Court File and Parties
COURT FILE NO.: CV-20-652146
DATE: 20211115
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: SABEELA ISHAQ and JASPAL SINGH, Plaintiffs
-and-
CARLOS ARAUJO and LUISA ARAUJO and 2462030 ONTARIO INC. and 2757043 ONTARIO INC., Defendants
BEFORE: FL Myers J
COUNSEL: Ryan M Kerr, for the Plaintiffs
Melvin Rotman, for the Defendants
HEARD: November 12, 2021
ENDORSEMENT
The Motion and Outcome
[1] The plaintiffs sue for a declaration that they continue to own their condominium unit in downtown Toronto. They ask the court to declare void the defendants’ purported non-arms’ length transfer of the property by power of sale under a second mortgage. The plaintiffs also seek punitive damages.
[2] In the statement of defence, the second mortgagee, 2462030 Ontario Inc., denies that the plaintiffs have any equity in the condominium. It counterclaims for payment of all sums due under its second mortgage.
[3] The plaintiff moves for summary judgment with a reference to determine the amount properly due to the second mortgagee.
[4] Although not pleaded in its statement of defence and counterclaim, 2462030 Ontario Inc. has tried to advance evidence that the plaintiffs agreed orally to quitclaim or transfer the condominium to it. Accepting the evidence as true, it does not amount to an enforceable agreement at law.
[5] For the reasons that follow, I grant summary judgment declaring the sale void as pleaded in para. 1 (a) through (d) of the statement of claim.
[6] During the hearing, I asked the plaintiffs’ counsel whether his clients were persisting with their claim for punitive damages if I were to find that the claim for punitive damages could not be determined summarily and in that case the claim to void the transfer of the condominium unit could not proceed because of the law precluding partial summary judgment. While arguing against that outcome as discussed below, counsel gave a clear concession that in the event that the claim for punitive damages would prevent me from granting summary judgment to void the defendants’ transfer of the condominium unit, the plaintiffs prefer to withdraw the claim for punitive damages and obtain judgment voiding the transfer of the unit now.
[7] For the reasons set out below, I find that I cannot grant summary judgment for punitive damages now and that were I to grant partial summary judgment voiding just the transfer of the mortgaged property, there would be a risk of duplication at the later hearing of the punitive damages claim. That risk would preclude me from granting partial summary judgment voiding the transfer of title. On that basis, the plaintiffs’ election to withdraw their claim for punitive damages is accepted.
[8] There will be a reference to an Associate Justice, to be identified by the Administrative Associate Justice, to conduct an accounting and determine all amounts justly due from the plaintiffs to the second mortgagee under its mortgage. This necessarily includes the amounts claimed to have been spent by the second mortgagee to preserve and protect its interest by paying out the first mortgage and as mortgagee in possession.
[9] The issue of whether the plaintiffs are entitled to a cessation of interest or imputed occupancy rent to be applied against accruing interest is included in the reference. Counsel for the plaintiffs expressed a concern that the resolution of some issues of law may be beyond the authority of an Associate Justice on a reference. That is not my understanding. It is my intention to refer the entirety of the remaining claims to the Associate Justice to the fullest extent of the law including, but not limited to, the powers set out in Rule 64.06 (3) of the Rules of Civil Procedure, RRO 1990, Reg 194. This is both the efficient and affordable process for resolution of the remaining accounting issues. This includes resolution of all questions of fact, law, and mixed fact and law required to determine the state of accounts among the parties to the mortgage. I remain available to grant directions in the event that the Associate Justice finds that despite my intention, the resolution of some issue is beyond his or her authority.
[10] On consent of the defendants, on confirmation of the Associate Justice’s report, whether by order or without an order under the Rules, the plaintiffs shall have 45 days to elect to: (a) redeem the mortgage immediately; or (b) consent to a sale of the condominium unit by power of sale; or (c) to quitclaim the unit to the mortgagee. If there is to be a sale, the parties will agree on the terms of sale failing which the conduct of the sale is also referred to the Associate Justice.
The Facts
[11] The plaintiffs jointly owned condominium unit No. 1206 at 218 Queen’s Quay West, Toronto and an associated locker.
[12] The plaintiffs were a married couple. By 2015, they had divorced. Ms. Ishaq resided at the condominium and Mr. Singh had moved to Australia.
[13] The plaintiffs already had a first mortgage registered against their condominium. By second mortgage dated May 28, 2015, the plaintiffs borrowed $26,000 from the second mortgagee 2462030 Ontario Inc.
