the lawsuit or why they are both applicants in this proceeding because, according to some of the documents, the money was loaned solely by Hildy Lesh and it was only her named in the mortgage. But there is also a transfer of charge from her to Steven Lesh. This does not have an impact on my decision but the payment out of court should be made only to one of them.