COURT FILE NO.: CV-18-609876-CL DATE: 20191213 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

TREZ CAPITAL LIMITED PARTNERSHIP, TREZ CAPITAL (2011) CORPORATION and COMPUTERSHARE TRUST COMPANY OF CANADA Plaintiffs – and – MARIO MORRISON, 2140090 ONTARIOS INC. and 275 WINDMILL LTD. Defendants

Counsel: Dominique Michaud for the Plaintiffs Crawford Smith and Philip Underwood for the Defendants

HEARD: December 4, 2019

Penny J.

Overview and Issues

[1] This is a motion for summary judgment in which both parties seek a summary determination of the issue in dispute in their favour.

[2] The defendants borrowed money from the plaintiffs. Disputes arose after the loans came due. There was a settlement of these disputes in which the plaintiffs compromised their claim to retroactive annual interest at 25% upon the defendants’ promise to repay the loans, in full, at a lower rate of interest. The settlement provided that the defendants would be released from any further obligations under the loans upon compliance with all of the terms of the settlement. One term of the settlement required the borrowers to consent to a sale approval motion for the sale of a property in receivership, provided the sale price exceeded a certain minimum.

[3] When the property was sold at a price above that minimum, the borrowers opposed the sale approval motion on the basis that the sale price was too low. They were unsuccessful. The sale of the property was approved. Essentially all of the settlement amounts were paid from a combination of refinancing and the proceeds from the sale of the property. The plaintiffs took the position, however, that the borrowers’ opposition to the sale approval motion was a breach of the settlement agreement. They sued and moved for summary judgment on their full claim for all arrears at an annual interest rate of 25% and all default administration fees. The defendants argue that: a) they should be granted relief from forfeiture; or, in the alternative, b) the rate of interest and default administration fees sought in the plaintiffs’ motion are unenforceable as being contrary to the federal Interest Act, R.S.C., 1985, c.I-15.

[4] For the reasons that follow, I grant relief from forfeiture on terms set out below.

Background

[5] The plaintiff Trez Capital Limited Partnership (TCLP) is a mortgage broker. Trez Capital (2011) Corporation is its general partner. The loans in this case were owned by Trez Capital Mortgage Investment Corporation (Trez MIC). TCLP served as Trez MIC’s mortgage broker and administrator. Computershare Trust Company of Canada provides custodial services to the Trez Capital group of companies.

[6] Trez MIC, through TCLP, made two loans to the corporate defendants. Mr. Morrison, the principal of the corporate borrowers, guaranteed the loans. The loans were renewed at intervals. Ultimately, the loans bore maturity dates of January and April 2016 respectively. These loans bore interest at a “standard rate” which floated between 8.5 and 9.7%. The loans also contained a provision that the interest rate increased to 25% in the last month of the term of the loan. Prior to the events described below, no interest rate of 25% was ever invoiced or charged to the borrowers.

[7] There is a dispute about when the loans matured but, in light of subsequent events, that dispute was overtaken and is not relevant to the resolution of this motion.

[8] Between January and June 2016, there were ongoing negotiations between Trez and Morrison regarding the renewal of the loans. Trez continued to issue monthly invoices at the standard rate of interest. The borrowers, for the most part, paid these invoices as they came due.

[9] In May 2016, the board of directors of Trez MIC announced a windup of that company. As part of this process, Trez MIC ceased: a) to make any new loans; and, b) all mortgage renewal activity. As a result, TCLP was directed by Trez MIC to refuse to renew the defendants’ loans.

[10] The recorded outstanding balances at the time were approximately $1.36 and $5.07 million (for a total of $6.43 million). However, following the refusal to continue any renewal discussions, Trez delivered a payment statement claiming interest at 25% and a $7,000 monthly “default administration fee” retroactively to March 2015. Morrison refused to pay the additional interest and fees. Litigation ensued in which Trez obtained consent court orders appointing a receiver over the corporate borrowers and their real estate holdings.

