Court File and Parties

Court File No.: 9140/08 Date: 2018-12-19 Superior Court of Justice – Ontario

Re: Pollard Windows Inc, plaintiff, moving party And: 1736106 Ontario Inc., Andrew Ferri, Niagara Home Builders Inc. c.o.b. as Niagara Heritage Homes and Steveco Enterprises Inc., defendants And: 1746878 Ontario Inc., responding party

Before: Mr Justice Ramsay

Counsel: Santiago Costa and Geoff Daley for Pollard Kris Hutton for 1746878

Heard: December 17, 2018

Endorsement

[1] This is a motion to determine priority between creditors following a judicial sale. Some $358,000 has been paid into court following the sale of a residential property at 3627 Carver Street in Fort Erie. The moving party and the responding party each claim priority. No one else has responded.

[2] At the outset of the hearing of this motion. I asked whether any party wanted me to recuse myself. Neither did. I then heard 1746878’s request for an adjournment and dismissed it reasons given séance tenante. I heard oral argument on the motion and reserved my decision. This is it.

The history of the development and the proceedings

[3] Some of the history of the proceedings is set out in my endorsement of March 21, 2018. Since then I have had the benefit of further affidavit evidence, and in particular, cross-examination on those affidavits. The depositions of the two real estate lawyers, Miller and LaRose, were illuminating as to 1746878’s methods of doing business and Andrew Ferri’s involvement therein.

[4] In the late 1990s Lawrence Beam began developing the subdivision in question through his company, Niagara Home Builders Inc., which owned the property subject to a mortgage to NBY Enterprises Inc. Mr Beam deposes that he ran out of money so he “arranged for Steveco to purchase the property on September 1, 2000 by way of power of sale from NBY …” Steveco Enterprises is a subsidiary of Niagara Home Builders. Steveco gave a first mortgage to Northguard Capital Corporation and a second mortgage to Mr and Mrs Carther. They have not responded to this proceeding, so I assume that the second mortgage has been paid. In any event I need not mention the Carthers again.

[5] On November 14, 2007 Steveco transferred ownership of the remaining vacant lots to 1736106 Ontario Inc. subject to the mortgage, which covered all the lots.

[6] In 2008 Pollard Windows, at the request of 1736106, installed $12,813.61 worth of windows at 3627 Carver Street during its construction. Pollard was only paid $2,500, leaving $10,313.61 owing. The transaction went ahead on the basis of the application for credit by Niagara Home Builders Inc. (“C.E.O. or owner Andrew Ferri, Contract manager Lawrence Beam”) that had been submitted to Pollard on December 24, 1999. The cheque in partial payment was signed by Ferri for “Niagara Home Builders Inc.” and dated February 19, 2008.

[7] Northguard, 1736106 and 1746878 are all controlled by Andrew Ferri.

[8] On January 1, 2010 Northguard assigned the mortgage to 1746878 Ontario Inc.

[9] Northguard issued a notice of sale under mortgage to Steveco, allegedly on March 10, 2010. The notice claimed that $689,720.18 was due on the mortgage as of March 10, 2010. It listed the appropriate parties to be notified, and is accompanied by undated Canada Post receipts for registered mail to those parties. Pollard Windows’ notice was addressed to its lawyers at an address from which they had moved, so Pollard would not have had notice of the power of sale.

[10] On March 20, 2010 Pollard filed a construction lien.

[11] On September 16, 2010 Tucker J. gave judgement to Pollard against 1736106 for $10,313.61. She declared that Pollard had a valid construction lien on the property.

[12] On April 10, 2014 Tucker J. ordered a judicial sale of the property and directed a referee to supervise the sale. Ferri represented 1736106 before Tucker J.

[13] On June 2, 2014 1746878 executed an agreement of purchase and sale of 3627 Carver Street with Kevin Creighton, a friend of Andrew Ferri, on the strength of the power of sale dated March 10, 2010. The consideration was a promissory note from Creighton in the amount of $290,000. At that point the property was worth more than that. The sale never closed and the property was never transferred. The Creightons remained in possession of the property for several years.

[14] On September 14, 2014 the Creightons appeared before the referee, Mr Thomas. No one appeared for 1746878 although it had been served. Mr Thomas adjourned the hearing to October 29, 2014 to give the Creightons the opportunity to prove their claim to possession. On October 29, Mr Thomas found that the home had not been sold under power or sale, and the mortgagee had not complied with its duties to subsequent encumbrancers such as the plaintiff. Finally, he had serious concerns about the proposed sale under power of sale being improvident. He ordered that no further steps be taken to sell the property under power of sale without court order. The referee ordered a further hearing at which the mortgagee would be required to prove the basis of its claim.