[14] In 2016, Ms. Ishaq suffered mental health and substance abuse issues that resulted in both mortgages falling into arrears. Mr. Singh was unaware of the arrears.
[15] In September, 2016, the first mortgagee brought power of sale proceedings under its mortgage. In January, 2017, the second mortgagee 2462030 Ontario Inc. paid out the first mortgage to preserve its position. It paid $283,514.32 to the first mortgagee.
[16] The second mortgagee then brought a lawsuit for possession and on the covenant. It also sought to exercise its power of sale under the mortgage privately.
[17] The mortgagee never served its statement of claim on the plaintiffs. The litigation never went ahead.
[18] A representative of the mortgagee was in touch with Ms. Ishaq in early 2017. Ms. Ishaq apparently told her that she could not afford the various costs of the condominium and that she wanted to move out. She moved to a women’s shelter.
[19] It is the defendants’ evidence that the mortgagee’s representative agreed orally with Ms. Ishaq that she would transfer possession and ownership of the condominium to the mortgagee in return for forgiveness of the mortgage debt, outstanding realty taxes, outstanding common expenses, and legal expenses under both mortgages. A price was set at $350,000 despite both parties knowing that the outstanding liabilities exceeded that amount. The mortgagee agreed not to pursue a deficiency judgment.
[20] The mortgagee asserts that there was part performance of the agreement because Ms. Ishaq moved out and left the keys for it with the concierge. It has also paid all arrears and accruing liabilities, common expense charges, and repair costs for the condominium since then.
[21] For the purposes of this motion I accept these facts.
Legal Analysis of the Oral Agreement
[22] On the defendants’ evidence as accepted, two points prevent the alleged oral agreement from being recognized as a binding contract:
First, Mr. Singh never agreed to the alleged terms. He was never made an offer. He never communicated an acceptance. The defendants’ only evidence is that Ms. Ishaq said that her former husband and she no longer wanted financial responsibility of the condominium. When the second mortgage was granted, the mortgagee knew that it needed the assent of both titled spouses. It required Mr. Singh to attend before a lawyer in Australia to confirm his identity and to sign the mortgage. The defendants do not even allege that the oral agreement was reached with Mr. Singh.
Second, despite calling its acts of taking possession and paying out priority claims and repairs “part performance”, they are the exact same acts that the mortgagee would take on merely taking possession of the unit as mortgagee in possession under the mortgage. Taking possession and paying protective costs are contemplated under the mortgage. They are not referable at all, let alone “unequivocally referable”, to an undocumented sale or quitclaim for $350,000 with a release and indemnity agreement or a foreclosure and indemnity agreement.
[23] On these bases alone, I find that there was no agreement binding on the plaintiffs to transfer title to the condominium unit to the second mortgagee as claimed.
The 2020 Sale by Power of Sale
[24] What happens next is also instructive. In 2020, the plaintiffs consulted counsel. Counsel searched title and saw that the plaintiffs were still shown on the title register as the owners of the condominium. Counsel requested a mortgage payout statement.
[25] The representative of the second mortgagee advised that she was too busy to provide a statement.
[26] Then, without notice to the plaintiffs or their lawyer, the second mortgagee executed and registered a sale of the condominium unit by power of sale to the defendant Carlos Araujo for $350,000. In addition, Mr. Araujo granted a mortgage over the purchased unit to 2757043 Ontario Inc. for $350,000,
[27] It is common ground that Mr. Araujo is a director of both the second mortgagee and the new mortgagee. Mr. Rotman properly concedes that the sale by power of sale was not a sale to a bona fide purchaser for value without notice. It was a non-arms’ length sale.
[28] While it is not necessary to the outcome, I note in passing that the sale by power of sale in 2020 is wholly inconsistent with the evidence that the second mortgagee had purchased the unit from the plaintiffs three years earlier under an oral agreement. If the mortgagee already owned the unit, the mortgage would have been long since released. As owner, 2462030 Ontario Inc. would sell the land by a simple deed of transfer and decidedly not by power of sale as a mortgagee.
[29] As I have already ruled that the alleged oral agreement was not made or effective in law in any event, the sale by power of sale was the correct mode of transfer. But, non-arms’ length transfers by power of sale are presumptively void unless the mortgagee establishes that it took reasonable steps to obtain fair market value for the mortgaged premises. 1173928 Ontario Inc. v. 1463096 Ontario Inc., 2017 ONSC 588, at paras 25 – 26.