[11] Morrison was trying to refinance. The parties continued negotiations. Eventually, in the spring of 2018, Morrison was able to obtain a financing commitment from Centurion Mortgage Capital Corporation. This enabled the parties to reach agreement on the terms of a settlement. The essential terms of the settlement were:

(a) the defendants would pay to the lender from the Centurion refinancing, an amount owing under the loans calculated at the standard rate of interest (not the 25% rate) together with additional charges and expenses incurred and incurred in respect of the loans;

(b) the receiver’s appointment over a property in Sydney, Nova Scotia would continue if the proceeds of the Centurion refinancing were insufficient to pay out the lender in full;

(c) if the receiver proceeded to sell the Sydney property, the defendants would consent to the order approving the sale, provided the gross sale price was at least $540,000;

(d) a consent order would be taken out discharging the receivership and the mortgage security in favour of the lender; and

(e) the lender would release the defendants from any obligations under the loans and guarantees, conditional upon the defendants complying with all of the terms of the settlement.

[12] As part of the settlement, the defendants provided the lender with an acknowledgement of debt in which the defendants confirmed that they were in default of their obligations under the loans and acknowledged the full amount owing at the contractual interest rate of 25% per annum and including default administration fees. The acknowledgement of debt:

(a) acknowledged the combined debt owing on the loans as at March 8, 2018 to be $11,366,833.40;

(b) made clear that this amount was owing without right of set off or defence or equity which would reduce these amounts; and

(c) appended a detailed mortgage statement which set out a breakdown of the debt owing on the loans. This breakdown clearly shows that the loans accrued interest at 25% per annum and each accrued a monthly default administration fee.

[13] The parties also entered into a mutual full and final release that was held in escrow pending completion of the settlement. The release provides, among other things, that should the defendants breach any term of the settlement agreement, the release by the plaintiffs “shall be void” and the plaintiffs “shall be free to pursue any and all claims” in respect of the loans and the guarantees.

[14] The Centurion refinancing closed towards the end of May 2018.

[15] After deduction of some $41,500 in respect of legal fees and a $175,000 reserve paid to the receiver, Trez received the balance of the funds, a total of approximately $6.46 million.

[16] The lender acknowledged that the amount paid from the refinancing was sufficient to pay off one loan in full. The lender provided a mortgage statement with respect to the other loan which indicated that, after a paydown from the remaining balance of the Centurion refinancing of about $1.02 million, the balance owing on the loan, as at June 1, 2018, was $618,982.72.

[17] The net available funds received from the refinancing were, therefore, insufficient to pay the full amount owing under the settlement. The debtors were not in a position to pay the outstanding balance. As a result, the receiver’s appointment in respect of the Sydney property continued. The receiver entered into an agreement of purchase and sale to sell the Sydney property for $675,000. The price for the sale exceeded the minimum price of $540,000 set out in the settlement agreement. Accordingly, Morrison was obliged to consent to an order approving the sale.

[18] Contrary to the settlement agreement, Morrison did not consent to court approval of the sale but actively opposed it. Morrison maintained that the sale price was below market, arguing that a third party had previously offered him $2.2 million for the property and that it had been appraised at $2.3 million in 2009. Morrison’s opposition was unsuccessful and the Supreme Court of Nova Scotia approved the sale of the Sydney property by order of July 23, 2018. Additional costs and interest expense were incurred as a result of Morrison’s opposition, although the specific amount of those additional costs has not been identified. In any event, the sale of the Sydney property closed. Following completion of the sale, the receiver made a distribution to the lender in the amount of $608,000 to be applied against the shortfall on the loans. Although the receiver has not yet been discharged, it appears that it’s fees and expenses up to September 27, 2019 have been paid and that, after the $608,000 distribution, there were remains an amount of $10,985.23 in cash. The receiver “expects there will be little to no funds available for distribution after the payment of professional and other costs.” No accounting or explanation of this expectation has been provided.

[19] Thus, on the record before me, the shortfall before the sale of the Sydney property was $618,952.72. The net return from that sale, after accounting for all of the Receiver’s costs and expenses up to September 27, 2019 (that is, including the expenses of the opposed sale approval motion), was $608,000 (distributed to the lender) plus $10,985.23 (retained, apparently, against possible future receivership expenses). On its face, therefore, including the retained cash, the sale of the Sydney property seems to have resulted in a surplus of $32.51 over the amount owing under the settlement agreement. Excluding the retained cash, there seems to be a shortfall of $10,952.72.

