COURT FILE NO.: CV-19-617526
DATE: 2020 09 17
SUPERIOR COURT OF JUSTICE - ONTARIO
IN THE MATTER OF the Construction Act, RSO 1990, c. C.30, as amended
RE: NDF FINANCIAL INC., Plaintiff
- and -
LIDIJA TOMAS also known as LIDIJA MOHAN, EVEREST FINANCE CORPORATION and THERIAULT HOLDINGS INC., Defendants
BEFORE: Master Todd Robinson
COUNSEL: K. Marynick, counsel for the defendant, Lidija Tomas (moving party)
C. King, counsel for the defendant, Theriault Holdings Inc. (responding party)
M. Middonti, counsel for the plaintiff, NDF Financial Inc.
HEARD: September 3, 2020 (by videoconference)
REASONS FOR DECISION
[1] The defendant, Lidija Tomas, moves against her co-defendant, Theriault Holdings Inc. (“Theriault”), for an order pursuant to Rule 45.02 of the Rules of Civil Procedure, RRO 1990, Reg 194 to preserve a portion of the proceeds from the sale of 17 Foch Avenue, Toronto. The property was sold by Theriault pursuant to a power of sale, prior to which Ms. Tomas was its owner. Ms. Tomas seeks an order requiring Theriault to pay into court the portion of sale proceeds that would otherwise be payable to Theriault on account of its second mortgage, arguing that there is a prima facie case that Theriault has breached its duties to Ms. Tomas as a mortgagee in possession.
[2] Theriault opposes the motion on the basis that, since there are no residual proceeds of sale, Ms. Tomas has no right to any of the undisbursed proceeds, that Theriault has satisfied the duties and obligations to Ms. Tomas that it has been required to fulfil, and that Theriault would be prejudiced by a preservation order. Although Theriault’s responding motion record includes a notice of motion, Theriault’s counsel confirmed at the outset of the hearing that no cross-motion was being pursued.
[3] For the reasons that follow, I have determined that the requested preservation order pursuant to Rule 45.02 should not be granted. I accordingly dismiss Ms. Tomas’ motion.
Background
[4] This motion is brought within the lien action of NDF Financial Inc. (“NDF”), commenced in respect of construction work performed at the property and referred to me for determination. NDF preserved and perfected a lien against the property for $90,356.55, claiming priority over both the first mortgage in favour of Everest Financial Corporation (“Everest”) and the second mortgage in favour of Theriault.
[5] Ms. Tomas’ evidence is that she has been “improving” the property since 2016. It appears from the evidence that Theriault’s mortgage loans were advanced for the purpose of financing the construction work. The evidence supports that Theriault provided its first mortgage loan of $48,000 to Ms. Tomas in December 2015, and thereafter made additional periodic advances to Ms. Tomas until September 14, 2017, by which time the principal mortgage debt was $301,128,40.
[6] In June 2018, partial payment of the mortgage debt to Theriault was made by Ms. Tomas and the balance of the mortgage was renewed or extended. It appears from the evidence that the amount of the mortgage was reduced to $168,850.00.
[7] By December 2019, Ms. Tomas was in default of her first mortgage with Everest and Everest had issued both a notice of intention to enforce security and a notice of sale under charge, asserting that $717,033.72 was owing under the first mortgage. Martin Theriault, the principal of Theriault, has tendered affidavit evidence that Ms. Tomas was in default of the mortgage with Theriault by August 2018, but that her default under Everest’s mortgage and Everest’s enforcement steps led to Theriault pursuing its own mortgage enforcement.
[8] In January 2020, Theriault and Ms. Tomas entered into a letter agreement by which Theriault agreed to bring the first mortgage back into good standing and maintain it in good standing for a period of three months. The agreement was subject to a number of conditions, including that Ms. Tomas must elect to sell the property, arrange refinancing to pay out all encumbrances, or complete construction. Ms. Tomas was also required to make three monthly payments of $4,000 to Theriault. Once the terms were accepted by Ms. Tomas, Theriault entered into a forbearance agreement with Everest on terms consistent with the letter agreement.
