COURT FILE NO.: CV-18-1272 DATE: 20200115 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
7084421 Canada Ltd. Plaintiff – and – Attila Vinczer, Peter Vinczer and Katalin Vinczer Defendants
Counsel: D. John Pierce for the Plaintiff Attila Vinczer in person
HEARD: November 22, 2019
Ruling on Motion to Set Aside a Default Judgment and for an Accounting between Mortgagors and Mortgagee
Boswell J.
Overview
[1] Judges spending any amount of time in motions court are well familiar with the issues raised in this proceeding. A mortgage with a private lender goes into default. The borrowers scramble to find alternate financing. After default, the costs and fees payable to discharge the private mortgage escalate at an alarming rate. The borrower turns to the court for relief.
[2] In this instance, the defendants borrowed a little more than $1 million from the plaintiff in mid-2017. The mortgage was to be repaid in six months. It was not repaid. It went into default in early 2018. The plaintiff sued for payment and possession of the mortgaged premises in August 2018. The defendants failed to serve and file a Statement of Defence.
[3] Default judgment was signed by the registrar of the court on November 9, 2018 for payment of a little over $1.2 million as well as possession of the mortgaged properties.
[4] On March 5, 2019 the defendants walked in an urgent, ex parte, motion seeking a stay of a writ of possession granted to the plaintiff further to its default judgment for possession. The stay was granted, on two conditions: that the defendants promptly move to set aside the default judgment and that they apply for a determination of any disputed amounts purportedly owing under the mortgage.
[5] The defendants more or less met the conditions of the stay. I say “more or less” because while they moved to set aside the default judgment, they did not commence a formal application for a determination of the amounts owing under the mortgage. Such an application would ordinarily be commenced under s. 12 of the Mortgages Act, R.S.O. 1990, c. M.40. Instead, the defendants essentially filed a second motion, described as an application, asking the court to examine all costs charged by the plaintiff.
[6] For a variety of reasons, the defendants’ motions were not heard until November 22, 2019.
[7] The manner in which the motions proceeded was not a model of clarity. Though the defendants formally sought an order setting aside the default judgment, it became apparent during argument that what both sides really wanted was for the court to decide the issues between them in a summary fashion and to, if necessary, vary the default judgment accordingly.
[8] For the reasons that follow, I have concluded that the default judgment should not be set aside. It should, however, be varied to deduct amounts I have concluded that the plaintiff is not entitled to.
[9] I will address the issues of setting aside the judgment and varying the judgment in turn. First, however, I will provide a brief factual overview that will put the dispute into context.
Basic Facts
[10] The plaintiff loaned the sum of $1,023,448.66 to the defendants on July 31, 2017 on the strength of a blanket first mortgage over two properties: 462 Lake Drive South, Keswick and 330 Premier Place, Newmarket.
[11] The mortgage, as registered, was in the amount of $1,033,157 which was the amount originally negotiated. A slightly lower figure was actually advanced. The term was six months. The mortgage provided for interest to be paid the rate of 12% which worked out to monthly payments of $10,331.57. The interest was fully pre-paid, meaning six months worth of interest payments were deducted from the funds actually advanced to the defendants.
[12] The defendants were required to pay a 3% fee to the plaintiff as a “lender bonus”, which totaled $30,994.71. They also paid a mortgage brokerage fee of $20,663.14. These amounts were also deducted from the mortgage advance.
[13] The mortgage disclosure form, signed by each of the defendants, made it clear that the cost of borrowing, over a six month term, was a rather arresting $120,147.27, or an equivalent interest rate of 23.258%.
[14] The mortgage commitment contained a schedule of terms. Paragraphs 9 and 12 are particularly significant, as they provided as follows:
Final Payment and Discharge: …In the event the loan is not repaid at the time or times provided within the Mortgage or in the notice to prepay earlier, the Lender will not be required to accept payment of the principal monies without first receiving three (3) additional months notice in writing or receiving 3 months interest bonus in advance of the principal monies.