[20] The lender took the position that the defendants breached the settlement by opposing the sale of the Sydney property. Due to the breach, the defendants were not entitled to the benefits of the settlement or the release. Accordingly, by letter of October 12, 2018, the lender made demand for repayment of the full amount owing to the lender on the loans at the contractual rate as stipulated in the acknowledgement of debt (less the amounts received). The borrowers did not pay so the lender commenced this action by statement of claim issued on November 29, 2018.

[21] The lender maintains that, as at December 4, 2019, the defendants owe the lender $3,268,441.40 under the first loan and $4,090,780.75 under the second loan, for a total of $7,359,222.15. It is common ground that this amount essentially represents the current value of the difference between the amount owing under the settlement and the amount under the acknowledgement of debt and is made up of interest at 25% and default administration fees of $7,000/month since March 2015.

[22] The defendants advanced a number of defences in their factum but, at the hearing of the motion, they relied on two. First, they seek relief from forfeiture. They also say in this context there is no evidence that anything remains owing under the settlement. Second, in the alternative, they argue that the increased interest rate of 25% and the default administration fees are, in any event, unenforceable as being contrary to s. 8 of the Interest Act, R.S.C. 1985, c. I-15.

Analysis

[23] The parties agree that the facts essential to the disposition of this motion are not in dispute. They both take the position this is an appropriate case for summary judgment. I agree. While in the course of argument it became apparent that there were facts in dispute, these particular disputes were superseded by events and are not relevant to the disposition of the issues necessary to decide this motion. Accordingly, I will proceed on the basis that the dispute between the parties is appropriately decided on a motion for summary judgment.

Relief from Forfeiture

[24] Section 98 of the Courts of Justice Act, R.S.O. c. C. 43 provides that “a court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.” Section 98 is a remedial section and should be given a fair, large and liberal interpretation, Kozel v. Personal Insurance Co., 2014 ONCA 130 at paras. 54-55.

[25] Relief from forfeiture simply refers to the power of a court to protect a person against the loss of an interest or a right because of a failure to perform a covenant or condition in an agreement or contract. The remedy of relief against forfeiture is equitable in nature and purely discretionary. The power is predicated on the existence of circumstances in which enforcing a contractual right of forfeiture, although consistent with the terms of the contract, visits an inequitable consequence on the party that breached the contract. Relief from forfeiture is particularly appropriate where the interests of the party seeking enforcement by forfeiture can be fully vindicated without resort to forfeiture. Relief from forfeiture is granted sparingly and the party seeking the relief bears the onus of making the case for it, Ontario (Attorney General) v. McDougall, 2011 ONCA 363 at paras. 86-87.

[26] In exercising its discretion to grant relief from forfeiture, a court must consider three factors:

(1) the conduct of the applicant;

(2) the gravity of the breach; and

(3) the disparity between the value of the property forfeited and the damage caused by the breach,

Kozel, supra, at para. 31, citing Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 S.C.R. 490 at p. 504.

Conduct of the Applicant

[27] The first factor focuses on the breaching party’s conduct. This requires an examination of the reasonableness of the breaching party’s conduct as it relates to all facets of the contractual relationship, including the nature and cause of the breach in issue and its aftermath, Ontario (Attorney General) v. 8477 Darlington Crescent, 2011 ONCA 363 at para. 89.

[28] The lender argues that the defendants are sophisticated commercial parties that were represented by legal counsel when they negotiated and entered into the settlement. The terms of the settlement and the release are not unconscionable. The defendants voluntarily acknowledged and agreed to the terms of the settlement documents, including the acknowledgement of debt and the provision that the release would be void should the defendants breach any term of the settlement.

