COURT FILE NO.: CV-19-00000240-0000
DATE: 2019/08/15
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Canadian Western Trust Company (In Trust for RRSP Plan #10084752 and Plan #10084190)
Plaintiff
– and –
1324789 Ontario Inc., Martha Lorraine Beach, Johnathan Gary Beach and 1073650 Ontario Inc.
Defendants
– and –
1324789 Ontario Inc., Martha Lorraine Beach, Johnathan Gary Beach and 1073650 Ontario Inc.
Plaintiffs by Counterclaim
– and –
Canadian Western Trust Company (In Trust for RRSP Plan # 10084752 and Plan # 10084190), Heliotrope Investment Corporation, Magenta Capital Corporation and Magenta Mortgage Investment Corporation
Defendants by Counterclaim
Charles Merovitz, for the Plaintiff/Defendant by Counterclaim
Charles Hammond, for the Defendants/Plaintiffs by Counterclaim
Denise Sayer and Adam Stikuts, for the Defendants by Counterclaim Heliotrope Investment Corporation, Magenta Capital Corporation and Magenta Mortgage Investment Corporation
HEARD: July 25, 2019
REASONS FOR Decision
RYAN BELL j.
Overview
[1] This is a mortgage enforcement action. Canadian Western Trust Company, in trust for RRSP Plan #10084752 and Plan #10084190, seeks to enforce two mortgages. 1324789 Ontario Inc. is the mortgagor and Martha Lorraine Beach, Johnathan Gary Beach, and 1073650 Ontario Inc. are the guarantors (collectively, the “Beach parties”) under the first mortgage; 1073650 Ontario is the mortgagor, and the other Beach parties are the guarantors under the second mortgage.
[2] The Beach parties seek a certificate of pending litigation over nine parcels of land.[^1] The two mortgages that Canadian Western seeks to enforce in this action are registered against six of the nine properties. As the Beach parties put it in their counterclaim:
In addition, the Defendants seek a Certificate of Pending Litigation over the lands that the Plaintiff is attempting to enforce on in this Action, as well as in the lands [sic] that Mr. Marshall, through his various investment vehicles, is attempting to enforce upon in the Actions bearing Court File Nos. CV-18-00000201-0000, CV-19-00000090-0000, CV-19-00000115-0000, and CV-19-00000239-0000.
[3] Canadian Western is the plaintiff in CV-18-00000201-0000. Heliotrope Investment Corporation is the plaintiff in CV-00000239-0000. Magenta Capital Corporation is the plaintiff in CV-19-00000090-0000 and CV-19-00000115-0000. The Beach parties are the defendants in each of these related mortgage enforcement actions.
[4] Eight of the nine properties have been listed for sale. The Beach parties maintain that they are not obligated to repay the mortgages at this time, and therefore, Canadian Western, Heliotrope Investment, and Magenta Capital are not entitled to sell the properties under power of sale. In their statement of defence and counterclaim in this action, the Beach parties allege breach of fiduciary duty, breach of contract, and bad faith on the part of Canadian Western, Heliotrope Investment, Magenta Capital, and Magenta Mortgage Investment Corporation (collectively, the “Marshall parties”), in the context of two joint venture agreements.
[5] The Marshall parties oppose the motion for a certificate of pending litigation on the following grounds:
i. they assert that the Beach parties are not trying to preserve or protect an interest in land;
ii. they assert that although the Beach parties are trying to prevent Canadian Western and the plaintiffs in the related mortgage enforcement actions from exercising their contractual rights under the mortgage commitments, the Beach parties have failed to plead fraud in the action and have led no evidence of fraud in support of their motion; and
iii. they maintain that the Beach defendants have claimed damages in this action, as well as in the related mortgage enforcement actions, and that damages are a sufficient remedy.
[6] I find that the Beach parties have not met the threshold requirement for a certificate of pending litigation because they have no reasonable claim to an interest in land. The motion for a certificate of pending litigation is dismissed.
Factual Background
[7] The two mortgages that are the subject matter of this mortgage enforcement action were registered on April 4, 2013. Gavin Marshall and his spouse are, respectively, the owners of RRSP Plan No. 10084189 and RRSP Plan No. 10084190.
[8] On February 6, 2014, Magenta Waterfront Development Corporation and 1324789 Ontario entered into a joint venture agreement for two residential land development projects known as Applewood Lane and Johnston Point, located north of Kingston. In July 2014, Magenta Waterfront Development and 1324789 Ontario entered into a second joint venture agreement with respect to a third property known as Pine Point. 1324789 Ontario funded its proportionate share of the development costs through mortgages, including the mortgages that are the subject matter of the related mortgage enforcement actions.
