COURT FILE NO.: CV-16-553774

DATE: 20211123

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: CVC Ardellini Investments Inc., Applicant

AND:

Diversified Capital Inc., Respondent

AND:

Sarah Terrelonge, Intervenor

BEFORE: W.D. Black J.

COUNSEL:

Kevin Sherkin, for the Applicant

Dominique Michaud, for the Respondent

Hossein Niroomand, for the Intervenor

HEARD: October 1, 2021

ENDORSEMENT

Overview

[1] This case concerns mortgages registered against title to the subject property at 97 Boulton Drive in Toronto (the “Property”). The Property was owned by Del Terrelonge, at some point occupied by Del Terrelonge (“Del”) and his spouse Sarah Terrelonge, (“Sarah”), and at the time of the hearing of the Application, was occupied by Sarah, the Terrelonges having divorced.

First Ranked Mortgage

[2] There is no question that the Respondent Diversified Capital Inc. (“Diversified”), holds the first ranking mortgage against the Property (the “first ranked mortgage” also referred to as the “Diversified Mortgage”). That mortgage was originally registered by Computershare Trust Company of Canada in April of 2013, in the principal amount of $725,000. It was later assigned, on April 10, 2015, to MPAC Service Corp. (“MPAC”). Diversified took an assignment of the first ranked mortgage on April 28, 2015 after MPAC delivered a notice of power of sale proceedings dated April 21, 2015.

[3] In consideration for the assignment, Diversified paid to MPAC the amount of $788,152.20.

Second Ranked Mortgage

[4] The Applicant CVC Ardellini Investments Inc. (“CVC”), holds the second ranking mortgage against the Property (“the “second ranked mortgage” sometimes referred to as the “CVC Mortgage”), originally registered by Romspen Investment Corp. on April 30, 2004, in the principal amount of $2,6000,000 and later assigned to CVC on June 2, 2014.

[5] The registration of the second ranked mortgage was more than a year before the marriage of the registered owner of the Property, Del, to Sarah.

Collateral Mortgage

[6] On August 25, 2016, CVC obtained judgment against Del, resulting in a court‑ordered collateral mortgage against the Property in favour of CVC securing its judgment against Del in the amount of $8,074,327.68 (the “Collateral Mortgage”).

[7] At the time of MPAC’s assignment of the first ranked mortgage to Diversified, CVC received no notice of that assignment and learned of it the day after it was registered on title to the Property.

Original Assignment of First Ranked Mortgage to Diversified

And CVC’s Concerns re Same

[8] CVC alleges that at the time of this assignment to Diversified, Del was likely insolvent. It says that Del had refused to attend judgment debtor examinations despite proper service and was attempting to frustrate, hinder and delay CVC’s attempts to enforce its judgment and security.

[9] It also alleges that the evidence and documentation about the details of dealings between Diversified and Del are characterized by obscurity and secrecy and points to the refusal by Diversified’s principal, Mr. Giannotta, to answer questions about the particulars of mortgage arrangements with Del, including whether or not any payments were being made and in what amount, and what if any fees were being charged. CVC maintains that there is evidence of other unrelated business dealings between Diversified and Del and that Diversified obtained an unrelated judgment against Del in September of 2014, before taking assignment of the first ranked mortgage, in the amount of $769,033.95 accruing interest at the rate of 13% per annum. Diversified issued a writ of execution in connection with that judgment on July 25, 2016 and confirms that the judgment is unsecured and remains unpaid.

[10] It is part of CVC’s theory in this application that Diversified’s taking assignment of the first ranked mortgage was a strategy to obtain payment of its unsecured judgment in a fashion described below.

[11] On April 29, 2016, the day that CVC discovered that MPAC had assigned the first ranked mortgage to Diversified, (one day after that assignment was registered on title to the Property), CVC requested from Diversified an assignment of the first ranked mortgage.

[12] CVC alleges that at that time, the first ranked mortgage remained in default, that the assignment of the mortgage to Diversified did not cure the default, and that therefore CVC was entitled to the assignment of the first ranked mortgage pursuant to section 2 of the Mortgages Act.

[13] Diversified maintains, to the contrary, that following the assignment, Diversified entered into an agreement with Del whereby the Diversified Mortgage was put into good standing and that Sarah provided her spousal consent to the agreement. Diversified further alleges that as of July 16, 2016, (when Mr. Giannotta swore an affidavit in response to the application before the Court), the Diversified Mortgage had remained in good standing.

The First Mortgage Amending Agreement

[14] In cross-examination, in response to questions about how the first ranked mortgage was put into good standing, various refusals were given on behalf of Mr. Giannotto. After CVC threatened to bring a motion on the refusals, Diversified produced a document dated April 20, 2016 entitled “Mortgage Amending Agreement”, purporting to be the agreement that put the mortgage back into good standing (the “First mortgage amending agreement”). In fact, CVC argues, the First mortgage amending agreement did not confirm that the first ranked mortgage was put into good standing but rather, confirmed the amendment of certain terms of the first ranked mortgage dated prior to the assignment.

