COURT FILE NO.: CV-19-00627862

DATE: 20201203

ONTARIO

SUPERIOR COURT OF JUSTICE UNDER THE MORTGAGES ACT, R.S.O. 1990, c. M. 40 and RULE 14.05 (3)(a)(e)(f) and (h) of the RULES OF CIVIL PROCEDURE, R.R.O. 1190, Reg. 194

BETWEEN:

FARAZ MOHAMMED, Applicant

– and –

RICHARD MAKHLOUTA and ROULA HANNA HARTMAN as executrix for the Estate of Michel Hanna Makhlouta, deceased, Respondents

Wendy Greenspoon-Soer, for the Applicant

David Marcovitch, for the Respondent Roula Hanna Hartman as executrix for the Estate of Michel Hanna Makhlouta, deceased

Richard Makhlouta, self-represented, not appearing although participated in the proceedings and was aware of the hearing date and details for connection

HEARD: November 16, 2020 by remote Zoom hearing

Kimmel j.

REASONS FOR JUDGMENT

Overview

[1] The Applicant, Faraz Mohammed (“Mohammed” or the “Purchaser”), brings this Application seeking:

(a) A Declaration that the Charge/Mortgage registered on June 14, 2013 as Instrument AT3325913 (the “Mortgage”) on the land municipally known as 131 Glendora Avenue, Toronto, Ontario (the “Property”) is void; and

(b) An Order directing the Land Registrar to discharge the Charge/Mortgage registered as Instrument Number AT3325913 on June 14th, 2013.

[2] Mohammed purchased the Property for $1,545,000.00 from the Respondent Richard Makhlouta (“Richard” or the “Vendor”) under an agreement of purchase and sale dated March 20, 2013 (the “purchase agreement”). The sale transaction closed on June 28, 2013.

[3] A title search conducted by the Purchaser’s counsel prior to sending a June 4, 2013 requisition letter did not disclose the Mortgage because it was registered by the Vendor after that date. None of the Purchaser, his lawyer or the lawyer acting for the Vendor on the real estate transaction were made aware of the intervening registration of the Mortgage in favour of Richard’s brother, Michel Hanna Makhlouta (“Michel”) on June 14, 2013. After registering the Mortgage, the Vendor signed an undertaking on June 20, 2013 confirming that he would pay off and discharge any existing mortgages, liens, executions and other encumbrances affecting the subject Property which were not being assumed by the Purchaser. The Mortgage was not paid or discharged on closing.

[4] The Purchaser had no knowledge of the Mortgage and did not agree to assume it on closing. The reporting letter to the Purchaser from his lawyer after closing indicated that a mortgage that the Purchaser had granted to the Bank of Nova Scotia to finance his purchase of the Property was registered as a first charge against the Property. The Mortgage, which assumed the position of a first charge against the Property after all prior encumbrances were discharged on the closing of the sale transaction, was only discovered five years later when the Purchaser was attempting to re-finance the Bank of Nova Scotia mortgage.

[5] Michel never took any steps to enforce or foreclose on, or seek repayment of, the debt allegedly secured by the Mortgage. Neither Michel nor his estate have ever taken any steps to claim or recover the mortgage debt from Richard. Nonetheless, Michel’s estate takes the position that the Mortgage is valid and enforceable as a first charge against the Property. At the claimed annual interest rate of 12%, over $40,000.00 in interest is added to the $340,000.00 mortgage debt every year after June 2013. Richard, now a discharged bankrupt, has filed evidence in support of the position now taken by Michel’s estate, but did not formally appear at the hearing of the application or file any separate written submissions by way of response.

[6] For the reasons that follow, I find that the existence of an equitable mortgage over the Property in favour of Michel prior to June 2013 has not been established by the Respondents on the record before me on a balance of probabilities. In the absence of such, the registration of the Mortgage in favour of Michel on June 14, 2013 raises a presumption of fraud that has not been rebutted or adequately explained by the Respondents. Accordingly, the Mortgage is void and unenforceable as against the Applicant by virtue of s. 2 of the Fraudulent Conveyances Act. The Application is granted.

Chronology and Uncontroverted Facts

[7] There are a number of uncontroverted facts that have been established on the record that I consider to be relevant to the determination of the issue before me, as follows:

a. Michel began advancing funds to Richard in 2001.

b. Richard invested in a business called Ability Health Care Supplies Inc. (“AHCS”) in 2005 and Michel provided financial assistance to AHCS from time to time thereafter.

c. Richard purchased the Property on August 30, 2007. Richard and his wife lived at the Property. Richard had planned to build a fully accessible home at the Property to showcase as part of the business of AHCS.

d. Richard says that Michel provided some funds that were used towards the purchase of the Property in 2007.

e. Further advances were made by Michel to AHCS after 2007. There are no signed documents in the record between Richard and Michel that set out the terms upon which Michel advanced funds to Richard and/or AHCS from time to time.

f. No mortgage was registered against the Property in favour of Michel until the Mortgage that was registered on June 14, 2013.

g. Five mortgages were registered against the title to the Property in favour of other lenders between 2007 and 2013. There is no evidence of any disclosure to these lenders of a mortgage in favour of Michel.

h. Richard decided to sell the Property in 2011 to relieve the financial distress that he and his business were under. There were three listings of the Property, starting in November 2011. The list price was reduced twice before it was sold.

i. The purchase agreement was signed on March 20, 2013 for a sale price of $1,545,000.00. This purchase price was higher than the list price for the Property at the time, which was $1,450,000.00.

j. On June 4, 2013, the Purchaser’s lawyer sent a requisition letter to the lawyer acting for Richard on the real estate transaction, requiring the Vendor to arrange for the discharge of all mortgages and liens and the removal of any executions affecting title to the Property.

k. The Vendor’s lawyer wrote to the Purchaser’s lawyer on June 5, 2013, outlining how and when the mortgages and construction lien identified in the title abstract would be discharged on closing and advising that he would be reviewing with the Vendor what could be done to have the identified executions removed. In that context, the Vendor’s lawyer indicated that he understood “that there had been forbearance on a third party who holds any equitable Mortgage on this property and it may very well be that the third party will step in and execute their right to sell the property and have this transaction proceed from the third party who hold [sic] the equitable Mortgage.”