[9] In February 2020, Theriault issued its own notice of sale under mortgage, asserting that $271,145.31 was owing at the time under the second mortgage.
[10] On April 20, 2020, an appraisal of the property was completed by Cross-Town Appraisal Ltd. The appraisal report appraises the value of the property at $1,450,000 on an “as if complete” basis, relying on a direct comparison approach with reference to properties previously sold in the area. The “as if complete” value is expressly acknowledged in the appraisal report as “hypothetical in nature” based on construction being 100% complete, with a caveat regarding the unknown impacts of the COVID-19 pandemic. Ms. Tomas’ evidence is that construction work is at least 63.3% complete, although her evidence on completion of the structure itself is inconsistent. Her affidavit indicates at one point that the structure is 75% complete and at a later point indicates it is 32% complete. The appraisal report provides a further “as is” appraisal value at $1,225,000.
[11] On May 14, 2020, Theriault took possession of the property and posted a notice of possession. Martin Theriault’s evidence is that he thereafter canvassed methods of listing the property for sale, and chose to list with PropertyGuys.com. Theriault signed a listing agreement on June 3, 2020 to list the property for sale at a price of $1,299,900.
[12] On June 26, 2020, it appears that three offers were made to purchase the property, ranging from $900,000 to $1,050,000. These are appended to Martin Theriault’s affidavit. Following what appears to have been a series of counter-offers, beginning with counter-offers by Theriault of $1,190,000, Theriault ultimately agreed to a sale price of $1,070,000. It does not appear that Ms. Tomas was made aware of the two other offers prior to Theriault’s responding motion materials being served.
[13] On August 11, 2020, Theriault issued a payout statement to Ms. Tomas, which calculates the payout amount at $367,905.94. Ms. Tomas’ evidence is that she received this payout statement from her counsel on August 13, 2020 (the day before swearing her affidavit in support of this motion), and that she was provided no other information regarding intended disbursement of the proceeds of sale.
[14] This motion first came on for a hearing on August 25, 2020, the day after the sale closed. At that time, the parties had substantially agreed on terms for adjournment of the motion, which included a timetable for exchange of motion materials, payout in full of Everest’s first mortgage, and authorization to post the agreed statutory holdback into court to vacate NDF’s claim for lien and certificate of action. Payout of the balance of sale proceeds, confirmed at that time to be approximately $144,000, was to be addressed as part of the disposition of this motion.
[15] Based on the evidence filed, Everest was paid from the proceeds of sale in satisfaction of its first mortgage. That payment appears to have been in the amount of $688,999.01, payment of which was not disputed by Ms. Tomas on this motion. After deducting the sum of $14,015.73 in statutory holdback, which is to be posted into court pursuant to the consent order, the remaining proceeds of sale at issue on this motion total $366,985.26.
Analysis
[16] Ms. Tomas’ motion is an interlocutory step within NDF’s lien action and, accordingly, leave of the court is required pursuant to s. 13 of O Reg 302/18 under the Construction Act, RSO 1990, c C.30. The leave requirement was not raised by any party during the course of scheduling or arguing this motion. I did not require submissions on leave, since I was satisfied that the hearing of the motion may reasonably expedite resolution of the matters in issue regarding the mortgages.
[17] Rule 45.02 of the Rules of Civil Procedure provides as follows:
SPECIFIC FUND
45.02 Where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on such terms as are just.
[18] As acknowledged by Ms. Tomas, and as argued by Theriault, an order under Rule 45.02 is, in effect, a form of execution before judgment. It secures the specific fund claimed pending the outcome of litigation. In Sadie Moranis Realty Corporation v. 1667038 Ontario Inc., 2012 ONCA 475, at para. 17, the Court of Appeal outlined the policy approach to motions under Rule 45:
Rule 45.02 is part of Rule 45, which, as its title suggests, provides for the interim preservation of property pending litigation. The Rule is a limited exception to the law's deep-seated aversion to providing a plaintiff with execution before a trial. The risk of such an order, because of its invasive nature, is well explained by Sharpe J.A. in Injunctions and Specific Performance, 4th ed., looseleaf (Toronto: Canada Law Book, 2012), at para. 2.760:
Clearly, pre-trial execution of any kind poses definite problems. Attachment of assets or interference with disposition of assets will often constitute a serious interference with the defendant's affairs. That interference may be more readily justified where the plaintiff's right is specifically related to the asset in question. However, where the plaintiff asserts a general claim and looks to the assets only as a means of satisfying a likely or possible monetary judgment against the defendant, interference with the defendant's assets is more difficult to justify.
[19] The applicable analysis on a motion under Rule 45.02 is not in dispute. A three-part test applies, namely: (i) does the moving party claim a right to a specific fund? (ii) is there a serious issue to be tried regarding the moving party’s claim to that fund? and (iii) does the balance of convenience favour granting the relief sought by the moving party?: Sadie Moranis, supra at paras. 18-21; Brauti Thorning Zibarras LLP v. Di Paola, 2016 ONSC 7708 at para. 12. In assessing the first requirement, the court is also to consider if the moving party is claiming a legal right to the specific fund in question, rather than a general claim for damages, since there is a distinction between an amount that may be owing to the moving party and a “right” of the moving party to a fund, although the legal right claimed need not be a proprietary right: Sadie Moranis, supra at paras. 21 and 27; Brauti Thorning, supra at para. 17.
[20] On the first requirement, I am satisfied that the funds in question are a specific fund that is readily identifiable and that Ms. Tomas claims a proprietary interest in respect of that fund. Theriault claims entitlement to the balance of proceeds of sale from the property in part satisfaction of the amounts owing under the second mortgage. Ms. Tomas correctly asserts that, as owner of the property at the time of sale, she has a legal right to any residual proceeds of sale after payout of the two mortgages and payment of fees and disbursements related to the power of sale. Section 27 of the Mortgages Act, RSO 1990, c M.40 outlines the priorities for payment of monies from a sale pursuant to a power of sale. There is a dispute regarding the extent of the specific fund and conflicting evidence on its quantification, but I agree that the fund itself is readily identifiable, is quantifiable, and is a specific fund to which Ms. Tomas has a legal claim.
[21] On the second requirement, I am not satisfied that the issues to be tried regarding Ms. Tomas’ claim to the proceeds of sale are sufficiently serious to warrant a preservation order. I have reached this determination for several reasons.
[22] Ms. Tomas sought to argue that Theriault had failed to account for how the discharge amount for its mortgage increased from $199,709.53 to $367,905.94. However, Theriault’s discharge statement dated August 11, 2020 provides a detailed breakdown of the additional charges incurred since January 12, 2020, including unpaid interest charges, amounts charged in respect of Theriault’s payments to Everest, and other charges in respect of the maintenance and sale of the property. Ms. Tomas has tendered no evidence or argument to dispute her indebtedness as set out in Theriault’s discharge statement for the sum of $367,905.94.
[23] Section 27 of the Mortgages Act sets out a number of payment priorities ahead of any residual that would be payable to Ms. Tomas, including the expenses incident to the sale and the amounts due to each of Everest and Theriault pursuant to their respective mortgages. Section 78 of the Construction Act also gives liens certain priorities over mortgages. The parties have quantified the deficiency in statutory holdback at $14,015.73, for which NDF’s lien will have priority over Theriault’s mortgage if proven at trial.
[24] The property was sold for $1,070,000. As noted above, after deducting the statutory holdback to be paid into court and the undisputed amount paid to Everest of $688,999.01, there is a balance of $366,985.26. The discharge amount claimed by Theriault, unchallenged by Ms. Tomas on this motion, is $367,905.94. Accordingly, before considering expenses incident to the sale, which have priority over the payout of encumbrances, there is evidently a shortfall in the proceeds of sale.