[15] Specifically, the First mortgage amending agreement amended the principal amount of the Diversified Mortgage from $725,000 to $788,030.34; amended the interest rate from 2.99% to 12.0%, amended the required payment from $3,045.51 per month to interest only, monthly, and finally converted the mortgage from having the outstanding balance fall due on April 4 of 2018 to being “On Demand”.

[16] CVC points out that, based on the terms of the First mortgage amending agreement, the monthly payment of interest required amounted to $7,880.30.

[17] On August 31, 2017, CVC delivered a letter to Diversified asserting that the first ranked mortgage remained in default, inasmuch as Del was insolvent, given that CVC’s second ranked mortgage remained in default and having regard to CVC’s judgment registered against the Property.

[18] In response and at various junctures over the following years, Diversified continued to represent that the Diversified Mortgage was in good standing, confirming that position in writing to CVC not only on June 30, 2016 but then again on September 5, 2017, November 30, 2017, May 31, 2018 and March 11, 2020. CVC says that by way of these specific confirmations, CVC was led to believe that the monthly interest payments of $7,880.30 were being paid to Diversified and that therefore, the balance owing on the first ranked mortgage remained at $788,030.34.

First Acknowledgement of Default

[19] By letter of August 27, 2020, CVC again requested confirmation from Diversified as to whether or not the first ranked mortgage remained in good standing. Diversified failed to respond for several months. When it did respond on April 27, 2021, Diversified for the first time, advised CVC that the first ranked mortgage was in default and that Diversified had commenced enforcement proceedings.

[20] After Diversified subsequently agreed to assign the first ranked mortgage to CVC, Diversified produced for the first time on July 20, 2021, a further “Mortgage Amending Agreement” dated May 6, 2016 (the “Second Mortgage Amending Agreement”), advising that it had mistakenly not produced the document previously.

Concerns About the Second Mortgage Amending Agreement

[21] The Second Mortgage Amending Agreement attracted a great deal of attention during submissions. CVC argues that it is at best suspicious having regard to various factors. First, it is odd says CVC, that the Second Mortgage Amending Agreement is dated only a few weeks after the First Mortgage Amending Agreement, essentially revising the same terms, and that Diversified has failed to provide any reasonable explanation for why that would have been the case, and why the Second Mortgage Amending Agreement was only produced years later.

[22] In addition, it argues that the Second Mortgage Amending Agreement is self-serving and purports to revise the terms of the first ranked mortgage in favour of Diversified and to the detriment of CVC’s second ranked security given that:

(i) the term of the mortgage was again revised, from “on demand” to one year;

(ii) the mortgage would now automatically renew, subject to certain conditions being met, with a renewal fee of 2.5% of the principal amount of the mortgage;

(iii) the interest rate remained at 12% per annum but the monthly payments were again revised, reduced from $7,880.30 to $3,045.51 (so no longer covering the monthly interest generated under the terms of the mortgage);

(iv) interest was now calculated daily, compounded and accrued monthly; and

(v) there was now a “carve out” for an Event of Default:

“any ongoing litigation, defaults, judgments, writs of execution orders relating to any ongoing litigation against the Borrower or Guarantors with the 2nd Mortgagee does not constitute an event of default under the Diversified Loan”.

CVC maintains that this carve out for the Event of Default was seemingly in response to CVC’s letter to Diversified dated August 31, 2017 (notwithstanding the purported date of May 6, 2016 of the Second Mortgage Amending Agreement).

[23] CVC points out that Diversified confirmed on cross-examination as did Sarah, that Sarah did not provide her consent for the Second Mortgage Amending Agreement.

Statement of Account for First Ranked Mortgage

[24] CVC’s concerns are compounded by a statement of account for the first ranked mortgage produced by Diversified and dated June 15, 2021.

[25] That statement of account shows that the purported balance of the Diversified Mortgage as of June 26, 2016 had been $840,911.43, contrary to Diversified’s prior representation that the balance had been $788,152.20 as of June 30, 2016, which balance of $788,152.20 was consistent with Diversified’s prior representation that the terms of the mortgage, as amended by the First Mortgage Amending Agreement, required payment of interest only on a monthly basis and that the mortgage was in good standing.

[26] Likewise, according to the June 15, 2021 mortgage statement, the purported balance of the mortgage as of November 26, 2016 was $868,500.02, which is again contrary to Diversified’s prior representation at that time that the balance remained $788,152.20 as of November 28, 2016 which, again, conformed with Diversified’s prior representation that the terms of the mortgage, as amended by the First Mortgage Amending Agreement required payment of accrued interest only, on a monthly basis, and that the mortgage was in good standing.

[27] The June 15, 2021 statement also showed that Del had stopped making payments to Diversified as at the end of May 2018, which is contrary to Diversified’s representation to CVC on March 11, 2020 that the first ranked mortgage was in good standing.

[28] The June 15, 2021 statement showed, given the absence of payments since May 2018, that the total outstanding on the mortgage as of June 15, 2021 was $1,865,362.37, and that additional amounts were accruing at a per diem rate of $613.27.