l. Richard signed a separation agreement with his wife that identified certain mortgage debts as well as a private loan from his brother Michel in the amount of $300,000.00. The date next to Richard’s signature on this document is June 7, 2013. The date next to his wife’s signature on this document is June 6, 2013.

m. The Mortgage was registered on June 14, 2013 by the lawyer who had acted for Michel’s wife in connection with their separation agreement, and who recorded that he was formally retained to register the Mortgage the day before, on June 13, 2013, based on written instructions from Richard dated May 31, 2013 and signed by Richard on June 11, 2013; this other lawyer was unaware of the purchase agreement and the imminent closing of the purchase transaction.

n. There is no indication in the record before the court that any loan documentation was provided to the lawyer who registered the Mortgage on or before its registration on June 14, 2013.

o. There was a break-in at Richard’s office on June 15, 2013, after which he reported that some unspecified legal documents were stolen.

p. No funds were advanced by Michel to Richard or AHCS at the time of the registration of the Mortgage.

q. At the time the Mortgage was registered on June 14, 2013, the following registrations were already on title in favour of other creditors of Richard:

i. A first mortgage to Firstline Mortgage, with $757,211.79 outstanding as of closing;

ii. A second mortgage to Hillmount Capital Inc., with $509,791.34 outstanding as of closing;

iii. A construction lien to Azimuth Tree Enterprises Inc. in the amount of $179,559.86; and

iv. Two executions for judgments against Richard, one in the amount of $76,175.90 plus $1,200.00 in costs and the other in the amount of $213,031.50 plus $1,200.00 in costs.

r. Richard signed an undertaking dated June 20, 2013 in anticipation of the closing of the Applicant’s purchase of the Property that he would pay off and discharge any existing mortgages, liens, executions and other encumbrances affecting the Property.

s. These prior encumbrances were all discharged or removed from title in connection with the sale of the Property to the Applicant that closed on June 28, 2013. According to the report on closing to Richard, setting out the distribution of sale proceeds, the first three secured creditors were paid in full and $52,813.07 was paid to the execution creditors in satisfaction of their outstanding debts with a registered face value in excess of $290,000.00.

t. Richard retained no surplus equity in the Property upon completion of its sale to the Applicant.

u. The Mortgage was not repaid or discharged at or around the time of the closing of the purchase of the Property by the Applicant.

v. The Applicant did not agree to assume the Mortgage on closing.

w. Neither of the lawyers acting on the purchase transaction, for the Vendor or the Purchaser, conducted a further sub-search of the title to the Property between June 4 and the June 28, 2013 closing date. Richard did not disclose to either of them or to the Purchaser that he had arranged for another lawyer to register the Mortgage.

x. A mortgage was registered in favour of the Scotia Mortgage Corporation on closing to secure funds advanced for the purchase of the Property by the Applicant. It was supposed to be secured by a first charge against the Property.

y. Richard moved out of the Property after it was sold to the Applicant.

z. There is no mention in the reporting letter from Richard’s lawyer in respect of the closing of the purchase of the Property by the Applicant of any payment having been made to Michel, nor any reference to the Mortgage.

aa. Michel took no steps to collect the monies owing to him, or to enforce or foreclose upon the Mortgage or to take possession of and/or sell the Property after the Mortgage was registered, or after its stated maturity date of December 31, 2013.

bb. Richard never repaid the monies that Michel had advanced to him.

cc. Michel’s last will and testament is dated January 6, 2015.

dd. Michel did not leave anything from his estate to Richard. The residue of Michel’s estate was left to Michel’s and Richard’s two other siblings, his sister Roula Hanna Hartman (the executrix of Michel’s estate and a party Respondent in that capacity) and Antoine Makhlouta, who was the alternate estate representative and primary deponent for the Respondent estate on this application).

ee. Michel died on February 4, 2015.

ff. Richard filed an assignment in bankruptcy on February 7, 2018. Michel’s estate was not listed as either a secured or unsecured creditor or Richard’s estate in bankruptcy.

gg. The Mortgage was first discovered by the Applicant in connection with his efforts to renew his mortgage with the Scotia Mortgage Corporation in 2018.

Contentious Facts

[8] There are other facts that are disputed, which the parties nonetheless want me to determine based on the written record that has been provided on this application. These have to do with the understandings and agreements that Richard says he had with his brother Michel, and that representatives of Michel’s estate say Michel told them about before he died. The controversy is not between Richard and Michel, nor between them and any other witness. Rather, it is about the credibility, reliability and eventual weight, if any, to be given to this testimony when considered in light of the conduct of the brothers, both before and after the registration of the Mortgage, and in light of the absence of any contemporaneous corroborating records.

[9] No motion was brought by the Respondents to convert this application into an action. Both sides conducted the pre-hearing steps and briefing of the application on the assumption that it would be decided based on the written record, notwithstanding the factual controversies that were raised. Both counsel have indicated that, if the court determines that it is necessary to hear from any of the witnesses viva voce in order to make the necessary assessments regarding the credibility and reliability of their evidence, they will make arrangements for the witnesses to appear. Neither party takes the position that this is necessary for me to decide the issues on this application, but they offer it should the court determine it to be necessary.

[10] I have determined that it is not necessary to hear from the affiants to resolve these factual controversies. I am able to do so based on the uncontroverted facts and circumstances and documents (or absence of such) and the conduct of Richard and Michel. The parties are assumed to have put their best evidence forward having proceeded to the hearing on the basis that there would be a final adjudication.

There is a further problem that the Applicant has raised concerning some of the contentious evidence that Antoine has provided based on matters Michel is said to have told him about before Michel died. The use of hearsay evidence on an application is only permitted by Rule 39.01(5) in respect of facts that are not contentious, and then only if the source of the information and the fact of belief are specified in the affidavit. However, the normal hearsay exceptions can still be considered and applied to evidence tendered on an application, having regard to the necessity and reliability of the hearsay evidence being tendered. Even if the affidavit evidence in question does not meet the requirements of Rule 39.01(5), before disregarding it, the judge must also be satisfied that the evidence is not otherwise admissible, based on the law of evidence, if it was given by a witness in court. See Bilotta v. Booth, 2019 ONSC 5956, at para. 11, citing Fawley v. Moslenko, 2017 MBCA 47, at para. 76.

