Court File and Parties
COURT FILE NO.: CV-18-598657-00CL DATE: 20200310 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Donald Dal Bianco Applicant – and – Deem Management Services Limited and The Uptown Inc. Respondents
Counsel: D. Ullman for the Applicant Eric Gionet and Andrew Wood, for the Lien Claimant Maxion Management Services Inc. – General Contractor Crowe Soberman as Receiver D. Brendan Bissell, counsel for the Receiver Appearances also by Harold Rosenberg on behalf of subtrade lien claimant Deep Foundations -and- Jeffrey A. Armel for the lien claimant EXP Services Inc.
HEARD: March 6, 2020
C. Gilmore, J.
Reasons on Receiver’s Motion
Overview
[1] This is a motion initiated by the Receiver to determine competing priorities under s.78 of the Construction Act (“the Act”) between registered lien claimants and a registered mortgage. Through various court attendances it was agreed that this motion would be separated from the other issues in dispute in the Receivership so that the priority dispute could be determined on an Agreed Statement of Facts. Excerpts from the Agreed Statement of Facts are set out below.
[2] The parties agreed Maxion Management Services Inc (“Maxion”) would be the moving party on this motion, that Mr. Dal Bianco would respond, and that the Receiver would also make submissions. Counsel for some of the other lien claimants appeared on this motion but did not make submissions or file material. They are aligned with the position taken by Maxion.
Receivership Background
[3] On May 31, 2018, pursuant to an order of the Honourable Mr. Justice Wilton-Siegel, Crowe Soberman Inc. was appointed as Receiver (the “Receiver”) of:
(i) the property known municipally as 215 and 219 Lexington Road, Waterloo, Ontario N2K 2E1 (the “Real Property”),
(ii) the assets and undertakings of Deem Management Services Limited (“Deem Management”) related to the Real Property, and
(iii) the property, assets and undertakings of the Uptown Inc. (the “Uptown”)
(collectively referred to as the “Property”).
[4] The background to the Property was more fully set out in the Receiver’s First Report dated June 8, 2018. In the Third Report, the Receiver has provided the following “overview”:
a) Deem Management is a company that has been working for many decades in the Ontario nursing home and retirement home sector. It was the registered owner of the Real Property.
b) A portion of the Real Property was vacant land where the Project had started. The remaining land contained the operating Pinehaven Nursing Home, which is an unrelated third-party nursing home business. Part of Deem Management’s business involved the collection of rent from Pinehaven.
c) The Uptown operated a presentation centre located on the Real Property and was engaged in the planning related to the redevelopment of the Real Property as a seniors’ retirement residence called the Uptown Residences. The work carried out by the Companies had primarily been in the nature of obtaining approvals relative to Phase 1 of the Project, and the excavation and installation of caissons necessary for that part of the development.
d) Both Deem Management and the Uptown are owned by Rob Dal Bianco, who is the sole director of the Companies, and is the son of the applicant, Donald Dal Bianco (“Dal Bianco”)
e) Maxion was the general contractor on the Project. The Receiver understands that Maxion is owned by Paul Michelin. The Receiver was advised by counsel for Michelin and Maxion that its clients assert a joint venture ownership claim, is a shareholder in Uptown, and therefore claim a beneficial interest in the Project.
f) The Receiver understands that Maxion was advised to cease construction by Rob?? in the early winter of 2018. Shortly after construction ceased, various service providers registered construction liens against title to the Property commencing on March 7, 2018 totaling $7,673,672.48.
g) In addition to the amounts claimed by the construction lien claimants, the Application Record dated May 28, 2018, outlined various mortgages and loans registered against title to the Property which exceed $20 million.
[5] For purposes of this Agreed Statement of Facts and the Priority Motion, the construction Improvement that is the subject of these proceedings will be referred to as “the Uptown Project”.
[6] Through the Receivership process, and various Court Orders, the Uptown Project was sold by the Receiver in the summer of 2018. After making certain distributions, including payment of the First and Second Ranking Mortgages described below, the Receiver still holds in trust the sum of $5,477,224.57 (inclusive of interest but exclusive of the fees of the Receiver and its counsel) from the proceeds of sale.
[7] The Receiver has not been able to distribute these remaining funds as a result of the competing priority claims between the constructions lien claimants and the Dal Bianco 3rd Mortgage.
The First and Second Ranking Mortgages
[8] IMC was the holder of the first-ranking mortgage, which was registered on May 9, 2017 and which amounted to $8,299,346.58.
[9] Dal Bianco was the holder of the second ranking mortgage (by virtue of postponement to IMC), which was registered on June 25, 2015 and which amounted to $5,002,656.45;
[10] The first-ranking mortgage of IMC and the second-ranking mortgage of Dal Bianco have been paid out in this Receivership, subject to some small disputes that are not relevant to this motion.
The Dal Bianco “third-ranking” Mortgage
[11] The third-ranking mortgage was granted by Deem Management to Don Dal Bianco on February 14, 2018 and registered on February 23, 2018 as instrument no. WR1099051.