[29] In the circumstances, CVC argues that it was first advised of a default in April of 2021, then first learned in June of 2021 that the outstanding amount allegedly secured by the first ranked mortgage was over $1.8 million rather than the $788, 152.20 that it had been led to believe was outstanding, and finally first learned in July of 2021 of the existence and alleged effect of the Second Mortgage Amending Agreement, purporting to substantially alter the terms of the mortgage and in a way considerably at odds with the contents of the First Mortgage Amending Agreement, dated and executed only a few weeks before the Second Mortgage Amending Agreement.

[30] Further, CVC argues these revelations coming to light between April and July of 2021, were in stark contrast to specific representations Diversified had made repeatedly, in response to specific inquiries about the status of the first ranked mortgage, over the period 2016 to 2020.

Acknowledgement by Diversified of Incomplete Information

[31] Counsel for Diversified candidly acknowledges that that information provided by Diversified in response to CVC’s inquiries in those years was, in retrospect, incomplete and that further and better information ought to have been disclosed, including the fact that interest was not being paid and was instead being accumulated and capitalized.

[32] However he argues that CVC did not detrimentally rely on these incomplete representations inasmuch as the right for CVC to take an assignment of the first ranked mortgage would only be triggered by Notice of Sale proceedings, so that until Diversified recently commenced such proceedings, there was no right or ability for CVC to take an assignment of the Diversified Mortgage.

[33] He says that CVC can now exercise its rights under the CVC mortgage and by paying to Diversified the amounts set out in the June 15, 2021 statement, (together with additional accrued interest at the per diem rate), it can obtain the assignment it seeks.

[34] CVC makes a number of arguments in support of its primary position that it should be entitled to an assignment of the first ranked mortgage upon payment to Diversified of $788,152.20.

Parties’ Positions on Main Issues

[35] I will discuss facets of these arguments in the following review, but fundamentally the dispute here boils down to the interpretation and impact of certain standard charge terms registered on title to the Property in connection with the first ranked mortgage, and whether or not those standard charge terms mean that the amendments made to the first ranked mortgage did not require notice to subsequent encumbrancers (here CVC) and did not need to be registered on title to take priority over subsequent encumbrancers.

[36] That determination in turn requires a review and reconciliation of certain cases, and also necessarily considers the role of equity, particularly having regard to actual (and acknowledged) misrepresentations made by or on behalf of Diversified in response to repeated and specific questions about the status of the first ranked mortgage.

[37] Dealing with the cases on which the parties respectively rely, the main disagreement between them stems from decisions of the court in Elle Mortgage Corporation v. Adalath et al (2012 ONSC 7061) (hereinafter “Elle”) and 2495940 Ontario Inc. v. 263346 Ontario Inc. (2020 ONSC 7937 (hereinafter “249”).

CVC’s Argument (Relying on Elle)

[38] CVC relies in particular on Elle, a 2012 decision of Justice Sosna.

[39] In that case, there was a contest between Elle, an assignee of the first mortgage on a residential property and the TD Bank which held a mortgage securing a line of credit to the homeowner, which mortgage was second in priority behind the mortgage assigned to Elle.

[40] In March of 2010, the homeowners – the Adalaths – defaulted on the first mortgage and needed funds to either refinance or sell their property. On March 11 the Adalaths entered into a one year mortgage accommodation and amendment agreement with Elle, extending their mortgage payments for that year and giving them time to refinance or sell the property.

[41] Pursuant to that agreement, the Adalaths agreed in writing to increase the interest rate (from 6.8% to 7.99%) and to increase the monthly payments. They also agreed to increase the principal amount of the mortgage by $12,000 representing an accommodation fee, mortgage brokerage fees, legal fees and to cover amounts paid by Elle for tax arrears to the Town of Ajax.

[42] On March 4, 2011 the mortgage was automatically renewed for an additional six months and Elle imposed a renewal fee in the amount of $23,706.08, which fee was contemplated by the accommodation and amendment agreement.

[43] The Adalaths made no payments on the renewed six month mortgage and also defaulted on TD’s charge. Elle commenced a foreclosure action and TD filed a Request for Sale.

[44] Ultimately, after TD secured vacant possession, the Adalaths advised Elle that they were expecting to receive an offer from a third party to purchase the property. In fact while there was ongoing wrangling over possession of the property, the Adalaths sold the property for $770,000. Elle applied to the court for judgment for sale and for approval of the sale based on appraisal evidence. The motion was opposed by TD and was adjourned to allow TD to conduct its own appraisals. Ultimately TD agreed to the sale and a consent judgment along with a vesting order was issued for the sale of the property in February of 2012.

[45] In the fight between Elle and TD over the distribution of proceeds of sale, Elle took the position that it was entitled to add to the mortgage account the increased interest rate upon renewal, the amending fees, and various administrative fees against the property in priority to the second mortgagee (TD). Elle argued that the authority for charging such fees and the mortgagor’s obligation to pay them, was provided under the standard charge terms within the mortgage assigned to Elle and registered on title.

[46] Elle submitted that when TD went on title as the second mortgagee, TD was deemed, by virtue of the provisions of the Land Titles Act, to have notice of the nature and intent of the standard charge terms such that, the additional fees and interest charges incurred had priority over TD’s position.