[11] The Applicant relies on R. v. Brooks, 2015 ONSC 7350, at paras. 30, 31, and 37, which places the onus on the Respondent estate to satisfy the court that it meets the principled exceptions to the hearsay rule, based on the requirements of necessity and the existence of sufficient indicia of reliability when the circumstances under which the evidence was generated is considered.

[12] The necessity requirement can be satisfied by the death of Michel in 2015, more than three years before the Mortgage was challenged for the first time by the Applicant. However, the reliability of the evidence about the agreement between Michel and Richard to provide security in the Property is not as straightforward. It is dependent upon the credibility of the evidence about the loans from Michel to Richard which, in turn, must be considered in light of their conduct and the lack of any corroborating contemporaneous documents. It is also dependent on the credibility of the testimony of Richard and Antoine regarding what Michel is alleged to have said to them before he died, and how those accounts advance their current self-interests in having the Mortgage enforced, particularly Antoine who is a residual beneficiary of Michel’s estate.

[13] The Respondent estate relies upon R. v. Mac, 2009 ONCJ 770, paras. 31, 32, 43 and 44, to support its position that the circumstances under which the statements were made by Michel (normal course statements of one sibling to another) are reliable, there being no motive for Michel to have lied to his brothers Richard and Antoine, and asks the court to admit the statements into evidence and leave other aspects of reliability to be assessed when the weight of this evidence is considered in the context of the entirety of the evidence before the court. I agree that this is the prudent course to take, to allow the evidence, subject to careful scrutiny and evaluation as to the weight, if any, it should be given when it is considered in context. To be clear, its admission in these circumstances is not a recognition that the hearsay evidence is credible as it remains subject to assessment in the context of the entirety of the evidentiary record.

Issues to be Decided

[14] Having regard to the written and oral submissions of the parties, the following issues require the court’s determination on this application:

a. Did Richard grant an equitable mortgage in the Property to his brother Michel and, if so, when?

b. Is there sufficient written evidence of the Mortgage and corresponding interest in the Property in favour of Michel to satisfy the requirements of the Statute of Frauds, R.S.O. 1990, c. S.19, s. 2?

c. Was the Mortgage a conveyance made contrary to s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 and is it void as against the Purchaser of the Property?

d. Was the Mortgage an assignment contrary to s. 4(1) of the Assignments and Preferences Act, R.S.O. 1990, c. A.33 and is it void as against the Purchaser of the Property?

e. Is the doctrine of unjust enrichment or other equitable considerations between the Purchaser and Michel’s estate relevant?

Analysis

[15] I will address each of the identified issues in turn.

Did Richard grant an equitable mortgage in the Property to Michel, and if so, when?

[16] The Respondent estate claims to have held an equitable mortgage in the Property since at least 2007 when the Property was purchased, which was to secure advances that had already been made by Michel to Richard and/or AHCS prior to Richard’s purchase of the Property, advances that were made at the time of the purchase of the Property and advances made by Michel after the purchase of the Property.

[17] I will address this issue first as it is the cornerstone of the Respondents’ position on this application. If this equitable mortgage had been established by the Respondents, that would have been a full answer to the Applicant’s claims; however, it has not been.

[18] An equitable mortgage creates a charge on a property where there has been a failure to transfer a legal estate in the property to an intended mortgagee. The cases often involve circumstances where there has been some instrument or act, founded on valuable consideration at the time the mortgage is said to have arisen, demonstrating an intention to create a security interest in favour of the mortgagee, but due to a defect in the execution of, or description of lands in, that instrument no legal mortgage or charge was created. See Shute v. Premier Trust Co., [1993] O.J. No. 2758, at paras. 46 and 48.

[19] An essential feature of an equitable mortgage is that there be a common intention, whether express or implied, of both the mortgagor and mortgagee that the Property be made security for a debt due or future advances. See Shute, at paras. 47 and 49.

[20] The Respondents have not been able to produce any document or instrument evidencing the existence of an equitable mortgage dating back to the time it is said to have been granted, in 2007 when Richard purchased the Property. The Respondents rely upon the registration of the Mortgage on June 14, 2013 and the mortgage terms indicated in that registration, which are alleged to reflect a pre-existing equitable mortgage in favour of Michel. The entire premise of Richard’s position is that he registered the Mortgage as part of the agreement that he made with Michel when the Property was purchased, back in 2007.

[21] The onus is on the Respondents to establish, on a balance of probabilities, that Richard and Michel had entered into an agreement that, even though not registered, created a security interest in favour of Michel in the Property giving rise to an equitable mortgage. The Respondents have attempted to meet this onus through the evidence of Richard and Antoine, the reliability, plausibility and credibility of which is challenged by the Applicant, as described previously in these reasons.

[22] Although not admitted, the Applicant does not seriously challenge the evidence of Richard and Antoine that some funds were loaned by Michel to Richard and/or AHCS over the years. However, the Applicant does challenge the Respondents’ assertion that there were ever any loan documents evidencing a common intention held by Richard and Michel to give Michel a security interest in the Property.

[23] Richard’s evidence is that Michel required a mortgage on the Property to secure the monies that Michel had loaned, and would in future loan, to Richard and/or his business and that Richard agreed to give him that mortgage security. Richard claims that they entered into a written mortgage document that was signed a few weeks before he closed his purchase of the Property in August 2007. He says that he planned to register this mortgage on title but it fell through the cracks. Richard’s explanation for the absence of any documentation evidencing this mortgage is that it must have been stolen when his office was broken into on June 15, 2013.

[24] Antoine deposes that Michel’s estate has not been able to locate any such mortgage documentation in Michel’s files. None of the estate’s representatives claim to have ever seen this documentation. Antoine deposes (subject to the hearsay objection of the Applicant) that both Richard and Michel told him prior to Michel’s death that Richard had agreed to provide a mortgage over the Property to Michel as security for the funds that he had loaned to Richard both before and after Richard’s purchase of the Property. Antoine further deposes that he was advised that Michel had insisted on receiving this security as a condition of granting any further funding and that Michel had assumed that a mortgage had been registered when additional funds were thereafter advanced.