[25] Ms. Tomas argues that the sale price was improvident, and has tendered the appraisal from Cross-Town Appraisal Ltd., which (as outlined above) appraises the value of the property on an “as-is” basis at $1,225,000. That is the basis on which the property was sold. Although Theriault’s materials refer to other appraisals performed on behalf of Theriault, no other appraisal is before me. The property was listed at a price of $1,299,900, which is higher than the “as-is” appraised value. However, assuming that the property had been sold at the “as-is” appraised amount, then after deducting the statutory holdback payment, payout of Everest, and payout of Theriault, there would be a balance of $154,079.32.
[26] Martin Theriault’s affidavit refers to only one specific expense incident to the sale of the property, namely a fee of $3,998 incurred for listing the property for sale through PropertyGuys.com. Mr. Theriault’s affidavit outlines the services provided by PropertyGuys.com for the fee charged. While Ms. Tomas argues that the use of PropertyGuys.com was improvident, Mr. Theriault’s evidence on the quantum of the fee charged for the listing services is unchallenged. That fee has priority over any residual interest of Ms. Tomas. However, on review of Theriault’s discharge statement, the fee is included in the discharge amount.
[27] Theriault’s factum refers to two additional charges for which priority is claimed: $30,277.01 payable to the cooperating brokerage and $139,100 for HST payable on the sale. These two expenses would exceed the balance of $154,079.32 in a hypothetical sale for $1,225,000. However, I cannot accept them on the evidence before me for the following reasons:
(a) Firstly, there is no evidence substantiating that a cooperating brokerage fee is payable or the amount to be paid. Theriault submits that the fee is drawn from a commission statement admittedly not in evidence, equating to a 2.5% standard cooperating brokerage fee. I am not prepared to accept that submission when the relevant evidence is not before me. It also appears inconsistent with a reference in the listing agreement to a 1.5% fee.
(b) Secondly, although Theriault argues that HST is payable on the sale, I was directed to no legal authority supporting that the sale is, in fact, subject to HST that Theriault is required to remit. The agreement of purchase and sale does include a standard HST clause providing that, if sale of the property is subject to HST, then HST is included in the purchase price. However, while it may be the case that Theriault is required to remit HST, absent being directed to a specific legal authority, which Theriault’s counsel was unable to do, I am not prepared to take judicial notice that HST is payable on a sale in these circumstances.
[28] Theriault’s position is that it has no obligation to account for the proceeds of sale prior to actually disbursing the funds, such that Theriault is not in breach of its duty to account. Even if that is a correct statement of law, Theriault has still failed to satisfy me that these expenses claimed from the sale have, in fact, been incurred. However, that is not an end to the matter.
[29] In my view, for there to be a serious issue to be tried regarding Ms. Tomas’ right to claim against the proceeds of sale otherwise payable to Theriault, there must be a serious issue regarding the reasonableness of the sale price for the property and the providence of Theriault’s power of sale process. That engages Theriault’s duties as a mortgagee in possession. Those duties were outlined by the Court of Appeal in Manufacturers Life Insurance Company v. Granada Investments Ltd., 2001 CanLII 2708 (ON CA) at paras. 64 and 67-68. Distilling those paragraphs, the pertinent duties are summarized as follows:
(a) A mortgagee in possession has duties to account to the mortgagor, manage the property in a reasonable way as a prudent owner would do, and act with reasonable care to get a true price, or the best price in the circumstances, when exercising a power of sale;
(b) A mortgagee selling under a power of sale has a duty to take reasonable precautions to obtain the true market value of the property as of the date of sale, but that does not mean the mortgagee must, in fact, obtain the true value;
(c) The duty of a mortgagee is only to take reasonable precautions. Perfection is not required. Some latitude is allowed to a mortgagee;
(d) In deciding whether a mortgagee has fallen short of its duty, the facts must be looked at broadly and the mortgagee will not be adjudged to be in default of its duties unless it is plainly on the wrong side of the line;
(e) The mortgagee is entitled to exercise an accrued power of sale for its own purposes whenever the mortgagee chooses to do so. It matters not that the moment may be unpropitious and that by waiting, a higher price could be obtained;
(f) The mortgagee is entitled to accept the best price it can obtain in an adverse market, provided that none of the adverse factors are due to fault on the mortgagee’s part; and
(g) Even if the duty to take reasonable precautions is breached, the mortgagor must show that a higher price would have been obtained but for the breach in order to be compensated in damages.