[30] The defendants took no steps to even try to obtain fair market value. In their statement of defence, they acknowledge that the maximum value of the condominium at the time of the purported non-arms’ length sale was $605.000.
[31] The defendants present no evidence to meet their burden to rebut the presumption that the non-arms’ length sale is void. Rather, they argue that the plaintiffs have no equity in the unit.
[32] In their statement of defence, the defendants set out costs approaching $800,000 that they say must be paid before the plaintiffs have any equity. This includes the cost of buying the first mortgage, the principal due under the second mortgage, property taxes, condominium common expenses and special assessments, an execution on title, interest, and a three month interest penalty.
[33] Mr. Kerr submits that the second mortgagee may have failed to fulfil its duties as mortgagee in possession. It should have either rented the unit to obtain rent payments to defray accruing interest or it should have sold the unit with alacrity. Accordingly, the plaintiffs submit that a reference is required to determine the proper amounts due under the second mortgage.
[34] The defendants do not seriously contest this outcome. They want to be paid what they are entitled to be paid. If there is equity in the property after the mortgage arrears and costs, the mortgagee recognizes that the equity goes to the owners once it is paid in full. It doubts that there is equity and therefore Mr. Rotman asked me to make the order set out earlier to give the plaintiffs 45 days after the reference to decide what to do. I think that is a fair proposition. I worry that mortgagors facing an indemnity for costs in the mortgage take on a considerable risk in engaging in legal proceedings to question the quantum unless there is an assurance of equity sufficient to defray the costs of the exercise. The 45 day option to walk away, sell, or redeem lets the plaintiffs make decisions with full knowledge.
[35] I find that this is a case in which I can find the facts and apply the law fairly on the question of the purported sale of the unit by the second mortgagee. There is no serous issue for trial because the outcome is clear even on the facts adduced by the defendants. As the plaintiffs waive their claim to punitive damages, Rule 20.04 (5) proves that summary judgment is available with a reference to take accounts.
Punitive Damages
[36] There is force to the plaintiffs’ argument that the defendants’ effort to sell the condominium unit was tortious or an egregious breach of the mortgagee’s duties. The defendants knew they were dealing with Ms. Ishaq at a time when she faced serious vulnerability. It ignored Mr. Singh’s rights altogether. It failed to provide a discharge statement as required by law and then secretly tried to flip the property, in an unlawful non-arms’ length sale at far below fair market value, to try to dissuade the plaintiffs from enforcing their rights.
[37] One can raise one’s eyebrows at a mortgagee who is owed $26,000 buying out a prior mortgage for ten times its investment. One could wonder whether the defendants made that large investment to protect their much smaller mortgage or because they saw an opportunity to strip the plaintiffs of their equity in the condominium unit.
[38] Had the defendants tried to obtain the ownership of the condominium unit by foreclosure, the plaintiffs would have had a right to convert the action to a sale to protect their equity See: Rules 64.03 (17) and (22). The value realized on a sale over and above the amounts due under the second mortgage belong to the plaintiff and not to the defendants. Perhaps the second mortgagee did not serve its own statement of claim on the plaintiffs, despite being able to contact them both, because they were trying to do something that they could not do in legal proceedings.
[39] Mr. Kerr fairly points to the vulnerability of mortgagors generally and of the plaintiffs in particular. He argues that punitive damages are required to prevent mortgagees from trying such inappropriate tactics. The surreptitiousness of the 2020 purported sale gives force to this argument.
[40] I find it particularly troubling that counsel (who was not Mr. Rotman) are identified for both the non-arm’s length parties in the 2020 Transfer by Power of Sale. Why were two counsel used for the same party in interest? Were they trying to create an appearance of an arms’ length transaction with a bona fide third party mortgagee? What did they do to ensure that the transaction was righteous and proper? Should the notice of sale have been refreshed? Was money even exchanged? Did anyone notice that $350,000 seems like a small amount of money for a lakefront condominium in Toronto in 2020? And what arms’ length mortgagee advances 100% of the purchase price if it is at fair market value? If counsel know that the transaction is a power of sale and it is not at fair market value, should they have signed on?
[41] But, there is another side. The second mortgagee did advance a loan to the plaintiffs. Ms. Ishaq found herself in an embarrassed situation on several fronts and appears to have thrown the keys to the mortgagee. Mr. Singh paid no attention despite being liable on the covenant of both mortgages. Not only were there substantial arrears of taxes and common area expenses due in 2017, when the property was abandoned by Ms. Ishaq, the plaintiffs left the second mortgagee to fund their future costs. And it has done so.