[29] The plaintiffs rely on the decision in Del Hugh Terrelonge v. CVC Ardellini Investments Inc., 2019 ONCA 811 (dismissing an appeal from the decision of Wilton-Siegel J. reported as Monk Development Corporation v. CVC Ardellini Investments Inc., 2019 ONSC 127). In Terrelonge, the debtor owed over $17 million. The creditor and debtor entered into a forbearance agreement under which, if the debtor paid $8,500,000 plus outstanding interest costs and expenses within a year, the balance of the debt would be forgiven. If the amount was not paid, the full amount of over $17 million would become due and owing. The debtor did not pay the $8.5 million. Upon the creditor’s enforcement proceeding, after the expiry of one year, for the full amount, the debtor argued that he should only be liable for $8.5 million. Wilton-Siegel J. held there was no basis for the exercise of the court’s discretion given that the debtor agreed that the full amount of the loan would become due and payable if the $8.5 million was not paid within a year.

[30] The Court of Appeal agreed. The forbearance agreement was not unconscionable and the result was not disproportionate. If the debtor had complied with the terms of the agreement, it would have expunged a $17 million debt for approximately $8.5 million. It was commercially reasonable that, if the $8.5 million was not repaid within the year, the creditor would require payment of a greater sum.

[31] The Terrelonge case is very different from the case at bar. In Terrelonge, the debtor paid nothing of the $8.5 million settlement. Here, the borrowers, post-settlement, paid $6.4 million of the slightly more than $7 million owed. Before turning to the remedy of selling the Sydney property, only $618,982.72 remained owing. The receiver signed an agreement to sell the Sydney property for $675,000. Payment in full of the plaintiff’s loan was all but assured. That property was sold and a distribution was made to the lender in the amount of $608,000. Including the residual cash on hand, the borrowers’ obligations appear, on the evidence available, to have been discharged in full. Not including the residual cash on hand, they appear to owe about $11,000 (a tenth of a per cent). Thus, the “aftermath” of the breach was that the lender still received the full amount (or virtually the full amount) of the agreed upon settlement amount, subject to a delay of a little over a month.

[32] “All facets of the contractual relationship” also include a consideration of the evidence that the borrowers kept largely current on their monthly obligations throughout the life of the loan. Post-March 2015, the lender continued to send invoices based on the standard rate of interest and appears to have taken the position that the loans had been renewed and were in good standing. The motivation for non-renewal in 2016 appears to have been the decision of Trez MIC to get out of the mortgage lending business altogether, not a particular default of the borrowers.

[33] There is no doubt Morrison breached the settlement agreement by failing to consent to the motion for sale approval of the Sydney property at $675,000. His objection was not to the sale itself but to a sale at what he viewed as too low a value. His motivation was to achieve a net higher return on the sale. Morrison agreed in the settlement to consent at any price above $540,000 to be sure. But he might be forgiven if he thought, with the lender owed only $618,000, there may have been a lack of incentive to obtain the highest price reasonably available.

[34] I do agree with the lender, however, that there was nothing “inadvertent” about Morrison’s conduct. He was told in no uncertain terms that his opposition, in the lender’s view, rendered the release null and void. However, inadvertence, although a relevant consideration, is not a necessary requirement for the application of relief from forfeiture.

[35] The lender relies on the decision of Akbarali J. in North Elgin Centre Inc. v. McDonald’s Restaurants of Canada Limited, 2017 ONSC 3306, [2017] O.J. 3121 (Ont. S.C.), where it was held that one of the conditions necessary for the court to exercise jurisdiction to grant relief from forfeiture is that the applicant has made diligent efforts to comply with the terms of the agreement which it could not comply with through no default of its own.

[36] In Kozel, supra, however, Ms. Kozel injured a motorcyclist in an accident while she was driving with an expired licence. The motorcyclist sued her for damages. Her policy of insurance prohibited her from driving a car unless she was authorized by law to do so. One of the issues on Ms. Kozel’s application for a declaration that her insurer was obliged to provide her with a defence to the motorcyclist’s claim was whether she had a defence of due diligence to driving without a valid licence. The applications judge held that she did. La Forme J.A. held, overturning the applications judge on this point, that Ms. Kozel had not established that she acted with due diligence in respect of her expired licence. He did so on the basis that there was no evidence she did anything to inquire or even consider her driver’s licence renewal. There was, accordingly, an absence of reasonable care on this issue (para 22).