[9] In May 2018, 1324789 Ontario commenced an action against, among others, Magenta Waterfront Development, Heliotrope Investment, Magenta Capital, and Magenta Mortgage Investment (the “joint venture action”). I note, parenthetically, that Magenta Waterfront Development is not a party to this action. In the joint venture action, 1324789 Ontario alleges that the defendants breached their contractual and common law duties in relation to the joint venture.
[10] In December 2018, 1324789 Ontario moved in the joint venture action for the appointment of a receiver-manager and, in the alternative, for an interlocutory injunction restraining Mr. Marshall from taking steps to compel the payment of the secured and unsecured debt owed to his companies. On January 18, 2019, Hurley J. dismissed 1324789 Ontario’s motion.[^2]
[11] There is a motion returnable September 5, 2019 to consolidate this action with the other mortgage enforcement actions and the joint venture action.
Certificate of Pending Litigation: The Legal Test
[12] The purpose of obtaining a certificate of pending litigation is to warn interested parties that there is a claim against the property. Where a motion for leave to issue a certificate of pending litigation is brought on notice, as is the case here, the test is the same as on a motion to discharge a certificate of pending litigation (Lawrence Avenue Group Ltd. v. Innocan Realty Inc., 1999 CanLII 14793 (ON SC), [1999] O.J. No. 1213 (S.C.J.), leave to appeal dismissed, [1999] O.J. No. 2892, at para. 6).
[13] Section 103(6) of the Courts of Justice Act sets out the circumstances in which the court may make an order discharging a certificate of pending litigation. Those circumstances include where the party at whose instance the certificate was issued claims damages in place of or as an alternative to the interest in the land claimed or the party does not have a reasonable claim to the interest in the land. The court must first ascertain whether the plaintiff’s claim to an interest in land meets the threshold requirement – that is, whether the claim to an interest in the land is “reasonable” and at least raises a triable issue. Then, the court must go on to consider the equities between the parties (Lawrence Avenue Group, at para. 6).
[14] In the absence of fraud, a mortgagor may not obtain a certificate of pending litigation to stop power of sale proceedings without having offered to redeem the mortgage (Maletta v. Thiessen, (1996), 1996 CanLII 11765 (ON CA), 28 O.R. (3d) 251 (Div. Ct.), application for leave to appeal to Court of Appeal dismissed). Where fraud is alleged, it must be fraud that affects the mortgagor’s right to redeem the mortgage (Muhammad v. 2156555 Ontario Inc., 2017 ONSC 7226, at para. 49). In Maletta, the order granting a certificate of pending litigation was set aside by the Divisional Court because there was no connection between the alleged fraud and the loss of the plaintiffs’ right to redeem.
[15] Where the threshold requirement as to an interest in land has been met, the factors the court is to consider on a motion for a certificate of pending litigation include:
• whether the plaintiff is a shell corporation;
• whether the land is unique;
• the intent of the parties in acquiring the land;
• whether there is an alternative claim for damages;
• the ease or difficulty in calculating damages;
• whether damages would be a satisfactory remedy;
• the presence or absence of a willing purchaser; and
• the harm to each party (Perruzza v. Spatone, 2010 ONSC 841, at para. 20, cited in Sun Rise Elephant Property Investment Corporation v. Luu, 2018 ONSC 5247, at para. 2).
Discussion
(i) No reasonable claim to an interest in land
[16] In this case the Beach parties have not met the threshold requirement for a certificate of pending litigation because they have no reasonable claim to an interest in land.
[17] The language of Rule 42.01(2) of the Rules of Civil Procedure is mandatory: a party who seeks a certificate of pending litigation shall include a claim for it in the originating process or pleading that commences the proceeding. It is inappropriate to maintain a certificate of pending litigation in one action based on a pleading in a different action (Muhammad, at para. 52).
[18] As Newbould J. observed in Erdman, Re, 2012 ONSC 3268, at para. 66:
There is reason for requiring a claim for an interest in land to be pleaded in a proceeding. One of the tests that must be established to obtain a certificate of pending litigation is that the plaintiff has a reasonable claim to an interest in the land. Without knowing the basis for the claim as pleaded, it would not be possible to determine this issue, which is usually dealt with after an ex parte order is obtained and a motion is brought to set it aside, or when the motion for the certificate of pending litigation is brought on notice.
