Court File and Parties
ONTARIO SUPERIOR COURT OF JUSTICE
RE: 1373077 ONTARIO INC., Plaintiff
-and-
FARRUKH ALAM and AMAD ALAM, Defendants
BEFORE: FL Myers J
COUNSEL: Saad Suleman, for the plaintiff Sumit Judge, for the defendants
HEARD: September 12, 2022
ENDORSEMENT
1Farrukh Alam is the registered owner of 4 Waltham Dr., Toronto.
2Amad Alam is the brother of Farrukh Alam. He is the registered owner of 90 Kingsmere Crescent in Alliston, Ontario
3Amad Alam has borrowed a significant amount of money from Mati Siddiqui. Those loans are between them in their personal capacities. Amad Alam has not provided security to Mr. Siddiqui for the personal loans.
4Mr. Siddiqui is the principal of the plaintiff corporation. In May, 2018, the plaintiff entered into a loan agreement that describes both Alam brothers as the borrowers. The loan agreement is dated April 24, 2018. It provides for the corporate plaintiff to loan $225,000 to the brothers to be secured by a charge on the property owned by Farrukh Alam on Waltham Drive. The loan agreement also defines Amad Alam as guarantor although it contains no terms setting out a guarantee.
5Two days later, Amad Alam signed a guarantee. It defines both brothers as the “Chargors”. Amad Alam guarantees payment of “all of the ‘Chargors’ Loan of $225,000”.
6Amad Alam provided security for his guarantee by way of a collateral second mortgage over his Kingsmere Crescent property. This mortgage (at Caselines page A154) expressly sets out the $225,000 debt and payment terms identical to the terms of the Waltham Drive loan and mortgage. The mortgagee is the corporate plaintiff. This mortgage therefore did not secure the personal loans owing by Amad Alam to Mr. Siddiqui personally.
7The description of Amad Alam as both a joint borrower and a guarantor may suggest that he has some equity in the Waltham Drive property or that the parties understood that he was the intended recipient of the loan. However, none of the parties suggest that the dual capacities of Amad Alam as borrower and guarantor affects the outcome.
8The plaintiff’s loan was for a six month term. The borrowers were required to pay interest only on a monthly basis during the term of the loan at the simple interest rate of 15% per annum. 15% of $225,000 amounts to an annualized interest payment of $33,750 or $2,812.50 per month.
9On closing, the borrowers gave six monthly post-dated interest payments of $2,812.50 to the mortgagee.
10The Alams did not repay the $225,000 loan when it came due in October, 2018. The parties agreed to extend it and the borrowers provided a further five post-dated cheques for $2,812.50. The first three (for November and December, 2018 and January, 2019) cleared the borrowers’ bank. The last two cheques (for February and March, 2019) bounced.
11While there is no written renewal agreement, the provision and acceptance of the cheques confirms the parties’ evidence that they agreed to extend the term – at least until the borrowers defaulted. I therefore accept the validity of the 5% renewal fee and legal costs claimed by the plaintiff in accordance with the terms of the loan agreement. The aggregate amount of $21,000 is properly included in the mortgagee’s calculations.
12There are two issues in this application. First, can the plaintiff charge compound interest on the renewal or subsequent default? Second, did the payment of $87,000 by Amad Alam in July, 2018 go to pay down the mortgage debt to the corporate plaintiff or the separate personal debts owing by him to Mr. Siddiqui?
Compound Interest
13Article 10 of the loan agreement provides:
- RENEWABILITY This Charge/Mortgage loan is not automatically renewable at the end of any stipulated term and any renewal terms must be negotiated and may bear a renewal fee. It the Charge/Mortgage is not renewed and the Chargor/ Mortgagor fails to repay the mortgage principal on the maturity date, then the interest rate shall become 17% annually, compounded monthly, and the Chargor/ Mortgagor agrees to pay an administration fee of $250.00 at the beginning of each month, for each month that the Charge/Mortgage loan is not repaid. These terms are not to be considered a Renewal of the Charge/Mortgage and the Charge/Mortgage loan is considered due and payable.
14Mr. Suleman advises that the plaintiff seeks to add missed interest payments to principal and then charge interest on the new total each month at 15% rather than the 17% allowed by the agreement. But by adding interest to principal each month, the plaintiff is charging compound interest (i.e. interest on interest). Moreover, while “only” charging interest at 15% compounded monthly, the plaintiff agrees that the equivalent nominal interest rate is more than the 15% simple rate charged during the term of the loan. (Put more simply, a rate of 15% per annum compounded monthly is higher than a simple interest rate of 15% per annum).