[15] On June 8, 2016 the hearing reconvened. The mortgagee, 1746878, now represented by counsel, had failed to produce the documents associated with the mortgage. Counsel for 1746878 challenged the jurisdiction of the referee. The referee referred the matter back to the Superior Court and stayed the removal of the Creightons.

[16] On January 13, 2017 the matter came before me. I ordered that the judicial sale proceed, that the Creightons vacate the property and that no steps be taken to sell the property under power of sale.

[17] The Creightons left and then moved back in. On January 24, 2018 counsel for 1746878 notified counsel for Pollard that 1746878 had registered a caution on title with respect to the notice of sale dated March 10, 2010. On March 21, 2018 I found that this constituted a step taken to sell the property under power of sale and I found 1746878 guilty of contempt of court. That conviction and the fine imposed are the subject matter of an outstanding appeal. The Creightons had by then moved out for good.

The positions of the parties

[18] The mortgagee, 1746878, says that it has priority over the construction lien for the following reasons:

a. Pollard’s lien rights were extinguished with the service and receipt of a bona fide notice of sale in March 2010. b. Pollard’s statement of claim failed to name 1746878 or to claim priority over it. c. 1746878 advanced funds on a bona fide mortgage. d. There was no fraud.

Pollard takes the contrary position on all four points.

The law

[19] The Construction Act provides:

78 (1) Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises. R.S.O. 1990, c. C.30, s. 78 (1) ; 2017, c. 24, s. 70 .

(2) Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered. R.S.O. 1990, c. C.30, s. 78 (2) .

(3) Subject to subsection (2), and without limiting the effect of subsection (4), all conveyances, mortgages or other agreements affecting the owner’s interest in the premises that were registered prior to the time when the first lien arose in respect of an improvement have priority over the liens arising from the improvement to the extent of the lesser of,

(a) the actual value of the premises at the time when the first lien arose; and (b) the total of all amounts that prior to that time were, (i) advanced in the case of a mortgage, and (ii) advanced or secured in the case of a conveyance or other agreement. R.S.O. 1990, c. C.30, s. 78 (3) ; 2017, c. 24, s. 70, 71 .

(4) Subject to subsection (2), a conveyance, mortgage or other agreement affecting the owner’s interest in the premises that was registered prior to the time when the first lien arose in respect of an improvement, has priority, in addition to the priority to which it is entitled under subsection (3), over the liens arising from the improvement, to the extent of any advance made in respect of that conveyance, mortgage or other agreement after the time when the first lien arose, unless,

(a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or (b) prior to the time when the advance was made, the person making the advance had received written notice of a lien. R.S.O. 1990, c. C.30, s. 78 (4) ; 2017, c. 24, s. 53 (1), 70 .

[20] The Mortgages Act provides:

28 The person exercising the power of sale has power to convey or assign to and vest in the purchaser the property sold for all the estate and interest therein of the mortgagor and of which the mortgagor had power to dispose. R.S.O. 1990, c. M.40, s. 28 .

1. The Notice of Sale of 2010 did not extinguish Pollard’s rights

[21] I note in passing that I doubt the bona fides and the validity of the notice. It was given between parties who are not at arm’s length – Northguard (for 1746878?) on the one hand and Steveco (for 1736106?) on the other. It has not been proven that the mortgage was in default. The terms of repayment are not set out in any writing to which the court has access so it is impossible to find objectively when or whether it went into default. It has not been proven to my satisfaction on the preponderance of the evidence that the notice was signed when it was issued.

[22] The point however is that the property was never sold under the mortgagee’s power of sale. Mr Thomas has already found that no sale took place under the notice of sale and no one disputes that. The notice of sale never resulted in a “conveyance … registered prior to the time when the first lien arose…” within the meaning of s. 78 of the Construction Act, nor was any interest “convey[ed]” within the meaning of s. 28 of the Mortgages Act. The notice of sale is a total red herring. The property was never sold pursuant to the notice of power of sale. Instead the Creightons moved in with Ferri’s permission on the strength of an alleged informal lease.

2. It does not matter that Pollard did not name 1746878 in its statement of claim

[23] The mortgagee had no say in whether the owner of the real estate owed money to the contractor. The mortgagee’s interests were only at stake once the contractor tried to enforce its judgment. From that point on 1746878 has had notice of the proceedings and has been participating. It was not necessary for 1746878 to be named in the statement of claim.

3. The mortgagee has failed to prove that it advanced money under the mortgage

[24] Ferri’s real estate lawyers, Miller and LaRose, made their depositions on the basis of information and belief from Ferri or Mr Hutton. Neither one has personal knowledge of the true state of affairs. The only firsthand evidence comes from Lawrence Beam, who deposed that Northguard advanced $400,000 to Steveco. He deposed that Steveco was served with a notice of power of sale dated March 10, 2010. He does not say when. He also says that he believes the amounts said to be owing in the notice of sale are true. I do not believe him.