[37] This conclusion, however, did not preclude Ms. Kozel from seeking relief from forfeiture under s. 98 of the Courts of Justice Act. This is because the inquiry under the first factor, the breaching party’s conduct, is much broader than whether the breaching party acted with all reasonable care such that they could make out a due diligence defence. La Forme J.A. held that the enquiry is broader because the court is required to consider the breaching party’s conduct in relation to all facets of the contractual relationship, only part of which includes the nature and cause of the breach in issue, including its aftermath.

[38] Whether a breach by a party is advertent or inadvertent is clearly a relevant consideration in the court’s analysis of the first factor. But, the law does not go so far as to say that inadvertence, or proof of due diligence, is a necessary precondition to reliance on s. 98 at all, nor do I read North Elgin to mean otherwise.

[39] Mr. Morrison took a grave risk in opposing the sale approval motion. In other circumstances, this might well have disentitled him from reliance on s. 98. However, in the aftermath of this breach, the court quickly concluded that the proposed sale met the requirements for such matters under receivership law and approved the sale. The shortfall, if there is one, was miniscule. The borrowers were entitled, and prepared, to pay any shortfall resulting from the sale of the Sydney property. However, the lenders refused to provide any accounting of that amount, taking the position that there was no longer a settlement, the release was void and an additional $7.3 million was owing on account of arrears of interest at 25% and other charges.

Gravity of Breach

[40] The second factor involves an inquiry into the gravity of the breach. This inquiry looks at both the nature of the breach itself and the impact of that breach on the contractual rights of the other party.

[41] This is a case in which the forfeiture provision operated as a means of securing the payment required under the settlement. Typically, this factor is fulfilled by payment of the amounts owing under the settlement.

[42] One might argue that the breach was serious because it put at risk a substantial outstanding payment of the settlement amount ($618,982.72). However, that is not really what happened. For Morrison’s objection to be upheld, the court would have had to be convinced that the Sydney property was worth demonstrably more than $675,000. In that scenario, there was no real risk to payment of the settlement amount. And, after a short delay of about a month and some additional receivership expense (all of which appears to have been paid out of the proceeds before the distribution), there was a further distribution to the lender from proceeds of the sale of the Sydney property in the amount of $608,000. In the circumstances, the only apparent “loss” to the lender is interest on $618,982.72 after June 1, 2018 to the date of the $608,000 distribution and interest on the remaining $10,952.72 to the present. Although the borrowers have asked for an accounting of these amounts outstanding and been prepared to pay them, the lenders have declined to provide any accounting other than the one based on their position that the settlement is void and arrears on interest at 25% per annum is owing.

Disparity Between the Value Forfeited and The Damage Caused by the Breach

[43] The third factor involves an examination of the disparity between the value of the property to be forfeited and the damage caused by the breach. This factor entails a kind of proportionality analysis.

[44] In this case, the disparity is enormous. On the evidence before me, the breach lead to a month’s delay in the payment of the final tranche of the settlement amount and possibly a miniscule shortfall as a result of the added receivership costs (a shortfall, however, which under the terms of the settlement, the borrowers were entitled (and obliged) to pay and which the borrowers maintain they are able and willing to pay if provided with an accounting showing the exact amount outstanding). Against this stands the amount forfeited – payment of an additional $7,359,222.15, representing compound interest since March 2015 at an annual rate of 25%.

Conclusion on Relief from Forfeiture

[45] For the reasons stated above, relief from forfeiture is granted. In the absence of relief from forfeiture, the lenders would enjoy a large windfall at the expense of borrowers who, while they acted foolishly in opposing the sale approval of the Sydney property, appear, at least, to have done so in good faith (with a view to maximizing the return from the Sydney property receivership) and whose breach caused essentially no prejudice to the lenders.

[46] Section 98 of the Courts of Justice Act, R.S.O.1990, c.C.43, permits me to grant relief against forfeiture “on such terms as to compensation or otherwise as are considered just.”