15Section 8 of the Interest Act, RSC 1985, c I-8 precludes a mortgagee from increasing the interest rate on default. It cannot charge a rate on arrears above the interest rate when the mortgage is not in arrears. Article 10 does not increase the rate at a specific date. Rather, it only applies if the loan is due and is not renewed at the end of the term or a renewal term. That is, the provision provides for an increased interest rate only when the loan comes due and the mortgagors go into arrears. In my view, that runs afoul of the statutory prohibition and is void. The fact that the rate does not increase by the passage of time distinguishes this case from Alleghe Mortgage Fund Ltd. v. 1988758 Ontario Inc., 2021 ONSC 4887 see para. 29.
16Accordingly, subject to the next issue, the simple interest calculation at Caselines page A460 is correct rather than the calculation at Caselines page A143 that is based on compounding interest.
Allocation of Payments
17In June, 2018, Amad Alam wanted to sell his Kingsmere Crescent property. He expected that $30,000 would be available to pay debt. Mr. Siddiqui said he would lift the collateral second mortgage on that property if Amad Alam used the $30,000 to repay some of his debt with Mr. Siddiqui personally. By direction dated June 28, 2018, Amad Alam directed $30,000 of the proceeds to Mr. Siddiqui.
18At some point before closing, the parties determined that a further $57,000 would remain available from the Kingsmere property. Mr. Alam says that he was willing to pay that money toward the $225,000 debt secured by the mortgage on his brother’s property on Waltham Drive (and which the mortgage on Kingsmere secured as well). A direction was initially made out to require Amad Alam to pay the $57,000 (initially $56,000) to the plaintiff. However, Mr. Siddiqui changed the payee to himself personally. Accordingly, Amad Alam’s lawyer Mr. Butt paid the $57,000 to Mr. Siddiqui personally.
19The parties agree that even with a payment of $57,000 to Mr. Siddiqui, Amad Alam continues to owe further money to Mr. Siddiqui personally.
20Amad Alam wants the full $87,000 or at least the $57,000 payment allocated to reduce the Waltham Drive mortgage debt to the corporate plaintiff. One might wonder what difference the allocation makes. If the payment is allocated to Waltham Drive, then Amad Alam will continue to owe the amount of the payment to Mr. Siddiqui personally. Apparently, however, the economic reality is that the only recovery available to Mr. Siddiqui and his corporation at this date is whatever remains after the first mortgage is paid on Waltham Drive. The debt owing by Amad Alam to Mr. Siddiqui personally (with or without the further $87,000 or even just $57,000) is not likely to be paid.
21The parties agree that the general law is that, unless a contract applies specifically, the debtor has the right to determine to which account a payment is to be allocated. 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2000] O.J. No. 77 (S.C.J).
22Here however, Mr. Siddiqui says that Amad Alam’s debts were owed to two separate parties. Mr. Siddiqui only agreed to lift the mortgage against the Kingsmere Crescent property on payment being made to him personally. At para. 10 of his affidavit, Mr. Siddiqui says:
In view of the Defendant Amad Alam's intention to pay back the Personal Loans by selling the Collateral, the Plaintiff had agreed to discharge the Collateral off Defendant Amad Alam's personal property for $0.00 to enable the Defendant Amad Alam to sell the Collateral in order to pay back the Personal Loan. For purposes of clarity, there was at no time any relation between the Mortgage Loan and the Personal Loan, the Mortgage Loan was only collaterally secured on the Defendant Amad Alam's personal property. The Mortgage Loan was mortgage obtained by the Defendant Farrukh Alam from the Plaintiff and the Personal Loan was loan obtained by the Defendant Amad Alam in his personal capacity from the Plaintiff. The discharge of the collateral mortgage was done for $0.00 consideration, with monies received applied to the outstanding debts between the Defendant Amad Alam and myself, the monies were not paid towards the Mortgage Loan. Mr. Naveed Butt, the Defendants' lawyer at that time did get one direction signed for $30,000.00 by the Defendant Amad Alam, but inadvertently did not get a second direction signed for the $57,000.00 to my name, but that was the intention, that the monies would not be applied to the Mortgage Loan but rather to pay back the loans, as both payments by Mr. Naveed Butt, the Defendants' lawyer, were paid into my name and deposited accordingly into my personal account. The total of $87,000.00 was paid towards the Personal Loans in my name. Attached hereto and marked as Exhibit "D" is a true copy of the Trust Ledger Statement prepared by the Defendants' Lawyer Mr. Naveed Butt for the sale of the Collateral. Attached hereto and marked as Exhibit "E" is a true copy of the Defendants direction for payment of $30,000.00 to me. Attached hereto and marked as
Exhibit "F" is a true copy of cheques made by the Defendant's Lawyer and deposit receipt of payment of $30,000.00 and $57,000.00 into my account.