[47] In response, TD pointed to the outstanding amount of the first mortgage as of the date of assignment to Elle and the interest rate in place at that time, and argued that the increased expenses sought by Elle were not set out in the first mortgage, but only in the various amending and/or renewal agreements entered into between Elle and the Adalaths without notice to or consent of TD. It argued that while such increased expenses might be a valid claim as between Elle and the Adalaths, they were not a charge against the property in priority to subsequent encumbrancers.

[48] In determining this dispute, Justice Sosna confirmed that under the relevant legislation, the registration of standard charge terms deemed such terms to be incorporated into registered mortgages referencing them.

[49] He confirmed that when Elle took assignment of the first mortgage, the mortgage terms including the provision for amending agreements were registered in Land Titles, such that when TD registered its charge against title in 2006, it did so aware that the first mortgage stood in priority to TD’s charge and that TD was deemed to have notice of the registered terms of that mortgage.

[50] The relevant standard charge terms in that case, as here, contemplated that it was not necessary in order for renewal and additional fees charged on renewal to retain priority of these charges as altered over subsequent encumbrancers, to register notice of any such renewal or obtain any consent or acknowledgment.

[51] In assessing the impact of the standard charge terms, Justice Sosna quoted with approval from the leading case of Reynolds Extrusion Co. Ltd v. Cooper (1978 1671 (ONSC)), in which the court held (at p. 6):

“I think the proper way to approach the matter is to consider the position of the second mortgagee. He is bound by the terms of the prior encumbrancer as known to him when he entered into his contract with the mortgagor. If that prior mortgage contains a clause entitling the mortgagee to charge greater interest or the mortgagor to an extension then the subsequent mortgagee must accept the amendments when they are made. If the mortgage does not contain such terms the subsequent mortgagee cannot be bound by the subsequent agreement…The mortgage must continue to have priority to the extent of the original contract of which the subsequent mortgagee had notice.”

[52] In Reynolds, the Court cited with approval an excerpt from Fisher and Lightwood’s “Law of Mortgages”, 9th ed. (1977) pp. 43-44:

“Where the prior mortgage provided for variation (e.g. being security for such sum as shall be owing from time to time, or providing for an increase in the rate of interest) a subsequent encumbrancer takes subject to those terms and the first mortgagee has priority consistent with those terms.”

[53] Justice Sosna, noting that Reynolds did not deal with registration under the Land Titles Act but finding its ratio nevertheless applicable, said:

“I further find that Reynolds Extrusion supra does not support Elle’s proposition that taken to its logical and final conclusion, a first mortgagee can make amendments to its mortgage and either decrease or wipe out any interest of the subsequent encumbrancer. To give effect to Elle’s proposition would cause potential lenders to be unable to have any certainty concerning the present or future value of security given to the potential lender. It would be almost no point in taking that security.”

[54] Further, His Honour held:

“Our law of real property is to a large extent based on notice given by registration of document, including mortgages/charges, standard charge terms and other registered instruments. Elle’s proposition makes a sham out of notice.”

[55] Justice Sosna elaborated:

“A potential lender is entitled to be able to ascertain the value of the proposed security by making reasonable inquiries and by relying on the Land Titles Register or Land Registry abstract and instruments registered in either system. A potential encumbrancer is entitled to rely on a first mortgagee statement of the status of its first mortgage and other facts of which the potential encumbrancer has notice. Unless terms of prior encumbrance were or should have been known by a subsequent encumbrancer at the time of registration of its mortgage/charge, the subsequent encumbrancer cannot be prejudiced by such unknown terms. Otherwise, reasonable due diligence and the importance of notice in our Land Registry and Land Titles systems becomes irrelevant.”

[56] Applying these principles to the case before him, His Honour said:

“In the present case, when TD registered its mortgage/charge, the property register indicated the existence of the Elle mortgage/charge and its supporting standard charge terms some of which have been previously reviewed. Subsequent to TD registering its mortgage/charge, Elle and the property owner executed a series of amending agreements. Many of the fees/expenses now claimed by Elle arise out of the amending agreements. At the time of TD’s registration of its mortgage/charge, TD had no knowledge of the amending agreements or fees/expenses contained therein. Those fees/expenses have the effect of significantly reducing the value of TD’s security. TD cannot be prejudiced in that manner.”

[57] Finally, in holding for TD, Justice Sosna said:

“Elle can only claim fees/expenses specifically set out in the registered mortgage/charge and standard charge terms. The vague reference in the standard charge terms to the possibility of other fees/expenses that may arise out of subsequent amending agreements cannot prejudice a potential subsequent lender who, at the time of registering its subsequent encumbrance, could not possibly know or ascertain the nature and amount of such fees/expenses that might be included in future amending agreements in which the subsequent encumbrancer had no input and, as a result, no means of protecting its security in the property.”

Diversified’s Argument (Relying on 249)

[58] For its part, Diversified relies on the more recent decision of Justice Vella in 249.

[59] In that case, Her Honour was dealing with first and second mortgages registered against a property under the Land Titles Act.