[25] There are too many unexplained gaps and inconsistencies in the evidence for me to accept Richard’s evidence that there was a written mortgage loan agreement entered into between him and Michel when he purchased the Property in August 2007. Some of these unexplained gaps and inconsistencies are as follows:

a. In the separation agreement that has the date of June 7, 2013 next to his name, Richard describes his liabilities to include certain mortgage debts but he described the loan from Michel as a private loan from his brother, with no mention of a mortgage.

b. Although Richard suggests that the Mortgage is predicated on this loan agreement, there is no evidence that he disclosed or provided the loan agreement to the lawyer who he engaged to register the Mortgage. The Mortgage was registered prior to the break-in, on June 14, 2013, based on written instructions from Richard that had been provided to the lawyer even earlier than that, dated May 31, 2013 and signed on June 11, 2013, which make no mention of the 2007 mortgage loan agreement. The claim by Richard that the loan agreement was among the documents that were stolen when his office was broken into on June 15, 2013 does not explain why the loan agreement was not given to the lawyer who he engaged to register the Mortgage.

c. The written instructions describe the Mortgage (to be registered) to represent “further security and collateral” to an existing General Security Agreement and Equitable Mortgage, dated April 4, 2001, given to Michel by Richard over all of his assets and property that is nowhere mentioned in Richard’s evidence. This suggests a loan agreement of a different date and origin than the loan agreement that Richard claims was entered into at the time the Property was purchased in 2007.

d. Further, these instructions indicate that Michel had commenced enforcement proceedings and had agreed to forebear to allow Richard to organize and restructure his affairs, circumstances which are also not mentioned anywhere in Richard’s evidence. The circumstances described in these instructions are not consistent with either Richard’s or Antoine’s evidence about Michel’s conduct prior to June 2013, during which he was allegedly operating under the assumption that he held a security interest in the Property, without any indication from Michel of enforcement or forbearance on his part.

e. The file notes of the lawyer who registered the Mortgage indicate that the client (Richard) “advised that the draft agreement had been in the works for some time and the amount owing to his brother was actually $340,000 and not only the $300,000 that was set out in the separation agreement.” These notes once again are inconsistent with there having been a signed mortgage agreement dating back to 2007. I do not rely on them for the truth of their contents but rather to reinforce that Richard did not bring the existence of the alleged mortgage loan agreement to the attention of his lawyer, nor has he offered any explanation for why he did not do so.

[26] If mortgage loan documentation had existed from 2007 as Richard claims, it is reasonable to assume that it would have been provided to the lawyer as part of the instructions given for the registration of the Mortgage. Instead, Richard provided instructions to the lawyer that make no mention of this 2007 mortgage loan documentation and describe a completely different set of circumstances as the predicate for the registration of the Mortgage, for which no satisfactory explanation has been provided.

[27] The hearsay evidence from Antoine, even if admitted, does not resolve these noted inconsistencies or provide corroboration for Richard’s evidence. Antoine’s evidence is imprecise as to the timing and terms of the agreement to provide security that he claims to have been advised of. Further, Antoine has a vested interest as one of the residual beneficiaries of Michel’s estate. I cannot accept his evidence as an independent or objectively reliable account of what Michel understood before his death, in the face of the inconsistencies in Richard’s evidence and the lack of any contemporaneous corroborating documentation.

[28] I do not need to hear viva voce evidence to reach the conclusion that the Respondents have failed to meet their burden on the record before me to establish that there was any pre-existing written agreement evidencing the equitable mortgage that they rely upon as support for the prior registration of the Mortgage on June 14, 2013.

[29] Even if an equitable mortgage dating back to 2007 could be established in the absence of any documents evidencing it (and I am not sure that it can be based on the authorities that have been presented to me), I am not satisfied of the other essential requirement for an equitable mortgage. On the record before me, the Respondents have not met their burden, on a balance of probabilities, to establish that there existed an agreement or common intention to grant Michel a security interest in the Property dating back to 2007 as the Respondents have alleged.

[30] While both Richard and Antoine (based on hearsay evidence from Michel that the Applicant objects to) have deposed that Richard and Michel intended that Michel be granted a security interest in the Property for his prior and future loan advances, their testimony is simply not consistent with the conduct of these two brothers between 2007 and 2013, during which time:

a. No mortgage documentation was finalized (per my finding above) and no mortgage was registered on title to the Property.

b. Michel continued to advance more funds, despite having told Antoine that he would not do so unless a mortgage was registered.

c. Richard says it slipped through the cracks, yet he did manage to register five other mortgages on title to the Property and provides no evidence of having disclosed the existence of an equitable mortgage in favour of his brother Michel to any of these other mortgagees whose priorities could have been impacted by that mortgage if it existed.

[31] It is simply not plausible that the brothers intended to register a mortgage in favour of Michel dating back to 2007 and both of them forgot or neglected to do so. The suggestion by Antoine that Michel assumed a mortgage had been registered and was distracted by his travels and other business does not accord with the description of him as an experienced and sophisticated businessman of the world.

[32] I accept that Richard intended to repay Michel the monies loaned to him and to his company AHCS, and that Michel expected to be repaid. However genuine those intentions may have been, that does not translate into an intention to grant a security interest in the Property sufficient to support the Respondent estate’s claim now to an equitable mortgage.

[33] What is more plausible and is supported by the evidence in the record is that Michel and Richard decided to put a Mortgage on the Property in favour of Michel in May or June of 2013, after the Property had been sold (whatever the reason for that may have been, which is a point that will be addressed in more detail later in these reasons). It was only in this context that Richard and his lawyers began to characterize the prior loan advances from Michel to Richard as an equitable mortgage (as reflected in Richard’s instructions to the lawyer who registered the Mortgage and in the June 5, 2013 letter from Richard’s conveyancing lawyer responding to the requisitions for the closing of the purchase agreement). The parties’ retroactive characterization of the loans from Michel to Richard as an equitable mortgage does not make it such. They are lacking sufficient foundational or corroborating evidence of a common intention to grant security in the Property to Michel to meet their burden on this issue.