23There are errors in this evidence (which is actually argument). First, Mr. Butt did not forget to create a direction for the payment of the $57,000 tranche. I suspect that Mr. Siddiqui did not wish to disclose the direction showing his handwritten change of the payee from the plaintiff to himself.
24The bolded sentence above is also wrong. The second mortgage on Kingsmere was completely related to the Waltham Drive loan. It was collateral security to Amad Alam’s guarantee of that specific loan. It did not secure Mr. Alam’s debts to Mr. Siddiqui personally.
25Mr. Butt was clear that in July, 2018, he was dealing only with lifting the Kingsmere Crescent mortgage. He knew that Mr. Siddiqui required payment of the full $87,000 to lift the Kinsgmere Crescent mortgage. But Mr. Butt had no evidence of any agreement or actual discussions on the accounting allocation as between Mr. Siddiqui and Amad Alam in their various capacities.
26However, one mustn’t confuse debt with security. Had Kingsmere been sold by creditors enforcing their security, there is no doubt that all payments on the second mortgage would have gone to the plaintiff and would have reduced Amad Alam’s guaranteed liabilities and therefore the brothers’ liability on the Waltham Drive mortgage as well.
27But that is not what happened.
28In July, 2018, the Waltham mortgage was still in good standing. It was still in its initial term for which interest had been paid by post-dated cheques. The mortgage was a closed mortgage. Amad Alam had no specific right to require Mr. Siddiqui or the plaintiff to allow an early repayment of principal of that mortgage debt. Neither did they purport to do so. Rather, Amad Alam opened a negotiation with Mr. Siddiqui to ask him to lift the collateral second mortgage on Kingsmere Crescent.
29The parties were free to agree to any terms that they wished. Mr. Siddiqui (or the plaintiff) could have refused to lift the mortgage until the Waltham Drive mortgage debt was paid in full. Instead, Mr. Siddiqui says he agreed to release the plaintiff’s security for Amad Alam’s guarantee of the Waltham Drive debt provided he received $87,000 towards his personal loans to Amad Alam.
30The evidence of Amad Alam is that he directed Mr. Butt to provide the $87,000 payments to lower the principal amount of the Waltham Drive mortgage debt. He swears:
At all material times, the Mortgagors and the Mortgagee had agreed to use the Partial Payment to discharge the Collateral Charge and paydown the principal on the Principal Mortgage (hereinafter the "Agreement").
The Mortgagee re-directed the Partial Payment to Mr. Siddiqui towards an unrelated unsecured debt rather than apply the Partial Payment to principal owing on the Principal Mortgage. This was in contrast to the Agreement between the Mortgagee and Mortgagors.
31While he asserts that the parties “had agreed” and that Mr. Siddiqui taking the funds personally was “in contrast to the Agreement” he is unable to point to any agreement actually being made. The best he says in cross-examination is:
- Q. Yes. Thank you. And at the time you sold the Kingsmere property, do you have any correspondence from yourself to Mr. Siddiqui requesting that the mortgage term be changed from closed to open to allow you to make a partial payment on the mortgage?
A. I think I talked to Mr. Siddiqui and I said to him, the money, it's coming from this property, take it for the loan. Because that was connected with 4 Waltham Avenue money.
- Q. So, do you have any evidence where you requested the Plaintiff mortgagee –
A. Again, the way ---
- Q. - to open the mortgage to allow for partial payment?
A. Yes, I ---
- Q. Very specifically. Do you –
A. I talked ---
- Q. -- have any evidence?
A. I talked to him before the property was closing and I said to Mr. Siddiqui, I said his money is going back to the mortgage.
32A statement in passing is a long way from a bilateral agreement to re-open a closed mortgage and allow a substantial principal reduction. Mr. Siddiqui denies that any such agreement was made.
33If the allocation mattered to Amad Alam, why did he not ensure that his lawyer had the Waltham Drive mortgage opened and the allocation recognized?
34Of much greater significance however is what happened several months later. Recall that when the borrowers failed to re-pay the principal in October, 2018, they provided a number of cheques to the plaintiff to pay monthly interest for an extension. Those cheques were for $2,812.50 – the same amount as before. That is the monthly equivalent of 15% simple interest on outstanding principal of $225,000.
35If the principal had been paid down by $87,000 the previous July, then only $138,000 would have remained due (ignoring the interest decrease during the remaining term). If there was only $138,000 (or less) remaining due when the mortgage matured and was extended, 15% interest would have been $1,725 per month. Paying $2,812.50 per month would have represented about 24.5% interest on $138,000.