[60] On January 8, 2018 default judgment was granted in favour of the original first mortgagee (after the property owner defaulted under the original first mortgage).

[61] Before the property was taken into possession, the original first mortgagee and the respondent entered into an assignment agreement pursuant to which the respondent took an assignment of the first mortgage in exchange for paying the outstanding indebtedness claimed owing, in the amount of almost $2.6 million.

[62] The day after the assignment, the homeowner and the respondent entered into an agreement to renew and amend certain terms of the first mortgage, including confirming the principal amount of the mortgage to be the $2.6 million paid by the respondent to obtain an assignment of the mortgage, renewing the mortgage and extending its maturity date by a year, increasing the interest rate from 8% to 11.5%, and allowing the respondent the option of directing repayment of any or all of the principal outstanding under the charge in U.S. dollars rather than Canadian currency, at a stated exchange rate.

[63] The Transfer of Charge was registered against the property with the Land Titles office but the details of the amending and extension agreement were not registered on title.

[64] The homeowner had defaulted on the second mortgage at around the time that he defaulted on the first mortgage. The second mortgagee, having been advised of the assignment of the first mortgage, obtained a judgment on consent against the homeowner and a writ of possession for the property from Sossin J. (as he then was), in the amount of $1,125,000 plus interest at the rate of 11% (the rate under the second mortgage).

[65] The applicant second mortgagee was aware by the time of obtaining the judgment from Justice Sossin that a Transfer of Charge reflecting the assignment of the first mortgage had been registered on title.

[66] The applicant entered into an agreement of purchase and sale to sell the property under Power of Sale with a closing date of October 31, 2019. It was the intention of the applicant to pay out and discharge the renewed first mortgage from the proceeds of sale of the property. However the homeowner again defaulted under the first mortgage.

[67] The respondent obtained summary judgment under the first mortgage against the homeowner on consent in the amount of $3,261,290.58, including accrued interests, plus costs in the amount of $30,000.

[68] In order to complete the sale of the property, the applicant required a discharge from the respondent but the applicant did not agree that the respondent was entitled to the amount it claimed owing. To facilitate the sale, the parties agreed that upon the sale of the property an amount of $2,750,000 would be paid to the respondent and certain amounts over and above that amount would be paid into Court pending a determination of priorities to the funds over and above $2,750,000.

[69] The property sold for the price of $4,350,000.

[70] The matter then came on before Justice Vella for a determination, among other items, as to whether the “disputed charges” claimed under the first mortgage were legitimate amounts owing thereunder, and in particular, whether or not the increase in the interest rate and the option to require payment in U.S. funds had priority over the second mortgage.

[71] The part of the judgment relevant for purposes of this case is Her Honour’s discussion of the increased interest rate, which, as Her Honour put it:

“…Raises the important question of whether, and under what circumstances, a term increasing the interest rate in a renewed mortgage and increases the amount of indebtedness owing under the mortgage on discharge takes priority over a subsequent mortgage which is registered before the date of the renewed first mortgage.”

[72] In the case before her, Justice Vella observed

“The second mortgagee did not have actual notice of the increased interest rate until after it registered its own charge. This is important as the changed term in this case has the effect of prejudicing the applicant by reducing the value of the remaining proceeds of sale to below the outstanding indebtedness accrued under the Second Mortgage.”

[73] In analyzing this issue, Her Honour first distinguished the 1991 decision of this Court in Cardinal Insurance Co. (Liquidator of) v. Standard Trust Co. (1991) 7374 (ONSC), in which the Court said that a first mortgagee cannot:

“…for their own benefit and to the prejudice of others…contract out of the Registry Act requirement for prior registration or for actual notice by agreeing that any modification they desire to make to the mortgage should be binding upon subsequent encumbrancers without registration or without any actual notice to the latter. I agree and for the foregoing reasons, I hold that the plaintiff (a subsequent mortgagee), is not bound to pay the higher rate of interest stipulated in the renewal agreement in order to obtain a discharge of the first mortgage”.

[74] Her Honour said that, while at first blush that decision would seem “an entire answer to this issue”, it was not, having regard to the role and function of standard charge terms under the Land Titles system.

[75] Justice Vella said that, “Unlike in Cardinal, the original first mortgage (before her) incorporated by reference the Standard Charge Terms 200033” and focused on language within s.19 of those particular standard charge terms providing that

“…the Charge may be renewed by an agreement in writing at maturity for any term with or without an increased rate of interest notwithstanding that there may be subsequent encumbrances. It shall not be necessary to deliver for registration any such agreement in order to retain priority of the Charge so altered over any instrument delivered for registration subsequent to the Charge.”

[76] Interestingly, Her Honour then quoted with approval the same passages from Reynolds Extrusion and Fisher and Lightwood’s text that Justice Sosna had quoted in Elle, (implicitly taking a different view that Justice Sosna as to the interpretation of those passages) and then referred to the Elle case itself, distinguishing it on the basis that the charge terms with which His Honour was dealing in Elle were not the same as those before Justice Vella and, “for example, did not address the issue of priority against subsequent encumbrancers.”