Management Fee: The Mortgagee or its agent will be entitled to a management fee based on 5% of the mortgage principal plus H.S.T., which fee the Borrower acknowledges is a reasonable estimate of the fees to be incurred, which amount is deemed not to be a penalty, in the event that the Lender or its agencies commence Power of Sale proceedings or appoint a Receiver, or if a receiver is appointed or the Lender takes possession of the Property as a result of default under the Mortgage…
[15] Suffice it to say, that in today’s mortgage climate, the terms were quite favourable to the lender and the broker, while correspondingly poor for the borrowers. The obvious inference is that the defendants were in some financial distress at the time and were willing to pay rather punishing charges in order to keep their properties afloat. Further support for such an inference is found in the mortgage commitment, dated July 28, 2017, which indicated that the purpose of the loan was to refinance mortgages that were in default on the two mortgaged premises.
[16] The mortgage came due on February 1, 2018. It was not paid and went into default. There followed a lengthy series of negotiations which did not bear fruit.
[17] The plaintiff commenced power of sale proceedings against both mortgaged premises in March 2018. In addition, the plaintiff sued for payment of the outstanding balance and possession of the mortgaged premises by way of a Statement of Claim issued August 20, 2018.
[18] The Statement of Claim was served on the defendants, Peter Vinczer and Katalin Vinczer on August 22, 2018 and on Attila Vinczer on September 11, 2018. None filed a defence.
[19] Default judgment was obtained against the defendants on November 9, 2018 in the amount of $1,211,722.97 plus $1,406.64 in costs. A copy of the judgment was served on the defendants by ordinary mail on December 6, 2018. Attila Vinczer deposed in an affidavit sworn March 26, 2019 that he received the default judgment in the mail on December 18, 2018. He described his reaction as one of shock. Nevertheless, he took no immediate steps to address the judgment.
[20] The plaintiff proceeded to obtain a writ of possession and instructed the Sheriff to execute it against both mortgaged premises. Evictions were scheduled for March 13, 2019.
[21] On March 5, 2019 Mr. Attila Vinczer walked into court an emergency motion without notice to the plaintiff. He sought an order staying enforcement of the writ of possession. A stay was granted on two conditions: that the defendants move, no later than March 19, 2019, for an order setting aside the default judgment and that they commence an application for an accounting of all fees and costs charged by the mortgagee after default.
[22] On March 19, 2019 the defendants received an extension of the stay until March 26, 2019. The defendants did initiate a motion by that time, whereby they sought to set aside the default judgment. They did not commence a formal application for an adjudication of the amount properly payable to obtain a discharge.
[23] After a series of adjournments, the matter came before me on November 22, 2019.
The Live Issues
[24] The positions taken by the parties and the governing legal principles raise the following issues to be determined:
(i) Have the defendants satisfactorily explained their default? (ii) Did the defendants act promptly to set aside the default judgment? (iii) Do the defendants have an arguable case on the merits? (iv) Which party is at risk of greater prejudice should the judgment be set aside or not set aside? (v) Should the judgment be set aside? (vi) If the answer to (v) is no, does the court have the jurisdiction to vary the judgment? (vii) If the answer to (vi) is yes, should the judgment be varied?
[25] I will address the issues in turn, in two broad categories. First, the issues that relate to the request to set aside the default judgment. Second, the issues that relate to varying it.
A. Setting Aside the Default Judgment
[26] Default judgments may be set aside by the court under r. 19.08(1) of the Rules of Civil Procedure, which provides as follows:
19.08(1) A judgment against a defendant who has been noted in default that is signed by the registrar or granted by the court on motion under rule 19.04 may be set aside or varied by the court on such terms as are just.
[27] As the wording of the rule suggests, the court must determine whether it is, in the particular circumstances, just to relieve the defendant from the consequences of his or her default.