[30] In Broos v. Robinson, (1984) 23 ACWS (2d) 556 (HCJ), Gray J. set out steps that a mortgagee should consider, if not follow, in discharging its duty to the mortgagor “to take reasonable precautions to obtain the true market value of the mortgaged property.” Those steps include (1) act bona fides in the exercise of the power of sale; (2) attempt to realize fair market value in the sale; (3) give some consideration to the interests of the mortgagor as well as the mortgagee’s own interests; (4) do not conduct the sale in bad faith (which is the reverse side of (1)); (5) see that the property comes to the attention of a wide segment of the market; (6) obtain proper appraisals; (7) advertise the property for sale; (8) place “For Sale” signs on the property; (9) place the property with the Multiple Listing Service (MLS); and (10) ensure that efforts are conducted over a reasonable period of time.
[31] Although seemingly not available to Ms. Tomas when this motion was brought, Martin Theriault’s affidavit outlines the efforts undertaken by Theriault in selling the property. There is evidence supporting professional photographs being taken, a 3D virtual tour being prepared, sale signage being placed, and online advertisements, an MLS listing, and other listings being prepared. There is evidence supporting that the property was viewed a total of 1,481 times through online listings on PropertyGuys.com, Facebook, Kijiji, Google, and Realtor.ca. Mr. Theriault maintained a record of inquiries and showings. It discloses over 40 individual inquiries, of which at least 15 are recorded as having a scheduled showing. The evidence further discloses three offers to purchase the property that were all within proximity to one another.
[32] The evidentiary record before me is limited. I agree with Ms. Tomas that there appear to be arguable issues regarding whether Theriault has failed to discharge its duties as a mortgagee in possession, including by failing to obtain a true market value for the property. I lack sufficient evidence to determine those issues on this motion. However, I am not satisfied that the issues are serious issues to be tried. As noted above, the case law supports that a mortgagee is not required to obtain the true value, and is entitled to obtain the best price in the circumstances. Also, even if reasonable precautions were not taken by Theriault, it is Ms. Tomas’ onus to show that a higher price would have been obtained but for Theriault’s breach.
[33] In my view, an appraised value for the property that is higher than the sale price actually obtained is not sufficient evidence that a higher price could have been obtained, particularly where that appraisal is based on comparisons to houses sold prior to the COVID-19 pandemic with an express caveat stating, “As of the effective date of the appraisal, the full impact of the Covid-19 Pandemic on the local real estate market was not yet fully known.” Ms. Tomas has tendered no evidence on what impact, if any, the COVID-19 pandemic may have on the value of the property or reliability of the appraised value. Moreover, the evidence discloses that Theriault listed for $1,229,900 and seems to have made initial counter-offers at $1,190,000. In my view, the evidence does not support sufficiently serious issues to warrant a preservation order over the remaining proceeds of sale.
[34] On the third requirement, even if I had found serious issues to be tried regarding Ms. Tomas’ claim to the fund, the balance of convenience nevertheless favours declining the preservation order. In my view, the prejudice to Theriault from a preservation order outweighs the potential prejudice to Ms. Tomas from not granting it.