Discussion of Parties’ Positions

[77] Diversified urges the same interpretation in the case before me and argues that Justice Vella’s decision in 249 is the last word on the subject and therefore authority to which I should adhere.

[78] It is not clear to me that the effect of the charges with which Justice Sosna was dealing in Elle were distinguishable from those before Justice Vella in 249. In particular, and with respect to the issue of priority against subsequent encumbrancers on which Her Honour focused, I read clause 9 of the standard charge terms excerpted by Justice Sosna in Elle to deal with that issue squarely where it says:

It shall not be necessary to register a notice of any such renewal or obtain any consent or acknowledgments in order to retain priority for this charge so altered over any subsequent encumbrancer.”

Earlier in the clause, in seems apparent that “so altered” encompasses adjustments in the amounts of payments being made.

[79] Apart from being uncertain that Elle is in fact distinguishable in the way it is distinguished in 249, I am also drawn to the notion that fairness and predictability in the registration of charges requires notice to not only mortgagors but subsequent encumbrancers as well.

[80] In 2575105 Ontario Inc. v. Diversified Capital Inc., 2017 ONSC 3809, in discussing the importance of notice of assignments, Senior Justice Ricchetti wrote:

“The rationale for requiring reasonable notice to the mortgagor described in 2272045 equally applies to all parties entitled to redeem the assigned mortgage. Otherwise, an undisclosed assignment of the mortgage would deprive the remaining mortgagees and encumbrancers with knowledge of who and how to effectively redeem the assigned mortgage.”

[81] To similar effect, and dealing more particularly with undisclosed amendments to instruments higher in priority without notice to subsequent encumbrancers, Justice Sosna, in the passages quoting from Elle above, explained how non‑disclosure and the failure to give notice would irreparably disadvantage subsequent encumbrancers and “make a sham out of notice”, causing “knowledge, reasonable due diligence and the importance of notice in our Land Registry and Land Titles systems” to become “irrelevant”.

[82] In my view the case before me, given the significant amendments to the first ranked mortgage without notice, illustrates the point.

[83] Without notice to CVC (or any subsequent encumbrancer) Diversified changed the terms of the mortgage in multiple ways, increased the interest rate almost threefold, capitalized ongoing amounts owing and unpaid, and thereby purported to increase the principal amount owing on the first ranked mortgage by about $1.1 million, an amount itself approximately 150% of the principal amount of the mortgage when Diversified took assignment of it about 5 years earlier.

[84] Notwithstanding my recognition and respect for the efficiencies that standard charge terms bring to the system of registration of charges, I do not believe, as a matter of policy, that merely registering standard charge terms gives a lender carte blanche to remake the terms of an instrument, under cover of those charge terms, dramatically and to its unilateral benefit.

[85] Moreover, in the case before me, the mischief is considerably compounded by Diversified’s continuing pattern of providing incorrect and incomplete information in response to CVC’s direct questions over the years as to the status of the first ranked mortgage.

[86] As noted above, CVC inquired regularly in the period 2016-2020 about the first ranked mortgage. Among other responses, on June 30, 2016 prior counsel for Diversified sent to CVC in response to CVC’s inquiry about the mortgage, a letter from Mr. Giannotta of Diversified that said “We confirm that the principal balance of the above noted mortgage is $788,152.20 and that the mortgage is in good standing as at June 30, 2016.”

[87] To the contrary, in the mortgage account statement produced by Diversified dated June 15, 2021, the balance of the first ranked mortgage on June 26, 2016, (four days before Mr. Giannotta confirmed the balance of $788, 152.20), was recorded at $840, 911.43.

[88] When Mr. Giannotta was cross-examined on July 26, 2016, he testified under oath that the then current principal balance of the first ranked mortgage was, on that date, $788,152.20. The June 15, 2021 statement on the other hand, records the balance on that day as $846,275.04.

[89] On December 9, 2016, Mr. Michaud, who represented Diversified on the motion before me, emailed CVC attaching a mortgage statement as of November 28, 2016. It represented the total loan amount at that time to be $788, 152.20, specifically purported to confirm that there was no outstanding interest and that the “total loan amount” as at that date was therefore $788,152.20.

[90] The June 15, 2021 statement shows the outstanding balance of the mortgage as of November 26, 2016 to be $868,500.02.

[91] Moreover, in the backdrop at this time, purportedly governing the mortgage from May 6, 2016 onward, but not disclosed to CVC until much more recently, was the Second Mortgage Amending Agreement, with terms markedly different not only from the original mortgage terms, but also markedly different from the terms specified in the First Mortgage Amending Agreement dated a few weeks before.

[92] The effect of all of this was that, without CVC’s knowledge despite its repeated inquiries, Diversified was aggressively and continuously capitalizing missed interest payments, and dramatically increasing the principal amount of its loan allegedly covered by the first ranked mortgage.

Role of Equitable Estoppel

[93] Diversified’s version of the loan being in “good standing” was that by forgiving and capitalizing missed interest payments, and entering into a couple of forbearance agreements (with associated fees) along the way, Diversified was allowing its mortgage to grow to a size that would cover not only the debt it originally secured, but also, CVC alleges with some force, would cover additional amounts owed to it by Del from other ventures.