[28] The analysis to be applied by the motions judge on a motion brought under r. 19.08 is well-settled. It involves the consideration of five factors:
(a) Whether the motion was brought promptly after the defendant learned of the default judgment; (b) Whether the defendant has a plausible explanation for the failure to defend the claim; (c) Whether the defendant has an arguable defence on the merits; (d) The prejudice that may be caused to each party should the motion be granted or refused, as the case may be; and, (e) The effect that any order granted may have on the administration of justice.
See Intact Insurance Co. v. Kisel, 2015 ONCA 205, at para. 14.
The Position of the Defendants
[29] The defendants take the position that they have a good defence on the merits. They concede that they did not defend the plaintiff’s action, but explain that they were actively negotiating with the plaintiff to pay out the mortgage. They claim to have acted with dispatch to set the default judgment aside once they learned it had been granted.
[30] In the defendants’ submission, they have been treated unlawfully by the plaintiff who seeks to extract from them unjustifiable fees and an illegal rate of interest. The prejudice to them in not setting aside the default judgment would substantially outweigh any prejudicial impact on the plaintiff should the judgment be set aside.
[31] The most recent mortgage discharge statement provided to the defendants by the plaintiff, dated March 25, 2019, set out the following amounts as owing:
Principal $1,033,157.00 Accrued Interest 141,642.39 Three Months Interest Penalty 30,994.71 Management Fee 51,657.85 Legal Fees 13,380.80
[32] The defendants assert that the sum of $9,708.34 was not advanced on the original principal, meaning that the principal claim was inflated by that amount. It should be $1,023,448.66. The defendants concede that the principal, as adjusted, is properly due and owing.
[33] The defendants dispute the lawfulness of the three months interest penalty and the management fee.
The Position of the Plaintiff
[34] The plaintiff submits that the defendants have failed to adequately explain why they did not defend the action in the first place. They further failed to act expeditiously in moving to set aside the default judgment. Moreover, they have no arguable defence on the merits, save with respect to the slight adjustment to the principal amount owing, which is conceded.
[35] The plaintiff urges the court to conclude that the defendants are merely delaying the inevitable. They have no realistic means of paying out the balance owing. The mortgage has been in default for almost two years. No payments have been made in that period of time. At the same time, tax arrears in excess of $50,000 have accumulated, to the prejudice of the plaintiff.
[36] The plaintiff contends that the defendants have delayed these proceedings and have not approached them in good faith. Attila Vinczer was cross-examined on September 10, 2019 and gave forty-nine undertakings. He has refused to answer his undertakings on the basis that he has made an allegation of fraud to the York Region Police Service and will only provide answers to his undertakings to them.
[37] The plaintiff submits that, apart from varying the principal amount outstanding, the judgment should remain undisturbed.
Discussion
Issue One: The Explanation for the Default
[38] Mr. Attila Vinczer argued the motions on behalf of all defendants. All are self-represented litigants. He filed a number of affidavits in support of his position. For the most part, they do not help the defendants’ cause.
[39] The explanation offered for not responding to the Statement of Claim is that the parties were negotiating a repayment of the outstanding financing. This is an understandable, if not entirely satisfactory, explanation. It obviously would have been preferable had the defendants obtained an explicit indulgence from the plaintiff regarding the deferral of a defence pending negotiations.
[40] I would characterize the explanation for the default as weak.
Issue Two: Did the Defendants Move Expeditiously?
[41] The defendants received the default judgment in mid-December 2018. They moved to set it aside in late March 2019. I find that their interest in the default judgment was not triggered until the Sheriff was at the door looking to evict them. Indeed, in oral argument, Mr. Attila Vinczer submitted that he acted expeditiously once he became aware that the Sheriff was involved.
[42] I find there to be no satisfactory explanation as to why it took the defendants three months to do anything about the default judgment.
Issue Three: Is there an Arguable Defence?
[43] For the most part, the defendants have not raised an arguable defence.