[25] Beam admitted in paragraph 3 of his affidavit that when his company “ran into financial difficulties” in 2000 he arranged for his company, Steveco, to buy the property by a power of sale exercised by the then mortgagee (NBY) against Beam’s other company Niagara Builders. Steveco gave a new mortgage to Northguard (i.e. Ferri). Why “arrange” for your mortgagee to enforce the mortgage by power of sale against your company and sell to another one of your companies? Why not simply re-finance? To re-finance you might have to pay your creditors. Under a power of sale, you would not.

[26] In 2007 when the market slowed down and there were still a few empty lots remaining on Carver Street, Steveco transferred ownership to 1736106 (i.e. Ferri). In January 2010 Northguard (i.e. Ferri) transferred the mortgage to 1746878 (i.e. also Ferri). In February 2010 Ferri sent the cheque for $2,500 to Pollard. Within a month, 1736106 had allegedly defaulted and a notice of sale is said to have issued.

[27] Ferri and Beam have worked together to defeat creditors for years. They were still working together in 2016. According to Miller the real estate lawyer (Motion record tab 42, qq. 185 – 187), in 2016 the six lots then remaining (also subject to 1746878’s mortgage) were sold to RO Beam & Sons, another Beam company, with a mortgage to Krown Financial, another Ferri company:

Q. And do you know if, in fact, that sale was by the property owner 173 or was it by the mortgagee 174 under power of sale? A. I believe it was by 174. 173 would – would have judgments against – I’m sure it’s power of sale, I’m positive it’s power of sale.

[28] Beam is not independent of Ferri, and the two of them have a longstanding pattern of acting together to defeat their creditors in a manner that casts doubt on their credibility, in Beam’s case as a witness and in Ferri’s as an informant.

[29] Moreover there is not a shred of documentation as to advances or repayments anywhere, in any form, in spite of repeated requests and orders for production. Connie Northdurft, Ferri’s wife and a director of 1736106 and 1746878 at various times, deposed that the records were destroyed in a fire in 2013. I do not believe her. There was a fire in 2013 but 1746878 was able to produce an apparently signed copy of the notice of sale in 2014. The fire would not have destroyed bank records, Beam’s records or tax records. I infer that that advances and repayments were all notional. They were all inside Ferri’s mind. They were what he wanted them to be when he wanted them to be such.

[30] The mortgage to 1746878 could only have priority to the extent of advances made. It has failed to prove on the preponderance of the evidence that any advances were made.

4. The mortgage from 1736106 to 1746878 was a fraudulent conveyance

[31] The Fraudulent Conveyances Act provides:

2. Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns. R.S.O. 1990, c. F.29, s. 2 .

3. Section 2 does not apply to an estate or interest in real property or personal property conveyed upon good consideration and in good faith to a person not having at the time of the conveyance to the person notice or knowledge of the intent set forth in that section. R.S.O. 1990, c. F.29, s. 3 .

[32] The mortgage that was assigned to 1746878 shows numerous badges of fraud:

a. The transaction was not at arm’s length. Ferri controls 1736106 and Northguard. b. 1736106 had no assets apart from the real estate that was mortgaged. c. 1736106 was about to procure goods and services from contractors when it acquired the property subject to the mortgage to Northguard. d. Niagara Home Builders Inc. had left unpaid creditors on the same project in 2000 and 1736106 would do so again in 2016. e. When Pollard was trying to collect its debt, the mortgage was assigned to 1746878, also controlled by Ferri, and apparently a notice of sale was issued between parties who were not at arm’s length. f. The parties to the proposed sale under power of sale were not at arm’s length. g. The proposed sale under the power of sale would have been improvident. No attempt was even made to ascertain or obtain market value.

[33] There is a strong inference that the transaction was intended to defeat creditors. There is very little evidence that the transaction took place in good faith upon good consideration apart from the bare assertion that it did. To the extent that there is any, I reject it. I find that the mortgage held by 1746878 is part of what was ultimately a simple scheme to defeat the creditors. Ferri created 1736106 to contract for goods and services and used 1746878 and its predecessor to get priority over the contractors when they tried to get paid. The mortgage is void as against Pollard.

[34] 1746878 cannot rely on corporate identity in the face of all this fraud.

Conclusion

[35] The Town’s tax bill has been paid. I order that the money in court be distributed as follows:

a. First, to pay the judgment in favour of Pollard in the amount of $10,313.61 with interest from September 16, 2010 at the contractual rate. b. Second to pay Pollard’s costs of the action once I have fixed them. The parties may make written submissions to costs not exceeding three pages in length, to which may be appended a bill of costs and any offers to settle, Pollard by January 18 next, 1746878 by January 25. c. If any money remains, I can be spoken to as to how it shall be distributed.

J.A. Ramsay J. Date: 2018-12-19