[94] In Amendola v. Carelli (2014 ONSC 3934) Justice Morgan dealt with somewhat similar circumstances. In that case, the property in issue was subject to a first mortgage in favour of the Bank of Montreal. The owner of the property/mortgagor was the Respondent’s sister-in-law. In early April of 2009 the Respondent loaned her $240,000 and registered a second mortgage against title to the property to secure the loan. The second mortgage was for a six month term, specified an interest rate of 10% per annum, and listed a last payment date of September 30, 2009.

[95] In early 2010 the Applicant loaned the homeowner $65,000 and registered a third mortgage against the property to secure the loan. There was evidence before Justice Morgan that the Applicant inquired as to the state of the two prior mortgages before making the loan to the homeowner.

[96] In response to these inquiries BMO confirmed its mortgage was current, and the Respondent, responding to the Applicant’s inquiry in a brief email, said “I’m confirming that the second mortgage is in good standing to-date”, and providing a phone number at which he could be reached for further questions.

[97] His Honour found that on the strength of these representations the Applicant understood that both mortgages were in good standing and were up to date on all payments, and advanced funds operating on this assumption.

[98] In fact, contrary to the Respondent’s representation, the second mortgage in favour of the Respondent was not up to date and in good standing in January of 2010. The mortgagor had not made an interest payment required to have been made on September 30, 2009.

[99] In his evidence before Justice Morgan, the Respondent testified that he had agreed with the mortgagor to waive or defer interest payments under the second mortgage. As to the failure to disclose this fact, Justice Morgan noted that the Respondent “contends that the Applicant should somehow have been able to deduce that private agreement between the Respondent and the mortgagor; or that, if anything was unclear, he should have inquired by phone as invited to do in the January 20, 2010 email”.

[100] Justice Morgan referred to the Elle case in his discussion of equitable estoppel, saying that Justice Sosna “made it clear that a subsequent encumbrancer is entitle to rely on the statement of the prior mortgagee at the time of placing the subsequent mortgage. If there is something that the subsequent encumbrancer did not know about that was not in the mortgage statement, the subsequent encumbrancer cannot be prejudiced by it.”

[101] Addressing the Respondent’s contention that his email to the Applicant was not a formal mortgage statement, his Honour said; “This, however, does not make the misrepresentation contained in that email communication any less of a misrepresentation; likewise, it does not make the Applicant’s reliance on that communication any less reasonable”.

[102] Justice Morgan concluded, on the topic of equitable estoppel:

“In short, in anticipation of the third mortgage the Applicant asked the Respondent about the state of the second mortgage, and the Respondent advised that it was current. This gives rise to an equitable estoppel, and prevents the Respondent from now claiming back interest payments that would only be owing if the second mortgage had not been current.”

[103] In the Amendola case there was a further representation by the Respondent to the Applicant, in the context of the Applicant making a further loan secured by a fifth mortgage on the property in 2012, also in an email, again stating that the second mortgage was “up to date and in good standing” and again inviting a phone call if the Applicant required any further information.

[104] Soon thereafter, in January of 2013, the mortgagor defaulted on the third mortgage. In the face of the default and in preparation for enforcement proceedings the Applicant again asked the Respondent about the status of the second mortgage. This time, after again stating that the second mortgage was in good standing, the Respondent added “No principal or interest payments have been made to date”.

[105] His Honour noted that this was the first time that the Respondent had mentioned that no interests payments had been made on the second mortgage, and that this contradicted the Respondent’s previous assurances that the payments on the second mortgage “were entirely up to date”.

[106] Pursuant to its enforcement proceedings, the Applicant sold the property as mortgagee in possession for $950,000. The first mortgage and the principal amount of the second mortgage were paid from those proceeds, and the hearing before Justice Morgan dealt with competing claims for the proceeds beyond those payments.

[107] He held that “The Respondent is estopped from claiming that the second mortgage was not in good standing as of the date of his last representation to that effect. Given the information on the face of the mortgage, the last interest payment would have been due on the anniversary of the renewal date – i.e. September 30 of each year. Since the Respondent advised the Applicant on December 20, 2012 that the second mortgage was current, the estoppel prevents the Respondent from claiming any interest on the second mortgage from prior to September 30, 2012.” His Honour’s disposition reflected that approach.

[108] Diversified argues that the situation before me is different than that in Elle or Amendola, inasmuch as CVC, at the time of taking assignment of the second ranked mortgage, placed no reliance on any assurances from Diversified, since Diversified was not yet the holder of the first ranked mortgage at that time. Again, it regrets the incomplete information that it provided in response to CVC’s repeated inquiries about the status of the Diversified mortgage, but says that these incomplete representations could not, by definition, create reliance, because unless and until Diversified launched power of sale proceedings, CVC had not right to an assignment of the first ranked mortgage in any event.

[109] I find these submissions problematic in at least two ways. First, it seems clear that Del was in default under the first ranked mortgage on multiple occasions, and perhaps continuously, from the time of the assignment of the first ranked mortgage from MPAC to Diversified. Based on the ongoing default or defaults, had Diversified been forthcoming with the true state of affairs, CVC would have been in a position to claim an assignment of the first ranked mortgage pursuant to section 2 of the Mortgages Act.