[44] Typically, a moving defendant will file a copy of the draft Statement of Defence so that the court can get a clear sense of what allegations will be advanced should the default judgment be set aside. The defendants did not do so in this instance. I am prepared to make reasonable allowances in light of the fact that they are self-represented. But it remains necessary that, somewhere in their material, they set out what their arguable defence will be.
[45] Mr. Attila Vinczer tried somewhat to lay out what the arguable defence is in his affidavit of March 26, 2019. I confess, however, that I found it difficult to follow. There are certain themes in it, including misrepresentation, duress and bad faith dealing. But they are vague and not sufficiently detailed to rise to the level of an arguable defence.
[46] In oral argument, Mr. Vinczer submitted that the defendants are not suggesting that the entire amount advanced should be forfeited. He said his complaints largely relate to what happened when it came time to renew the mortgage.
[47] Mr. Vinczer contends that the plaintiff has charged fees that bring the interest rate charged under the mortgages to 82%. He was unable to explain how he arrived at that figure. His position is that the plaintiff has charged a criminal rate of interest.
[48] The Criminal Code of Canada defines “criminal rate of interest” as “an effective annual rate of interest calculated according to generally accepted actuarial practices and principles that exceeds 60% on the credit advanced under an agreement or arrangement.” (Cr. C. s. 347(2)).
[49] The mortgage disclosure statement provided by the plaintiff to the defendants reflected fees totaling $120,147.27 payable over the six month term of the loan; equal to an effective interest rate of 23.258%. If I add the three months bonus interest and the management fees to the total fees, they rise to $202,799.83 over a six month term. The revised effective rate of interest is in the range of 40%. This rate is absolutely outrageous by any reasonable standard. But not criminal.
[50] Canadian common law respects private ordering. That is a fancy way of saying that our law generally respects and enforces agreements reached between competent parties. Parties are free to enter good deals and bad deals. The deal entered into between the plaintiff and the defendants is bad for the defendants. In fact, it is downright ugly. Mr. Vinczer knows that and is trying his best to find a way around some of its worst features. But the fact is, the defendants were desperate at the time they borrowed from the plaintiff. And that desperation led them to enter a mortgage deal that bought them some time but at immense cost.
[51] Mr. Vinczer’s arguments otherwise focused on two elements of the balance claimed by the plaintiff: the imposition of three months bonus interest and a management fee in excess of $50,000. I find that there are arguable defences to both, grounded in the terms of the contract itself and in the law of unconscionability. I will elaborate on these defences momentarily.
Issue Four: The Balance of Prejudice
[52] In my view, there will be significant prejudice to both sides if I set aside the default judgment and put the parties back to the pleadings stage of the litigation. No one’s interests would be served in doing so. The result would simply be to prolong the litigation and increase the costs associated with it.
[53] The plaintiff’s mortgage has been in default now for almost two years. There are limited issues in dispute involving perhaps 7% of the total outstanding. On agreement between the parties I am able to resolve those disputed issues without having to formally set aside the default judgment.
[54] The parties have agreed that I have a sufficient evidentiary record to resolve the issues that are in dispute between them and each agreed that this hearing was a proper and just forum for doing so.
Issue Five: Should the Judgment be Set Aside?
[55] On balance, I am not persuaded that the default judgment should be wholly set aside. My conclusion is based on the following summary of the prevailing circumstances:
(a) The defendants offered a weak explanation for not defending the plaintiff’s claim; (b) The defendants failed to act expeditiously to set aside the default judgment once it came to their attention; (c) While the defendants have arguable defences to some of the fees charged after default, these fees represent only a small fraction of the amount outstanding; (d) The mortgage has been in default for almost two years. The parties are agreed that the court is able to determine any live issues between them on the current evidentiary record and the court was invited to do so.
[56] In my view, it is in the interests of justice to accept the parties’ invitation to resolve the live issues and to otherwise leave the judgment, amended as appropriate, in place.