[19] In their counterclaim in this action, the Beach parties plead breach of contract, breach of “fiduciary duties created in contract” and bad faith in contractual performance. The Beach parties do not claim an interest in the lands over which they seek a certificate of pending litigation. They allege they had a verbal agreement with the Marshall parties about when the mortgages could be enforced. Paragraphs 30 and 31 of their statement of defence and counterclaim state:
The Defendants state that based on the actions of the mortgages [sic] being enforced through this Action and the Actions bearing Court File Nos. CV-18-00000201-0000, CV-19-00000090-0000, CV-19-00000115-0000, and CV-19-00000239-0000 (the “Mortgage Enforcement Actions”) are not enforceable by the Magenta Parties and/or the Magenta Parties interest in the land is invalid based on the actions of Mr. Marshall as described above.
Moreover, the Defendants state that the mortgages being enforced in the Mortgage Enforcement Actions are invalid insofar as they are unenforceable against the Plaintiffs by Counterclaim. The Defendants plead and rely on the allegations in their Statement of Defence in this Action in this regard.
[20] The Beach parties plead that the mortgages are unenforceable by reason of the conduct of the Marshall parties in relation to the joint venture agreements. They do not plead that the mortgages being enforced in this action and in the related mortgage enforcement actions were obtained by fraud. They do not plead that the debts secured by the mortgages are not owed – the issue is when the debts are to be paid. There is no allegation of fraud that affected their right to redeem the mortgages.
[21] The Beach parties rely on Hirji v. Khimani (1978), 1978 CanLII 1491 (ON SC), 19 O.R. (2d) 750 (H.C.J.) in support of the proposition that “it is well accepted that an interest in a mortgage constitutes an interest in land.” In my view, their reliance on Hirji is misplaced. In Hirji, “[t]he interest in land the subject-matter of the litigation, is a mortgage alleged to have been obtained by fraud and which is registered on the land in question” (Hirji, at para. 2). In those circumstances, the court dismissed the application to vacate.
[22] As to fraud, the Beach parties rely on paragraph 27 of their statement of defence and counterclaim:
In the alternative, the Defendants allege that Mr. Marshall’s actions constituted a fraudulent scheme designed to saddle the Defendants with debt under the misrepresentation that he would and had tried to secure third party financing for the Joint Venture and that the Defendants debts would be paid out of Joint Venture lot sales when the Plaintiff’s true intention was to enforce on the mortgages and other debts at a time when Mr. Marshall knew the Defendants could not repay the mortgages and demand notes in full as a calculated effort to effectively “price out” the Defendants from their interest in the Joint Venture so that Mr. Marshall and his entities would reap the entire profit from the Joint Venture.
[23] The Beach parties’ allegation that Mr. Marshall engaged in a “fraudulent scheme” does not go to the validity of the mortgages or the right to redeem the mortgages. On his cross-examination in the joint venture action (the transcript of which was relied upon by the Marshall parties on this motion), Mr. Beach confirmed that he did not take issue with the fact that either he or his wife signed the mortgage commitments in dispute.
[24] The facts before me are similar to those that were before Lax J. in Lawrence. In Lawrence, the mortgagors claimed against the mortgagee for damages from overpayment on mortgages. Lax J. allowed the mortgagee’s appeal from the order granting certificates of pending litigation on the basis that:
[The mortgagors] do not allege that the mortgages are a nullity. They do not allege fraud. They dispute the amounts owing under the mortgages and not their validity. Putting their claim at its highest, the plaintiffs say that by reason of the defendants’ wrongful conduct, they paid too much money for these mortgages. I fail to see how this raises a triable issue that gives rise to an interest in title or land (Lawrence, at para. 15).
[25] Putting the Beach parties’ claim at its highest, they say that by reason of the Marshall parties’ alleged wrongful conduct in connection with the joint venture agreements, the mortgages are not enforceable at this time. As in Lawrence, the Beach parties’ claim in this action does not raise a triable issue that gives rise to an interest in title or land.
[26] The Beach parties face an additional hurdle on their motion for a certificate of pending litigation. All agreements relating to an interest in land, or any variations relating to such agreements, must be in writing (Statute of Frauds, R.S.O. 1990, c. S.19, s. 4; Bravar Custom Builders Ltd. v. Long Island Homes Inc., 2015 ONSC 6627, at paras. 24-25). As Kellock J. stated in Shook v. Munro, 1948 CanLII 8 (SCC), [1948] S.C.R. 539, at p. 543:
Assuming that the parties to the mortgage verbally agree to extend the time of payment until the mortgagor should be able to pay, that agreement cannot, by reason of the Statute of Frauds, be permitted to be proved for the purpose of varying the terms of the mortgage.