[110] Secondly, and a related point, Diversified’s admitted misrepresentations caused CVC to forestall aggressively pursuing this Application, and the passage of time under cover of these misrepresentations allowed, if one gives credit to Diversified’s purported accounting, for the principal amount covered by the first ranked mortgage to grow from less than $800,000 to what would now be, with continued accrual at the rate of over $600 per diem, well in excess of $1.9 million.

[111] For the reasons set out above, I am not prepared to credit Diversified’s position or its accounting.

[112] Applying these findings to the specific claims CVC makes in this Application, I find that Diversified was, by virtue of the initial and ongoing default under the first ranked mortgage, obliged to assign that mortgage to CVC, pursuant to CVC’s demand under section 2 of the Mortgages Act, on April 29, 2016, at which time CVC was an encumbrancer under section 1 of the Mortgages Act and at which time Del was in default under the first ranked mortgage. In fact there is no evidence that Del ever paid the monthly interest under the First Mortgage Amending Agreement, in effect as of April 29, 2016, or that he (and later he and Sarah) ever paid the taxes on the property.

[113] I also find, following Elle, that the unregistered and undisclosed mortgage amending agreements, and in particular the Second Mortgage Amending Agreement - which was not disclosed until late in the day, which memorialized commercially unreasonable terms, which was not complied with in any event, and which purported to be the vehicle to allow the principal amount of the debt secured by the first ranked mortgage to grow, without disclosure of this growth, by two and a half times over five years - does not operate in priority to CVC’s second ranked mortgage.

[114] Finally, following Amendola, I find that equitable estoppel also prevents Diversified from now claiming priority over the second ranked mortgage for amounts exceeding $788,152.20 (the amount paid by Diversified at the time it took assignment of the first ranked mortgage from MPAC).

Conclusion on Main Issue

[115] Having made these findings, I need not address CVC’s alternative argument that the Second Mortgage Amending Agreement is unenforceable against CVC by virtue of Diversified having failed to obtain spousal consent under the Family Law Act, nor its contention that the Second Mortgage Amending Agreement was backdated. On this latter score, while in my view there are reasons for concern, I have found that the lack of disclosure of the arrangement, whatever the date of the document, is sufficient to cause me to find against Diversified.

[116] In conclusion then, I find that upon payment to Diversified of the amount of $788,152.20, CVC is entitled to payment of the amounts secured by its second ranked mortgage, together with accrued interest thereunder.

Pending Trial Between CVC and Sarah

[117] CVC is also entitled to its costs of this Application. If those costs cannot be agreed, then I am prepared to receive written submissions in that regard.

[118] There is still one significant matter outstanding. That is there is a pending trial in a dispute between CVC and Sarah in which CVC seeks to enforce its mortgage against Sarah (the “CVC Mortgage Proceeding”). I am advised that that case, which is brought in Milton, has been on the brink of trial more than once, but that as a result of the pandemic and perhaps other reasons, and despite the parties’ desire to have the matter heard, that case has not yet proceeded.

[119] Counsel for Sarah, who intervened in this Application, asked that I make no finding in terms of the validity of CVC’s mortgage, as such finding might predispose the court in the CVC Mortgage Proceeding, to in turn accept its validity.

[120] I am not privy to the details of the dispute and positions at the heart of the CVC Mortgage Proceeding. I have seen nothing to cause me to invalidate the CVC Mortgage in the case before me, and indeed Diversified has specifically confirmed that it takes no position with respect to the CVC Mortgage Proceeding.

[121] Diversified does say, in paragraph 80 of its factum that “…if Diversified is unsuccessful on the priority issues on this application, then Diversified submits that the amounts of the Diversified Mortgage above those it is entitled to that do not have priority over the CVC Mortgage should be held in Court pending the outcome of the CVC Mortgage Proceeding. CVC’s ability to enforce against Sarah will be determined in the CVC Mortgage Proceeding. If this Court determines that CVC is not entitled to enforce the CVC Mortgage against the Property in the CVC Mortgage Proceeding, then Diversified will still be entitled to the full amount owing to it, pursuant to the Diversified Mortgage.”

[122] Counsel for CVC agrees, with the proviso that interest should continue to accrue under the CVC Mortgage at the stated rate, that the disposition of proceeds following from my decision can be held in abeyance pending the determination of the CVC Mortgage Proceeding. Accordingly, and on that basis, I make that further Order.

[123] Given that approach, the determination of the costs payable by Diversified to CVC should proceed, but payment of those costs should also await the outcome of the trial between CVC and Sarah.

[124] If Diversified and CVC cannot agree on the quantum of costs, CVC should provide written submissions, not to exceed 5 pages in length, together with its bill of costs, by 28 days from today’s date (December 21, 2021). Diversified should provide its response, also in writing and not to exceed 5 pages, by 21 days after receipt of CVC’s costs submissions (January 11, 2022) delivered to my assistant at: lorie.waltenbury@ontario.ca.

W.D Black J.

Date: November 23, 2021