[12] The Dal Bianco 3rd Mortgage secured the principal amount of $7,978,753.45.
[13] The amounts secured by the Dal Bianco 3rd Mortgage were all advanced between 2012 and 2015 without security having been registered. The first advance was made on April 22, 2012 and the final advance was made on January 22, 2015.
[14] All of the funds advanced by Dal Bianco that were secured by the Dal Bianco 3rd Mortgage were intended, and were in fact used, in an Improvement within the meaning of s. 78 of the Construction Act on the real property through the Uptown Project.
The Registered Construction Lien Claims
[15] Kieswetter Excavating Inc. (“Kieswetter”) registered its construction lien on March 7, 2018 in the amount of $1,827,409.
[16] Deep Foundations Inc. (“Deep”) registered its construction lien on March 14, 2018 in the amount of $918,432.
[17] Onespace Limited (“Onespace”) registered its construction lien on March 19, 2018 in the amount of $68,580.
[18] Maxion registered its first construction lien on March 29, 2018 in the amount of $4,522,597.
[19] EXP Services Inc. (“EXP”) registered its construction lien on April 12, 2018 in the amount of $336,654.
[20] Maxion registered its second construction lien on July 13, 2018 in the amount of $560,283.
[21] The parties have not agreed upon, and the Court is not being asked to make any determination of the timeliness or quantum of any of the above registered lien claims, however all parties agree that at least some amount of the above lien claims will be valid and owing to one or more of the registered lien claimants.
[22] Even though the liens were registered on title to the Real Property on the dates referred to in paragraphs [15] to [20], above, for purposes of the Construction Act the first construction lien arose and took effect with respect to the Uptown Project prior to the Dal Bianco 3rd Mortgage being registered on title.
Analysis
[23] Section 15 of the Construction Act sets out that:
15. A person’s lien arises and takes effect when the person first supplies services or materials to the improvement.
[24] The relevant sections of Section 78 of the Construction Act are set out below:
Priority over mortgages, etc.
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 .
Building mortgage
(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) .
Prior mortgages, prior advances
(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 .
Prior mortgages, subsequent advances
(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 .
Special priority against subsequent mortgages
(5) Where a mortgage affecting the owner’s interest in the premises is registered after the time when the first lien arose in respect of an improvement, the liens arising from the improvement have priority over the mortgage to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV. R.S.O. 1990, c. C.30, s. 78 (5) ; 2017, c. 24, s. 70 .
General priority against subsequent mortgages
(6) Subject to subsections (2) and (5), a conveyance, mortgage or other agreement affecting the owner’s interest in the premises that is registered after the time when the first lien arose in respect to the improvement, has priority over the liens arising from the improvement to the extent of any advance made in respect of that conveyance, mortgage or other agreement, 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 (6) ; 2017, c. 24, s. 53 (1), 70 .
[25] It is important to note the general intention of s.78 which is to give priority to lien claimants over mortgages with certain defined exceptions. The issue to be determined on this motion is whether or not any of the exceptions in s.78 are triggered which would deprive the lien claimants of their priority status.
[26] Given the prima facie priority of lien claimants, it is clear that the onus falls upon the mortgagee to prove that its mortgage falls within one of specified exemptions under s.78.
[27] In Boehmers v. 794561 Ontario Inc. (1993), affirmed , the court said:
Section 78(1) is the overarching principle of the regime of the Act for the determination of priorities. It is, if you will, the central interpretative principle for the adjudication of conflicts of this type before the court in this case. Surely, it necessarily implies that, as here, the burden must be on the mortgagee to persuade the court that it somehow falls clearly within a specified exception to the generalized priority of the liens.
[28] This principle was adopted in Jade-Kennedy Development Corp., Re, 2016 ONSC 7125 at para 54 (ONSC) upheld on appeal 2017 ONSC 3421 (Div. Crt.) (Jade-Kennedy) and XDG Ltd. v. 1099606 Ontario Ltd., 2002 CarswellOnt 4535 (XDG).
[29] Broadly speaking, s. 78 provides protection to lien holders and should be interpreted in that sense. In Jade-Kennedy at para 43, the court emphasized the burden on the mortgagee to persuade the Court that it falls within one of the exceptions to the general priority of lien claimants.
[30] There is no dispute that the 3rd mortgage was registered after the time when the first lien arose and is therefore a “subsequent mortgage” within the meaning of the Act. Given that it is a subsequent mortgage it is subject to s.78(1) which would give the lien claimants general priority, s.78(5) which gives lien claimants a special priority for deficiencies in any holdbacks and s.78(6) which gives subsequent mortgages priority for specific advances in certain circumstances. In this case, Dal Bianco also relies on s.78(2) claiming that his mortgage falls within the exception for building mortgages.
[31] It is this court’s view that s.78(6) does not apply to give the 3rd mortgagee priority in this case. This section is one which contemplates a mortgage registered after a project has commenced. The only way in which a mortgagee can gain priority over lien claimants in this scenario is if the advances were made “in respect of that mortgage,” there were no preserved or protected liens at the time of the advance, and the mortgagee has had written notice of any lien at the time of the advance. The last two conditions do not apply to this case.