[27] Even if I were to accept that the Marshall parties’ alleged agreement not to enforce the mortgages raises an issue regarding an interest in land, there is no evidence in the record that the alleged agreement was reduced to writing. Counsel for the Beach parties pointed to an email exchange which he maintained constituted an agreement in writing not to enforce the mortgages. In the first email, Mr. Marshall “authorized and directed [Canadian Western] to suspend future payments.” In the second email, Mr. Beach thanked Mr. Marshall for having done so. Whatever else this email exchange may be, it is not “an agreement…memorandum or note thereof…in writing and signed by the party to be charged therewith” as required by s. 4 of the Statute of Frauds.
[28] The Beach parties have no reasonable claim to an interest in land in this action. The threshold requirement for a certificate of pending litigation has not been met.
(ii) No offer to redeem the mortgages
[29] The Beach parties seek to stop power of sale proceedings. They have not offered to redeem the mortgages. They have not pleaded a fraud that prevents them from redeeming the mortgages. Their failure to do so is fatal to their motion for a certificate of pending litigation.
(iii) Damages are a sufficient remedy
[30] Where damages are a sufficient remedy, courts will not issue a certificate of pending litigation. The reason is clear: “[a] certificate of pending litigation is intended to protect an interest in land in situations where other remedies would be ineffective” (Bains v. Khatri, 2019 ONSC 1401, at para. 37).
[31] In their counterclaim in this action, the Beach parties seek damages for bad faith and, in the alternative, damages for breach of contract and damages for breach of fiduciary duty. They allege breach of the joint venture agreements and bad faith in contractual performance. They plead and rely on all of the allegations contained in their statement of claim in the joint venture action. In dismissing the motion for a receiver-manager and, alternatively, an injunction, Hurley J. concluded that damages would be an adequate remedy:
Financial harm, even bankruptcy, does not constitute irreparable harm…The plaintiff will be able to obtain an appropriate remedy – an award of damages – if it is successful in the lawsuit.[^3]
[32] I reach the same conclusion here. The Beach parties have not pleaded that the nine properties are unique. They are owned as an investment opportunity. The Beach parties’ dispute is with the Marshall parties’ actions in relation to the joint venture agreements. I agree with the Marshall parties that the Beach parties’ primary claim in this action, and in the other related actions, is for damages.
[33] If they are successful on their counterclaim, the Beach parties will be able to obtain an effective remedy – an award of damages.
Conclusion
[34] As the court in Duffin v. Norina Holdings Inc., 2011 ONSC 6431, summarized at para. 7:
Arnold v. Bronstein reiterates longstanding common law doctrine that a mortgagee will not be restrained from exercising a power of sale (whether contractual or by court order) unless the mortgagor pays the amount claimed by the mortgagee into court, “provided no case of fraud be made out.”
[35] The underlying rationale for the doctrine is straightforward: there is a very strong public interest in allowing mortgagees to enforce their contractual rights; lenders will not lend if they cannot enforce their right to be paid back (Duffin, at para. 8).
[36] These are not injunction proceedings but the intent in seeking a certificate of pending litigation over the nine properties is the same: to stop the power of sale proceedings. As the Beach parties themselves put it in their notice of motion: “[t]hese properties have been listed for sale and are currently on the market. Their sale could be imminent…The ninth property which has not yet been listed for sale but is subject to a mortgage held by [Canadian Western] and … a Notice of Sale has been delivered…”
[37] The Beach parties have no reasonable claim to an interest in land in this action. They have failed to plead or adduce evidence of fraud in relation to the mortgages. They have failed to make any offer to redeem the mortgages. And, in any event, their primary claim is for damages.
[38] For all of these reasons, the Beach parties’ motion for a certificate of pending litigation is dismissed.
[39] As the successful parties on the motion, the Marshall parties are presumptively entitled to their costs. If the parties are unable to agree on costs of the motion, they may make written submissions limited to a maximum of three pages. The Marshall parties shall deliver their costs submissions by September 12, 2019. The Beach parties shall deliver their responding costs submissions by October 10, 2019. If no submissions are received within this timeframe, the parties will be deemed to have settled the issue of costs as amongst themselves.
Madam Justice Robyn M. Ryan Bell
Released: August 15, 2019
[^1]: The nine parcels of land at issue on the motion have the following PINs: 36291-0501, 36291-0896, 36291-0920, 36291-0913, 36291-0939, 36291-0940, 36288-0303, 36288-0728, and 36921-0938. [^2]: 1324789 Ontario Inc. v. Marshall, 2019 ONSC 517. [^3]: 1324789 Ontario Inc., at paras. 40 and 46.