[47] Although I well understand the tactical reasons for doing so, it was a mistake on the part of the lender to refused to provide to the borrower and to the court an accounting of the precise amount of the outstanding balance under the settlement agreement. On the record before me, I would have been entitled to conclude that the outstanding balance is nil. I say this for two reasons. First, on the available evidence from the receiver, there is actually a small surplus of $32.51. While the receiver implies there may be further costs of the receivership, there is no evidence of what those are or may be. Second, the owner of the loans, Trez MIC, has itself reflected these loans in its books as fully satisfied.

[48] However, I can appreciate that both sides have been focused on the much larger issue of the claim for an additional $7 million of accrued interest. Further, following argument, I was provided with a without prejudice communication from the lender’s counsel to the borrowers’ counsel from October 2018 which contained a “my recollection is” estimate of the outstanding amount required under the settlement agreement. For these reasons, I will provide the lender with 30 days to serve a final accounting of any amounts outstanding on the payment required under the settlement agreement. The borrowers may, once that accounting is served, have 30 days to make payment or to make reasonable inquiries and serve any objection to the amounts calculated. If there is a dispute that cannot be resolved between the parties, they shall attend before me at a brief case conference at which we will determine how best to finally resolve any outstanding issues and make any final payments required.

Section 8 of the Interest Act

[49] As an alternative argument, the borrowers also submit that the claimed $7,359,222.15 is unenforceable as being in violation of s. 8 of the federal Interest Act. Section 8 provides that no fine, penalty or rate of interest shall be taken on any arrears of principal or interest secured by a mortgage that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal not in arrears.

[50] The borrowers argue that the annual interest rate of 25% and the default administration fees embedded in the acknowledgement of debt and in the calculation of the outstanding $7,359,222.15 constitute a fine, penalty or rate of interest which exceeds the charge (which floated between 8.5 and 9.7%) on principal or interest not in arrears.

[51] The mortgage documents for the first and second loans in this case provided that in the last month of each mortgage term, the interest rate increased to 25%. As a matter of fact, no such charge was ever levied, at the discretion of the lender, until maturity and non-renewal occurred in 2016.

[52] In Krayzel Corporation v. Equitable Trust Co., 2016 SCC 18, the Supreme Court concluded that such interest rate provisions were enforceable because a rate increase triggered by the passage of time alone does not infringe s. 8 of the Interest Act. The discretionary exercise of forbearance on the part of the lender in the last month of the term does not affect this result.

[53] Further, in TFS RT Inc v. Dyck, 2019 ONCA 25, the Court of Appeal held that whatever restrictions may exist on contracting out of the Interest Act protections, potential Interest Act arguments can be consensually resolved and that such consensual resolutions would be binding in accordance with the law of contract. As in this case, in Dyck the borrower agreed, in exchange for forbearance, not to raise any argument, defence or dispute regarding, among things, accrued or accruing interest. The Court of Appeal held that this undertaking was enforceable against the borrower. In the case at bar, the borrowers agreed, in exchange for forbearance and an opportunity to make full payment on a settlement amount which excluded the higher interest charges, to forgo any defences it might otherwise have had and agreed to the amounts stipulated in the acknowledgement of debt, including interest at 25% and default administration fees. That undertaking, as in Dyck, is enforceable.

[54] Had I come to a different conclusion on the issue of relief from forfeiture, therefore, I would not have given effect to the borrowers’ arguments alleging a violation of s. 8 of the Interest Act.

Conclusion

[55] In conclusion, I grant relief from forfeiture on the terms stipulated in these Reasons.

Costs

[56] At the parties’ request, I agreed to defer submissions on costs until after the release of my decision. As a result, parties may make brief submissions in writing on the matter of costs (not to exceed two typed, double-spaced pages), supported by any relevant documents and a cost summary. Any party seeking costs shall do so by submitting these documents within seven days of the release of these Reasons. Any party wishing to respond to a request for costs shall do so by submitting these documents within a further seven days.

Penny J. Released: December 13, 2019