[32] In XDG, the court addressed the issue of whether a mortgage registered on title as collateral security for a prior indebtedness gained priority. In considering s.78(6), the court made a distinction between “amounts secured” and “amounts advanced.” Given that the monies were advanced under a different financial arrangement and then subsequently secured by a mortgage, s.78(6) was not engaged and no priority was gained over the lien claimants.
[33] XDG was appealed to the Divisional Court and upheld. In their reasons, the Divisional Court held that the trial judge’s reasoning was correct in holding that the mortgagee’s priority was limited to the extent of any advance made in respect of the mortgage. Since the advances in that case were made in relation to a credit agreement and not the mortgage, the lien claimants’ priority was not disturbed.
[34] In Jade-Kennedy the court relied on the reasoning in XDG with respect to monies advanced in relation to a mortgage rather than secured. Further, it is important to note that in Jade-Kennedy, the court referred to XDG and held that it “was not necessary to go further and address whether or not the monies advanced under the mortgage benefitted the guarantor and I do not read the decision as doing so” (para 45). The court in XDG held that there was no case law cited to demonstrate that proceeds of an advance had to create any “benefit” to the borrower and that such an interpretation of s.78(6) could therefore not be supported (para 46).
[35] In the case at bar, the parties agree that all of the advances made by Dal Bianco between 2012 and 2015 benefitted the project. Dal Bianco argues that it would be absurd for his mortgage not to have priority given that the advances were clearly in relation to and for the benefit of the project. Respectfully, I disagree. As per Jade-Kennedy, I find that there is nothing in the wording of s.78 that carves out an exception on that basis. The section speaks to advances as opposed to amounts secured. Further, there is nothing in the section which would permit a lender to gain priority by retrospectively securing previously advanced sums whether in relation to the project or, in the case of XDG, a loan agreement.
[36] I also rely on 561861 Ontario Ltd. v. 1085043 Ontario Inc. 1998, CarswellOnt 2935. In that case, a sister advanced $100,000 to a brother in order for him to buy out his estranged wife’s interest in his farm. A first mortgage for this sum was registered on the property. The brother sold the farm property to a golf course and a new first mortgage was placed on the golf course property with the sister’s mortgage re-registered and ranking second. The original mortgage was discharged. The golf course project went into receivership and lien claims arose. The sister claimed she had priority over the lien claimants as her mortgage was registered prior to the liens arising. The Court did not agree and found that all monies had been advanced in relation to the prior mortgage which had been discharged. As such, the lien claimants retained their priority. The Court held at para 24 “…all monies had been advanced on the prior mortgage in 1991 which was subsequently discharged.”
[37] In summary, I do not find that Dal Bianco’s mortgage fits into the exclusion of a “subsequent mortgage” as the mortgage (notwithstanding its wording) does not secure advances. All the advances were already made.
[38] Turning to Dal Bianco’s arguments in relation to s.78(2), he submits that his mortgage is a “building mortgage” and therefore loses priority only to the extent of any deficiency in the holdbacks. It is clear that s.78 of the Act, in addition to providing a form of blanket priority to lien claimants, carves out a number of exceptions to exceptions. That is, even if a mortgagee is able prove that it falls within one of the exceptions to gain priority, that priority is still subject to the priority created for holdbacks.
[39] Interestingly, the Act does not contain a definition for the term “building mortgage.” As such, it is important to carefully review the initial wording of that section which says: “Building mortgage – Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement….” The interpretation of this section must be consistent with the overall intention of s.78 which is to grant priority to lien claimants. The section denotes a future intention on the part of a mortgagee; an intention to secure financing.
[40] I agree with Maxion’s counsel that using that form of construction, the section should be taken to mean that the mortgage is registered and then funds are advanced in the normal course. What happened in this case was the reverse, and in this Court’s view, not what was intended by 78(2).
[41] I also agree with Maxion’s counsel that the position taken by Dal Bianco would mean that if a mortgagee gained priority under s.78(2) as a building mortgage, it would mean that the mortgagee would also have priority as a subsequent mortgagee under s.78(6). Taken to its most concerning conclusion, this could mean that a building mortgage could have priority over registered lien claimants.
[42] Finally, an important point must be made in this case regarding the overall priority of lien claimants and subsequent mortgagees. Particularly in large projects, sub trades must be able to adequately assess their risk before undertaking work. If mortgagees are entitled to “lie in the weeds” while advancing funds for the project and then attempt to gain priority later by registering mortgages after liens arise, this would be unfair to lien claimants and contrary to the overall protection intended by the Act.
Orders and Costs
[43] Maxion’s motion is granted. The lien claimants shall have priority over the registered third mortgage.
[44] As agreed by the parties, the successful party will receive costs of $25,000. Therefore, Dal Bianco shall pay costs to Maxion of $25,000.