[35] Significantly, as noted above, Martin Theriault’s undisputed evidence is that Ms. Tomas has been in default under Theriault’s mortgage since August 2018. Only two of the three $4,000 payments that Ms. Tomas agreed to pay Theriault pursuant to the letter agreement were paid. On this motion, Ms. Tomas does not challenge the current discharge amount of $367,905.94. When asked about accounting in the discharge statement during oral argument, Ms. Tomas’ counsel acknowledged that there was evidentiary grounds in the record to find that the amounts owing under Theriault’s mortgage have been clearly stated to Ms. Tomas. Ms. Tomas maintains that mortgage accounting does not discharge Theriault’s obligation to account for the sale proceeds. In my view, though, irrespective of any duty to account for the disbursement of sale proceeds, the effect of granting the order sought by Ms. Tomas is that Theriault is paid nothing, even though the significant amounts owing under the mortgage have not been disputed on this motion.
[36] I also do not accept Ms. Tomas’ argument that enforcement of any judgment she may obtain against Theriault will become “impractical and impossible because the funds will be removed from Theriault Holdings and it will be wound up”. The only evidence tendered in support of that argument is Ms. Tomas’ unsubstantiated speculation that the sole purpose of Theriault’s incorporation was to protect the interest of its principal, Martin Theriault, in connection with the property and that any funds received by Theriault would be immediately dissipated. That speculation is not supported by any evidence before me. Martin Theriault’s sworn and unchallenged evidence is that Theriault was incorporated in 2009, and operates both residential real estate private lending and leasing businesses. Articles of incorporation filed on the motion confirm that Theriault was incorporated on December 22, 2009, well before Theriault’s loan to Ms. Tomas. There is no evidence supporting that Theriault has any intention to dissipate funds or that execution would be difficult or impossible if a preservation order is not granted.
[37] Theriault also argues that I should consider Ms. Tomas’ breaches of her letter agreement with Theriault. Ms. Tomas disagrees, arguing that the letter agreement and allegations regarding her conduct are irrelevant to the disposition of this motion, which should focus solely on whether Theriault discharged its duties to Ms. Tomas after taking possession of the property. I agree with Ms. Tomas that her compliance or non-compliance with the letter agreement, which was prior to Theriault exercising its rights of possession and power of sale, is irrelevant to whether Theriault discharged its duties as a mortgagee in possession. However, it is still relevant in assessing the balance of convenience factor.
[38] Martin Theriault’s affidavit outlines specific breaches by Ms. Tomas of the terms of the letter agreement. Ms. Tomas did not file and did not seek to file any responding evidence to refute or clarify Mr. Theriault’s statements. Based on the evidence before me, Ms. Tomas took no steps to sell or refinance the property. Ms. Tomas also took only limited steps to complete construction work and remedy deficiencies and damage, notwithstanding that such work may well have enhanced the sale value of the property. In my view, it would be inequitable to ignore these facts in assessing the balance of convenience.
[39] Orders under Rule 45.02 are an extreme remedy that must be exercised with caution: Brauti Thorning, supra at para. 12. In my view, the evidence before me and the circumstances of this case do not support granting that extreme remedy.
Disposition
[40] For the foregoing reasons, I dismiss Ms. Tomas’ motion. Since none of the remaining proceeds of sale will be posted into court, I thereby need not address NDF’s submissions regarding its continued claim to amounts posted into court that are ultimately found owing to Ms. Tomas.
Costs
[41] At the conclusion of argument, Ms. Tomas and Theriault had not exchanged costs outlines. I accordingly ordered that they exchange and file their costs outlines by September 10, 2020, which was done.
[42] The parties are encouraged to settle costs of the motion. However, if the parties are unable to resolve costs themselves, then Theriault shall deliver written costs submissions by October 1, 2020. Ms. Tomas shall deliver responding submissions by October 15, 2020. There shall be no reply submissions without leave. Costs submissions shall not exceed four pages, excluding any offers to settle or case law.
[43] Service of all costs submissions is hereby authorized by email. All costs submissions shall be submitted by email directly to me or my Assistant Trial Coordinator with a scanned copy of proof of service. Hard copies shall not be required. Original proof of service need only be filed if the court so directs.
[44] In the absence of receiving written submissions as directed above, the parties shall be deemed to have agreed on costs.
MASTER TODD ROBINSON
DATE: September 17, 2020