Does the interest in the Property claimed by Michel’s estate satisfy the requirements of the Statute of Frauds?

[34] Section 2 of the Statute of Frauds, R.S.O. 1990, c. S.19 states as follows:

2 Subject to section 9 of the Conveyancing and Law of Property Act, no lease, estate or interest, either of freehold or term of years, or any uncertain interest of, in, to or out of any messuages, lands, tenements or hereditaments shall be assigned, granted or surrendered unless it be by deed or note in writing signed by the party so assigning, granting, or surrendering the same, or the party’s agent thereunto lawfully authorized by writing or by act or operation of law.

[35] The Applicant argues that the equitable mortgage dating back to 2007 that is asserted by the Respondents cannot be established or enforced because there is no written deed or note evidencing it. Equitable mortgages are often based on defective documents, but typically they arise in cases where some documents exist so that Statute of Frauds considerations do not arise. See Cheung v. Li, [2006] O.J. No. 1210, at para. 12. An equitable mortgage is not a means by which the requirements of the Statute of Frauds can be avoided to enforce an oral agreement for a mortgage. See Cheung at para. 16.

[36] The Respondent estate argues that the registration of the Mortgage is sufficient evidence in writing for purposes of the Statute of Frauds. That position assumes that the Mortgage is evidence of the prior equitable mortgage that the Respondents assert, but I have found that the equitable mortgage asserted has not been proven, and the registration of the Mortgage does not establish its prior existence.

[37] The registered Mortgage does not offend the Statute of Frauds, but it is subject to challenge on other grounds discussed below.

Was the Mortgage a conveyance made contrary to s. 2 of the Fraudulent Conveyances Act?

[38] The Applicant contends that the registered Mortgage is void and unenforceable because it was registered with the intent to defeat, hinder, delay or defraud Richard’s creditors and potential creditors at the time, including the Applicant himself.

[39] Section 2 of the Fraudulent Conveyances Act R.S.O. 1990, c. F.29, provides as follows:

2. Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.

a) Does the Applicant have standing to challenge the Mortgage under the Fraudulent Conveyances Act?

[40] A threshold issue is raised by the Respondent estate as to whether the Applicant has standing to complain about an alleged fraudulent conveyance and seek a declaration that it is void as against him. It is argued that, to have standing, the Applicant would have to have had an existing claim against Richard as of June 14, 2013 when the Mortgage was registered.

[41] The Applicant argues that the words “creditors or others” contained in section 2 of this statute are wide enough to include any person who has a legal or equitable right or claim against the grantor of the conveyance or charge by virtue of which he is, or may become, entitled to rank as a creditor of the latter. The party attempting to impeach a conveyance does not have to demonstrate that it had an existing debt owing at the time of the conveyance. See Indcondo Building Corp. v. Sloan, 2014 ONSC 4018, 121 O.R. (3d) 160, at paras. 45-47.

[42] The Applicant contends his standing can be derived from the purchase agreement and the obligations of the Vendor thereunder, confirmed by the Vendor’s undertaking provided on closing to discharge any existing mortgages, liens, executions and other encumbrances affecting the Property which were not being assumed by the Applicant. Further contractual obligations of the Vendor pertaining to closing adjustments also existed under the purchase agreement that was in place prior to June 14, 2013. The Applicant argues that those contractual obligations of the Vendor created legal rights in the Applicant (Purchaser) which are sufficient to establish the Purchaser’s status as a prospective creditor of the Vendor at the time the Mortgage was registered.

[43] I agree with the Applicant’s contention that he has standing to challenge the registration of the Mortgage as a fraudulent conveyance. The Applicant was, at the time of the registration of the Mortgage, a party to whom contractual obligations were owed by the Respondent Richard, which, if breached, would render the Applicant someone with a claim for damages who would rank as a creditor. No attempt has been made to argue that the registration and failure to discharge the Mortgage was not a breach of the purchase agreement. Richard’s breach of his obligations to the Applicant is irrefutable. Richard’s and Michel’s decision to register the Mortgage in May or early June of 2013, and the prior instructions given by Richard to register the Mortgage, crystallized the Applicant’s status as a prospective creditor of Richard before the Mortgage was registered. Richard himself deposes that he assumed that the registration of the Mortgage before the closing of the sale would lead the lawyers to work out the issues with Michel, which indicates an understanding on Richard’s part at some level that the Applicant’s contractual rights would become contingent upon satisfying Michel’s interests once the Mortgage was registered.

[44] As stated by Perell J. in Indcondo, at para. 47:

49 The Fraudulent Conveyances Act was enacted to prevent fraud. It is remedial legislation and must be given as broad an interpretation as its language will reasonably bear. The purpose of the Act was expressed by Prof. Dunlop in Creditor-Debtor Law in Canada, 2nd ed. at p. 598:

The purpose of the Statute of Elizabeth and of the Canadian Acts based on it, as interpreted by the courts, is to strike down all conveyances of property made with the intention of delaying, hindering, or defrauding creditors and others except for conveyances made for good consideration and bona fide to persons not having notice of such fraud. The legislation is couched in very general terms and should be interpreted liberally.

[45] The Respondents argue, based on the decision in Stone v. Stone (2001), 2001 CanLII 24110 (ON CA), 55 OR (3d) 491(C.A.), at para. 23, that “creditor or other” must be someone who has at least advanced a claim against the debtor for unliquidated damages in contract or tort at the time of the impugned conveyance. I do not read that case to stand for such a restrictive interpretation. Rather, it interprets the statutory language to include someone who has a pending action even though they are not yet a judgment creditor. It does not require an unsecured creditor to have advanced a claim to qualify as a “creditor or other” under the Fraudulent Conveyances Act. Absent some clear authority to that effect, such an interpretation is not in keeping with the intended broad and purposive approach to this statute.

b) Was the registration of the Mortgage made with the necessary intent to render it void and unenforceable under the Fraudulent Conveyances Act?