B. Varying the Default Judgment
Issue Six: Jurisdiction
[57] Before I heard oral submissions from the parties, I put squarely to them the question of whether they wished me to address only the motion to set aside the default judgment or if they wished me to resolve any disputes regarding amounts charged by the plaintiff. Both sides opted for the latter. Both indicated that they were satisfied that I could decide any disputed amounts on the basis of the evidence before the court and that no trial of any issue was required.
[58] Given that r. 19.08(1) authorizes me to set aside or vary the default judgment, I am of the view that I have the jurisdiction to proceed as the parties have requested.
[59] There is no question that the plaintiff is entitled to judgment on the mortgage. The defendants acknowledge as much. The question is how much the judgment should be.
Issue Seven: Should the Judgment be Varied?
[60] Three components of the amount of the judgment are in issue: (1) the original principal sum; (2) the three months bonus interest charge; and (3) the management fees charged by the plaintiff.
[61] The three disputed issues are relatively easily resolved.
[62] The original principal amount is conceded. The correct principal outstanding is $1,023,448.66.
[63] In terms of the other two disputed issues, I find that the plaintiff is not entitled to the three months bonus interest, but is entitled to the management fees as charged.
[64] I will elaborate on these last two issues.
[65] The defendants submitted that the three months bonus interest provision essentially incorporated the terms of s. 17(1) of the Mortgages Act. That section provides as follows:
Despite any agreement to the contrary, where default has been made in the payment of any principal money secured by a mortgage of freehold or leasehold property, the mortgagor or person entitled to make such payment may at any time, upon payment of three months interest on the principal money so in arrear, pay the same, or the mortgagor or person entitled to make such payment may give the mortgagee at least three months notice, in writing, of the intention to make such payment at a time named in the notice, and in the event of making such payment on the day so named is entitled to make the same without any further payment of interest except to the date of payment.
[66] Section 17 is incorporated into every mortgage in Ontario. Its purpose was discussed by the Court of Appeal in Mastercraft Properties Ltd. v. EL EF Investments Inc.. There, McKinlay J.A. said as follows, at para. 21:
…The provision protects the mortgagor by permitting payment of arrears without penalty, or by permitting early redemption at a price. It protects the mortgagee by giving him a three-month period during which to arrange for reinvestment of his principal, or monies to compensate for lack of that notice. The option is that of the mortgagor. (Emphasis mine).
[67] As I held in Lee v. He, 2018 ONSC 5932, at para. 27, the rationale behind s. 17 ceases to make sense when a mortgage goes into default after maturity. In that circumstance, the lender has already received (or is entitled to receive) the whole of the income stream contracted for. The three months bonus interest would, in such circumstances, be nothing more than a penalty, which is not what the Mortgages Act intends.
[68] In addition to Lee v. He, a number of other Superior Court decisions have ruled that s. 17 does not entitle a mortgagee to “tack on” an extra three months bonus interest where a mortgage is enforced after maturity: see, for instance, Ialongo v. Serm Investments Ltd., 2007 CarswellOnt 1246 (S.C.J.) and 2468390 Ontario Inc. v. 5F Investment Group Inc., 2017 ONSC 4641.
[69] The plaintiff’s counsel pointed out that the subject mortgage did not merely incorporate the terms of s. 17 of the Mortgages Act. It in fact, provides for a “bonus fee” equal to three months interest if the balance owing was not paid when due. For ease of reference I will set out the subject provision again:
In the event the loan is not repaid at the time or times provided within the Mortgage or in the notice to prepay earlier, the Lender will not be required to accept payment of the principal monies without first receiving three (3) additional months notice in writing or receiving 3 months interest bonus in advance of the principal monies.
[70] The plaintiff’s position is that s. 17 of the Mortgages Act has no bearing on its entitlement to the three months bonus interest. It says its entitlement to that payment is grounded in para. 9 of the mortgage commitment.
[71] There are two reasons why I find that the plaintiff is not entitled to the three months bonus interest. Either is sufficient, on its own, to deny recovery.