[42] Mr. Kerr advises that once the second mortgagee failed to provide a discharge statement and then flipped the property, the plaintiffs took no steps apart from bringing this proceeding asserting their ownership. Perhaps they might have looked into making the payments required of them as owners in the intervening period? Perhaps they might have made inquiries and considered refinancing.
[43] I understand that by flipping title, the defendants took a very aggressive step to try to exclude the plaintiffs. Mr. Rotman quite properly took a much more cooperative approach before me once the plaintiffs were brought to account.
[44] Although I am prepared to criticize the surreptitious sale and consider whether there may have been a plan to strip the plaintiffs of their equity from the beginning, it seems to me that I need to know more before I can draw definitive conclusions or fairly find facts on a balance of probabilities. First, there has been no documentary or oral discovery and no cross-examinations.
[45] Before I find a plan to steal a vulnerable person’s property, I think the defendants should face the accusation and be given an opportunity to explain with contemporaneous documentation. The plaintiffs’ failure to cross-examine and put the allegations to the defendants makes it unfair for me to rely on the “best foot forward” principle or to draw an adverse inference in my view.
[46] But, even if I limit condemnation to the surreptitious sale in 2020 after counsel for the plaintiffs was involved, I am not sure that the plaintiffs have much to complain about. While the process was certainly wrongful, I have declared it void. But it is not at all clear that the plaintiffs have equity in the condominium after having left the defendants to carry their load for four or five years. They might. But, if the plaintiffs have no equity in the property due to their own neglect and failure to come forward with money to fulfill their obligations even in the past year, I am not sure that the defendants acts carry the degree of moral turpitude asserted by the plaintiffs. Perhaps they found themselves required to intervene to protect themselves and now risking being ousted when there is not enough value to repay their efforts. That does not make the transfer by power of sale any more valid. But it may put a more innocent spin on a ham-fisted effort to protect themselves.
[47] Perhaps it is the plaintiffs who are being opportunists? They walked away without caring what their obligations might have been. Would they be here offering to make the defendants whole to reclaim their ownership if they did not hope that the condominium has excess value for them? Where was their follow-up request for a discharge statement once the mortgagee said it was too busy to provide one? Why was there no motion to compel a discharge statement?
[48] I am not able to conclude on these points without discovery and, at least, the results of the reference to show who is winning and who is losing economically.
[49] On that basis I am not able to fairly come to factual conclusions either on the record or with the enhanced powers in Rule 20.04 (2.1) on the facts needed to assess whether punitive damages lie. Hryniak v Mauldin, 2014 SCC 7 directs that in the ordinary course I would remain seized of this issue and then work with counsel to devise an efficient and affordable process for resolution.
[50] But there is a procedural problem. If I invalidate the sale by power of sale but do not decide the issue of punitive damages, that means that the invalidation is “partial summary judgment”. In Mason v. Perras Mongenais, 2018 ONCA 978 the Court of Appeal established a bright line rule preventing the granting of partial summary judgment if there is any risk at all of duplication or inconsistent verdicts as between the summary judgment and the issues left for trial. The Court of Appeal expressly rejected the assertion that the motion judge might have discretion to weigh the risks and benefits of partial summary judgment where there is a risk of duplication or inconsistent verdicts.
[51] Here, the same witnesses will give the same evidence about the same transactions at trial as I am ruling on already. I do not see how the trial judge might be able to find that the sale by power of sale was valid based on the evidence before me. But, if there is a complete overlap in evidence, then the Court of Appeal jurisprudence would say that there is no benefit gained by the partial summary judgment. There is a Certificate of Pending Litigation registered against title to the unit, so there is no urgency to correcting title.
[52] Based on Mason and Butera v. Chown, Cairns LLP, 2017 ONCA 783, I find that I cannot grant partial summary judgment if the claim for punitive damages remains for trial.
[53] As discussed above, the plaintiffs’ counsel was presented with this possibility and advised that his instructions were to waive the claim for punitive damages in the event that I found that the continuation of the claim prevented me from granting judgment voiding the sale by power of sale.
Costs
[54] I defer the question of costs until after the reference is completed. At that time, the parties may arrange a case conference with me through my Juridical Assistant to set a summary process to argue costs under Rule 57.01 (7).
FL Myers J
Date: November 15, 2021