[46] To be held void under s. 2 of the Fraudulent Conveyances Act, I must consider the dominant motive behind the registration of the Mortgage. I must find that Richard registered the Mortgage with the intention to defeat, hinder or delay his other creditors, either based on direct evidence of his intent or evidence of surrounding circumstances that establish a prima facie intention to defeat, hinder, defraud or delay.

[47] The court often has to resort to inferences from the circumstances to making the necessary finding of intention to defeat creditors based on what have become known as the “badges of fraud”. The badges of fraud are said to represent evidentiary rules that may enable the court to make a finding of fraudulent intent unless the proponents of the transaction can explain away the suspicious circumstances. See Indcondo, at paras. 50-53.

[48] The following “badges of fraud” exist in this case:

a. Secrecy: Richard engaged a different lawyer to register the Mortgage and did not disclose the registration to the lawyer who acted for him in connection with the purchase agreement (who then, in turn, was not in a position to disclose it to the Purchaser). While the registration could have been “discovered” by a further sub-search of title to the Property after the June 4, 2013 requisition and before closing, there is no evidence from Richard to indicate that he expected it would be discovered or to explain why he did not tell the conveyancing lawyer about it. He simply states that he “…assumed the lawyers would work out the issues with Michel” after the Mortgage had been registered and that his involvement was at an end and that he did not believe that there would be any further issues. This explanation is nonsensical and illogical.

b. Timing or haste: Richard registered the Mortgage after the purchase agreement had already been signed but before the closing (only days before the original closing date and only two weeks before the extended closing date), in respect of loans that, according to Richard’s and Antoine’s evidence, had been accumulating for over almost six years (or longer). Richard’s instructions for the registration of the Mortgage are dated June 11, 2013, and the lawyer’s notes indicate that he was not formally retained by Richard to register the Mortgage until the day before it was registered, on June 13, 2013.

c. The close relationship between Richard and Michel: They are brothers. The Applicant argues that a suspicious transfer between near relatives, in itself, is enough to give rise to a prima facie presumption that calls for an explanation. See Rinaldo v. Rosenfeld, [1999] O.J. No. 4665 (S.C.), at paras. 49 and 50.

d. Inconsistent explanations: The written instructions signed by Richard for the registration of the Mortgage are not consistent with his sworn evidence to this court as to the circumstances under which the Mortgage was registered, in that they refer to a General Security Agreement and equitable Mortgage dating back to 2001, six years before the Property was purchased by Richard.

e. No new consideration: Even accepting everything that Richard has provided about the details of the loan advances from Michel, there is no evidence of any loan advances from Michel to Richard or AHCS after 2009. It was expressly noted by the lawyer who registered the Mortgage that it was not supported by any fresh advance of funds or consideration, but was rather predicated on an existing “equitable mortgage”, as of yet unregistered, supported by past consideration. I have found that the equitable mortgage did not exist.

f. Strategy to compromise execution creditors: The Mortgage was registered in the face of executions (reflecting judgments against Richard) that were identified as a threat to Richard’s ability to close the sale of the Property, since he could not afford to pay them and there would be insufficient sale proceeds to satisfy them in full. An (albeit misguided) suggestion had been made by Richard’s lawyer that the threat that these executions posed might be addressed if a third party mortgagee could “step in and execute their right to sell the property.”

[49] I accept the argument made by the Respondent estate that badges of fraud must be applied carefully. However, I do not accept the argument that they must be established based on a higher degree of probability than the normal civil standard of proof, even if not required to be established on the higher criminal standard of proof. The estate relies on Beynon v. Beynon, 2001 CanLII 28147 (ON SC), [2001] O.J. No. 3653 (S.C.), at paras. 49 and 50, for this proposition, which was later rejected by Perell J. in Indcondo at para. 59, having regard to the later jurisprudence coming out of the Supreme Court of Canada and the conclusion that, even in civil cases involving more serious consequences by the nature of the allegations made, “the seriousness of the allegations does not alter the standard of proof in civil cases,” which is always: proof on a balance of probabilities.

[50] Having carefully considered and applied the badges of fraud in all of the circumstances of this case, I find a presumption or inference of fraud has been raised in relation to the Mortgage that was registered on June 14, 2013.

[51] The existence of one or more of the recognized badges of fraud may not be determinative but, once their existence is established, an inference of fraud is raised and the evidentiary burden shifts to the Respondents to explain why the fraudulent intent should not be inferred. See Indcondo, at para. 53. The explanations offered by the Respondents to the identified badges of fraud are unsatisfactory:

a. Secrecy: Aside from the “discoverability” point (that I have addressed above), the Respondents also argue that the equitable mortgage was “disclosed” by Richard’s conveyancing lawyer’s June 5, 2013 response to the requisition letter. However, I have found that an equitable mortgage of the nature asserted has not been proven and so its “disclosure” in a letter talking about how to avoid having to pay out the executions registered by Richard’s other unsecured judgment creditors does not explain the secrecy around the registration of the Mortgage itself.

b. Timing or haste: The explanation for the timing of the registration of the Mortgage is that Michel demanded it when he found out that Richard was selling the Property. That is an explanation of the timing but it does not rebut the presumption that it was intended to give some priority or benefit to Michel that might defeat, hinder or delay Richard’s other creditors, such as the other unsecured execution creditors who, prior to the registration of the Mortgage, would have stood pari passu with Michel as unsecured creditors or Richard.

c. Near relationship: The Respondents suggest that even though Richard and Michel were brothers, they were not close, and that Michel was not trying to help Richard and he eventually cut Richard out of his will because their relationship was never repaired. However, both Richard and Antoine deposed to the fact that Michel had helped Richard many times in the preceding years, sometimes of his own volition. That was the type of brother he was. The demise in their relationship was said by both Richard and Antoine to be tied to Richard’s failure to grant Michel a mortgage security interest in the Property. Michel’s disinheritance of Richard after the Property was sold is equally, if not more, consistent with Michel believing that he did not receive a conveyance of an enforceable security interest in the Property before it was sold to the Applicant, leading him to instead settle his debts with Richard by offsetting them against any inheritance that he might have otherwise received when Michel died.

d. Inconsistent explanations: I am not satisfied that the entirely inconsistent accounts of the origin of the alleged equitable mortgage, as between what is documented in the mortgage registration instructions signed by Richard in June, 2013 and what Richard says in his affidavit on this application, can be explained away and ignored on the basis that the lawyer misunderstood the facts when drafting the instructions and the client (Richard) did not read or understand the document before he signed those instructions.

e. No new consideration: The Respondents say that new consideration was not required in June 2013 because the registered Mortgage was simply a reflection of an existing equitable mortgage. However, I have found that they have not proven the equitable mortgage, so it cannot solve the concern about a lack of consideration for the priority that Michel received by the conveyance of the Mortgage when it was registered on June 14, 2013.

f. Facilitation of strategy to compromise execution creditors: The Respondents argue that this strategy (of having the third party mortgagee step in to sell the Property) was not implemented and would not have been successful. While that is so, that does not mean that the registration of the Mortgage was not intended to advance that strategy, which the documents disclose to have been under consideration at the time.