36There is no suggestion in any document, communication, or evidence before the court that when the mortgage came due in October, 2018 the full amount was thought or said by anyone to be anything other than $225,000. The borrowers provided their interest cheques based on that amount of principal remaining outstanding and accruing monthly interest at the agreed rate.
37Amad Alam give conclusory affidavit evidence of an agreement having existed without any details of how or when it was formed. Then Amad Alam says in cross-examination that “he thinks” he spoke to Mr. Siddiqui about the proceeds from Kingsmere Crescent going against the mortgage on Waltham Drive. But there is no objective confirmation of any actual allocation having been communicated to the mortgagee by Amad Alam. Mr. Butt confirmed that Amad Alam knew that Mr. Siddiqui had directed the funds to be paid to himself personally rather than to the plaintiff. If there was an agreement to the contrary, why didn’t Amad Alam object or have Mr. Butt do so?
38For Amad Alam to have had the right to allocate the payment from Kingsmere Crescent to the Waltham Drive mortgage, (ignoring Mr. Siddiqui’s use of a corporation as a separate creditor) Amad Alam still needed to open the Waltham Drive closed mortgage. There is no hint of evidence that Mr. Siddiqui agreed to do that. Mr. Siddiqui took the $87,000 in his own name to the knowledge of and without complaint by Amad Alam. And months later the Alam brothers themselves recognized that interest remained payable on the full $225,000.
39This is a proper case for summary judgment. In view of the conflict in the evidence between Amad Alam and Mr. Siddiqui, it is apparent that I need to make a credibility finding to resolve the question of whether the parties agreed to an allocation or the debtors made an allocation that bound the creditor (assuming they had the right to do so).
40In my view, this is a proper case in which to find these contested facts. Mr. Judge suggests that a judge may want to hear Mr. Butt’s evidence in person. I read the transcript closely and see him making efforts to be careful to limit his knowledge of the affairs between the parties. He knew he was discharging the Kingsmere Crescent mortgage and that he needed to pay $30,000 and then $57,000 to do so. He had no details on the terms apart from knowing to pay them to Mr. Siddiqui personally. Both counsel established in cross-examination of Mr. Butt that their client’s evidence was not contradicted by what Mr. Butt said. He has nothing of substance to add.
41The protagonists too were fully cross-examined. This case turns largely on a very complete documentary record. Like most real estate deals, the lawyers’ files provide all of the usual conveyancing and deal documents one would expect. What undermines the credibility of Amad Alam’s evidence is not anything said by any of the parties. Rather, his oral evidence is simply not supported by a shred of documentary evidence in a transaction in which documents abound. Of greatest significance is that his evidence is not supported by his own conduct when he extended the Waltham Drive mortgage and provided new interest payments based on the $225,000 principal debt without a word of mention of a payment of $87,0000 to principal months earlier.
42In addition, if money was paid to principal in July, then interest from that day to October 19, 2022 was overpaid. There is no request for a credit or a re-calculation of principal on maturity based on that calculation.
43I simply cannot accept that as a condition of allowing the discharge of the Kingsmere Crescent mortgage, Mr. Siddiqui agreed to accept the payment of $87,000 or $57,000 toward the Waltham Drive mortgage debt and to re-open the mortgage to do so. If in the case of a closed mortgage with a legally different creditor, Amad Alam remained entitled to allocate the payment, I cannot accept that he did so at the relevant time of the payment.
44I am satisfied that this is a case in which it is in the interest of justice for me to find the facts using the enhanced powers in Rule 20.04 (2.1). There is nothing unsaid. There is nothing more to be gained at trial. I can find the facts and apply the law in a fair and economical manner at this stage. I find that there was no agreement to open and reduce the Waltham Drive mortgage debt and no allocation of payment by Amad Alam to that debt in any event. Mr. Siddiqui required the payments to be made to him personally as a condition of lifting his security to allow the sale of the Kingsmere Crescent property at Amad Alam’s request. There is therefore no genuine issue requiring a trial in this action.
45Accordingly, judgment is to go against both defendants jointly and severally for $374,060.97 plus post-judgment interest at the simple interest rate of 15% per annum.
46The plaintiff is entitled to possession of the Waltham Drive premises subject to the rights of residential tenants. The plaintiff is granted leave to issue a writ of possession against Farrukh Alam qua landlord.
Costs
47The plaintiff may deliver no more than five pages of costs submissions by September 23, 2022. The defendants may deliver no more than five pages of costs submission by September 30, 2022. To be considered, each submission shall be accompanied by a Costs Outline. The parties may also file any offers to settle on which they rely. Submissions and Costs Outlines shall be uploaded to Caselines
FL Myers J
Date:, September 14, 2022