[72] First, the provision is an undisguised penalty clause. Courts have historically taken a dim view of penalty clauses. The power to strike them down – or to refuse to enforce them – is rooted in the court’s equitable jurisdiction to provide relief against oppression and unconscionability: see Elsley v. J.G. Collins Ins. Agencies Ltd., [1978] 2 S.C.R. 916 at para. 47. I have no hesitation in finding that the terms of this lending arrangement are oppressive on the whole. The three month bonus interest penalty is just one aspect of the oppressive nature of the agreement. I would not enforce it on that basis.
[73] Second, the wording of the provision itself does not support the payment of the three months interest sought. The provision is framed in the alternative. The defendants could either pay three months bonus interest or give three additional months notice in writing of their intention to pay out the balance owing. Interest would, of course, accrue during those three months and so the plaintiff would collect an additional three months interest in either event. In this instance, the plaintiff has received many more than three months notice. It is entitled to interest for the entire time the mortgage has been in default – many more than three months. In other words, the plaintiff has received what it bargained for.
[74] The final issue in dispute relates to the management fees provided for at para. 12 of the mortgage commitment. Those fees were agreed to at 5% of the outstanding principal. They were calculated at $51,657.85, but that was based on 5% of $1,033,157.00. The correct outstanding principal is $1,023,448.66. Five percent of the correct principal is $51,172.43.
[75] Contracting parties are free to agree upon genuine pre-estimates of damages (so long as they are not oppressive). The jurisprudence makes a distinction between enforceable “liquidated damages” clauses and unenforceable penalty clauses. The mortgage commitment in this case specifically provided that the management fee was a reasonable estimate of the fees likely to be incurred by the plaintiff if it had to take enforcement proceedings on the mortgage. It was agreed that the management fee was not a penalty.
[76] The language used by the parties is not conclusive however: see Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd., [1915] A.C. 19 (H.L.). The true nature of the clause remains a matter of construction: Waddams, The Law of Damages (2009: Toronto), para. 8.70.
[77] I have grave reservations about the amount purportedly “pre-estimated” as management fees. They are certainly arguably oppressive. Having said that, unlike the three months bonus interest, they are at least connected to a rational purpose. The plaintiff would undoubtedly incur costs associated with enforcing the mortgage against two properties should it go into default. One would expect that most of those costs would be legal fees, as opposed to internal management fees. But I am cognizant of the fact that this dispute has been going on for two years now. Undoubtedly the plaintiff has incurred time and expenses internally.
[78] The fees agreed to are extremely high. But the defendants entered the agreement knowing what they were. They had independent legal advice. I appreciate that Mr. Vinczer has raised concerns about the sufficiency of that advice. At the same time, he has refused to produce any evidence of the advice given, citing solicitor/client privilege. I am unable to conclude that the independent legal advice was insufficient without such disclosure.
[79] There is no evidence in the record regarding the actual costs incurred by way of “management” fees, that I might compare to the agreed pre-estimate. I can only speculate that they are much less than $51,172.43.
[80] I do not like the management fee. But I am not able to conclude that it is oppressive or unconscionable. In my view, I am obliged to enforce it.
Conclusion
[81] In summary, for the reasons expressed, I am not prepared to set aside the default judgment. I am prepared to vary it, again for the reasons expressed. I find the following amounts outstanding on the mortgage:
(a) Principal $1,023,448.66 (b) Accrued interest to January 15, 2020 (714 days @12%) 240,244.06 (c) Management Fees 51,172.43 Total $1,314,865.15
[82] The plaintiff is entitled, therefore, to judgment in the amount of $1,314,865.15 and to possession of the mortgaged premises. The judgment will continue to accrue interest at 12% per annum.
[83] I have not addressed the issue of costs. I would ask for the parties’ written submissions on costs. The plaintiff’s submissions are to be served and filed by January 29, 2020. The defendants’ by February 12, 2020. Submissions should be filed with the judicial secretaries’ office in Barrie.
Boswell J.