[52] A presumption of an intention to defeat, hinder, delay or defraud Richard’s unsecured creditors at the time of the registration of the Mortgage has been raised and has not been rebutted. The Respondents have not met their “burden of explanation”, either specifically or based on the surrounding circumstances taken as a whole. See FL Receivables Trust 2002-A v. Cobrand Foods Ltd., 2007 ONCA 425, 85 O.R. (3d) 561, at paras. 39 and 40.

[53] The Respondent estate contends that the Applicant must prove an intention on the part of both Richard and Michel to defraud Richard’s creditors, beyond mere suspicion, relying upon Cybernetic Exchange Inc. v. J.C.N. Equities Ltd., [2003] O.T.C. 1035 (S.C.), at paras. 218 and 220. This argument is predicated on the position that there was valuable consideration for the Mortgage because it was simply the formal legal registration of a pre-existing equitable mortgage for which there had been valuable consideration given through prior loan advances. However, I have found that the Respondents have not proven the existence of an equitable mortgage. Without the equitable mortgage, the justification for the enhanced priority through security that Michel received on June 14, 2013 by the registration of the Mortgage falls away.

[54] The Respondent estate acknowledges that a conveyance without consideration that had the effect of defeating, hindering or delaying Richard’s other creditors in and of itself would justify an inference that this effect was intended. It argues that this presumption can be rebutted by cogent evidence that there was no such intention and that the conveyance was made for an honest purpose. See Cybernetic Exchange Inc., at para. 211. The Respondents have not offered any tenable honest purpose for making the conveyance represented by the registration of the Mortgage on June 14, 2013. While both Richard and Antoine depose that the purpose of registering the Mortgage was for Richard to make good on his promise to Michel to secure Michel’s loans, neither Richard nor Michel conducted themselves after it was registered in a manner consistent with them holding an honest belief that Michel had a security interest in the Property. The “honest purpose” proffered is simply not plausible when the surrounding circumstances taken as a whole are considered.

[55] Michel’s estate contends that the conveyance (registration of the Mortgage) was understood and intended by Michel to enable him to stop the sale of the Property, maintain it with all of the associated costs and sell it for a higher price that would generate sufficient sale proceeds to pay off the prior encumbrances with something left to repay Michel’s loan advances. Thereafter, Michel took no steps to stop the sale, nor is there any evidence of him having made any inquiries or taken any steps before or after the sale, or before or after the Mortgage term expired on December 31, 2013, in respect of the Property or with a view to maintaining, marketing or selling it, nor did he demand payment of the Mortgage or take any steps to enforce or foreclose upon it prior to his death over a year later. The suggestion by Antoine that Michel was satisfied that his position was protected by the registration of the Mortgage and that he expected payment from the sale proceeds is entirely incongruous with his behaviour, and Richard’s behaviour, thereafter.

[56] Richard proceeded to complete the sale of the Property to the Applicant on the strength of the undertaking that he gave to the Applicant, after the Mortgage was registered, that he would repay and discharge all mortgages. While Richard claims not to have read or understood the undertaking he signed, his further explanation, that the Mortgage was registered to placate Michel and that he assumed that the lawyers would take care of Michel’s interests upon the sale without his involvement, is implausible. Richard knew, or ought to have known, that the sale proceeds would not be sufficient to repay his secured and unsecured creditors whose debts had been registered previously on title. He knew that the Purchaser had not agreed to assume the Mortgage. The reporting letter that he received from his conveyancing lawyer after the closing of the sale of the Property makes no mention of the Mortgage or of taking care of Michel’s interests. Nor does Richard offer any plausible theory for how Michel could be taken care of after the Mortgage was registered that would have allowed the sale of the Property to close, as it did.

[57] Years later, when Richard filed an assignment in bankruptcy on February 7, 2018, Michel’s estate was not listed as either a secured or unsecured creditor or Richard’s estate in bankruptcy. Michel’s estate did not file a claim in the bankruptcy.

[58] The Respondents have not proffered any plausible theory of an honest purpose for having registered the Mortgage within weeks of the closing of the sale of the Property to the Applicant and taking no steps in furtherance of it thereafter. A more plausible theory (which need not be proven but need only exist as a plausible theory in contrast to the absence of any credible honest purpose having been established by the Respondents) is that the intention of registering the Mortgage was to facilitate the sale of the Property by retroactively asserting an equitable mortgage in favour of Michel that could take priority over other unsecured creditors, but to discharge that mortgage on closing, as Richard undertook to do.

[59] The Respondents have not rebutted the presumption of an intention to defeat, hinder or delay Richard’s creditors through the registration of the Mortgage, either by the surrounding circumstances or by any plausible theory of an honest purpose. The Mortgage is thus void and unenforceable as against the Applicant and the Property, unless the Respondent estate can demonstrate that it falls within one of the exemptions under either ss. 3 or 7(2) of the Fraudulent Conveyances Act.

c) Is the registration of the Mortgage exempt because it was granted for good consideration in favour of a bona fide mortgagee without notice of any fraudulent intent?

[60] Section 2 of the Fraudulent Conveyances Act does not apply in certain circumstances. Section 3 provides that:

3. Section 2 does not apply to an estate or interest in real property or personal property conveyed upon good consideration and in good faith to a person not having at the time of the conveyance to the person notice or knowledge of the intent set forth in that section.

[61] Section 7(2) provides another exemption, specific to mortgages, as follows:

No lawful mortgage made in good faith, and without fraud or covin, and upon good consideration shall be impeached or impaired by force of this Act, but it has the like force and effect as if this Act had not been passed.

[62] Both of these exemptions are dependent upon good consideration having been given for the conveyance. The conveyance that is being examined for this purpose is the registration of the Mortgage on June 14, 2013. The Respondents argued that the consideration was the prior agreement and intention to grant a security interest to Michel and advances made on the strength of that agreement. However, they have failed to prove that agreement and thus the consideration that they rely upon to support the registration of the Mortgage has also not been established.

[63] Further, these exemptions are also dependent upon the conveyance having been made in good faith and without fraud, again contrary to the findings I have made in this case.

[64] Michel is not an innocent third party in this scenario. He was a related party who made loan advances to his brother that were not secured, equitably or legally, against the Property prior to June 14, 2013, and whose estate is now trying to capitalize on a Mortgage that was registered under suspicious circumstances which have not been rebutted.

[65] My conclusion that the Mortgage is void and unenforceable as against the Applicant under s. 2 of the Fraudulent Conveyances Act remains unchanged. The Mortgage is not “saved” under either ss. 3 or 7(2).

Was the Mortgage an assignment contrary to s. 4(1) of the Assignments and Preferences Act?

[66] In light of my findings that the Mortgage is void and unenforceable by virtue of the Fraudulent Conveyances Act, I do not need to address the arguments as to whether the same is true by virtue of the Assignment and Preferences Act.

[67] Beyond the requirement of demonstrating that Richard was insolvent or on the eve of insolvency when the Mortgage was registered, there is a preliminary hurdle for the Applicant under this statute because it is specific to creditors and does not extend to “creditors or others” and has been held to only be available to creditors and not potential or prospective creditors such as the Applicant. See Hopkinson v. Westerman (1919), 1919 CanLII 466 (ON CA), 48 DLR 597 (Ont. S.C. (A.D.)), at p. 607.

Are there relevant equitable considerations?

[68] If the Respondents had succeeded in establishing that Michel was granted an equitable mortgage in the Property at the time it was purchased in 2007, then the Applicant would have resorted to other arguments about their lack of clean hands, suggesting that the court should not enforce or give effect to the equitable mortgage that they claimed.

[69] In light of my finding that the Respondents have not met their burden of establishing the equitable mortgage that they now assert, the equitable considerations raised by the Applicant do not arise and need not be considered by me.

[70] I will offer the observation that the court does not look favourably at the Respondent estate seeking to take advantage of what it alleges is a failure on the part of the lawyers acting on the closing of the purchase agreement to discover the intervening registration of the Mortgage, with the result that the Respondent estate is left in a first priority secured position over the Property (far better than the priority position the Mortgage was in at the time it was registered), and placing the entire burden of the repayment of Michel’s loans to Richard on the unwitting Purchaser of the Property. Having failed to prove the existence of the equitable mortgage upon which the Respondent estate’s case for upholding the Mortgage is predicated, I can conceive of no other juristic reason for this outcome which clearly would unjustly enrich the Respondent estate at the expense of the Applicant. See Servello v. Servello, 2014 ONSC 5035, at para. 101.

Disposition, Costs and Implementation

[71] This court has inherent jurisdiction as a court of common law and equity. This is enshrined in s. 11 of the Courts of Justice Act, R.S.O. 1990, c. C.43. Having found the Mortgage to be void under the Fraudulent Conveyances Act and its registration to unjustly enrich the Respondent estate, I:

(a) Declare that the Charge/Mortgage registered on June 14, 2013 as Instrument AT3325913 (the “Mortgage”) on the land municipally known as 131 Glendora Avenue, Toronto, Ontario (the “Property”) is void; and

(b) Order and direct the Land Registrar to discharge the Charge/Mortgage registered as Instrument Number AT3325913 on June 14, 2013.

[72] The parties asked at the conclusion of the hearing of this motion for the opportunity to exchange costs outlines and to make their cost submissions after they have my decision. I assume that the exchange of costs outlines has occurred. I encourage the parties to try to reach an agreement on the costs of this motion now that they have my decision and have exchanged their costs outlines. If an agreement on costs is reached, counsel are asked to advise the court of such by December 31, 2020. If counsel require more time, they may ask to extend the deadlines for their cost submissions.

[73] If no agreement on costs is reached, then each side may deliver to the other and file with the court a brief written cost submission (of no more than 3 pages double spaced) together with their costs outline on or before January 15, 2021 and each may deliver to each other and file with the court a brief written response to the other’s submission on costs (of no more than 1.5 pages double spaced) on or before January 29, 2021. All submissions may be sent by PDF to my assistant, linda.bunoza@ontario.ca.

[74] If the court has not received any cost submissions from the parties by January 15, 2021, or such later date as the parties may ask the initial and subsequent deadlines for submissions to be extended to and the court may permit, the issue of costs will be deemed to be settled without the necessity of any further ruling from the court.

[75] Notwithstanding Rule 59.05, this decision is effective immediately and is enforceable without any need for entry and filing. In accordance with Rules 77.07(6) and 1.04, no formal Judgment need be entered and filed unless an appeal or a motion for leave to appeal is brought to an appellate court. Any party to this decision may nonetheless submit a formal Judgment for original signing, entry and filing when the court returns to regular operations.

Kimmel J.

Released: December 3, 2020

COURT FILE NO.: CV-19-00627862

DATE: 2020103

ONTARIO SUPERIOR COURT OF JUSTICE

UNDER THE MORTGAGES ACT, R.S.O. 1990, c. M. 40 and RULE 14.05 (3)(a) (e) (f) and (h) of the RULES OF CIVIL PROCEDURE, R.R.O. 1190, Reg. 194

BETWEEN:

FARAZ MOHAMMED, Applicant

– and –

RICHARD MAKHLOUTA and ROULA HANNA HARTMAN as executrix for the Estate of Michel Hanna Makhlouta, deceased, Respondents

REASONS FOR JUDGMENT

Kimmel J.

Released: December 3, 2020