Rocco Sebastiano v. Brunello Imports Inc., James Savona and Marina Savona
COURT FILE NO.: CV-20-638343
DATE: 20220916
ONTARIO SUPERIOR COURT OF JUSTICE
RE: ROCCO SEBASTIANO, Plaintiff
-and-
BRUNELLO IMPORTS INC., JAMES SAVONA and MARINA SAVONA, Respondents
BEFORE: FL Myers J
COUNSEL: Stephen Schwartz, for the Applicant Emilio Bisceglia, for the Respondent James Savona and Marina Savona Philip J. Gertler, for Rumanek & Company Ltd, the Trustee in Bankruptcy of Brunello Imports Inc
HEARD: September 14, 2022
ENDORSEMENT
The Motion and Outcome
[1] The plaintiff asks for an order for payment to him of funds being held by the court that are proceeds of the sale of the Savonas’ home at 27 Tillplain Road, Toronto.
[2] The plaintiff held a mortgage on the property dated July 16, 2019. The Savonas sold the property with leave of the court in accordance with the terms of a consent order made by Associate Justice McGraw dated September 21, 2021.
[3] To facilitate the sale the plaintiff agreed to discharge his mortgage over the Tillplain property on condition that the net proceeds of sale would be paid into court and remain subject to the security of the mortgage.
[4] In para. 4 of the consent order, the parties agreed and the Associate Justice ordered that the proceeds would be “paid into Court to the credit of the within action until further court order.” [Emphasis added.]
[5] On October 8, 2021, the Savonas paid into court $456,152.60 from the sale of their house. The plaintiff asks for payment of that money plus all accrued interest toward his mortgage.
[6] For the reasons that follow the order is granted as asked.
The Condominium
[7] The Savonas own the shares of Brunello Imports Inc. It owned a condominium unit on Frederick Street, Toronto.
[8] Brunello Imports Inc. is bankrupt. In its Statement of Affairs, signed by Ms. Savona, the bankrupt corporation listed 60 unsecured creditors with claims totalling more than $1.4 million. That is before a claim for a tax deemed trust that Mr. Gertler says may be valued at another $170,000 approximately.
[9] The bankrupt is also listed as the guarantor on the Savonas’ term sheet with Mr. Sebastiano. It granted a second mortgage over its condominium unit in support of its liability. There is a single charge document registered on title to both the house and the condominium. It shows the bankrupt corporation and both Savonas as “chargors”.
[10] At the time that Mr. Sebastiano advanced his mortgage loan, CIBC already held a first mortgage on the condominium. Mr. Sebastiano’s loan refinanced and replaced a prior second-ranking mortgage on title to the condominium.
[11] Shortly after the plaintiff’s mortgage loan advance in the summer of 2019, the defendants defaulted on monthly payments due on both registered mortgages.
[12] CIBC delivered a notice of sale on its first mortgage in January 2020.
[13] On January 15, 2020, Mr. Sebastiano delivered notice of sale for both the Savonas’ house and the corporation’s condominium.
[14] Brunello went bankrupt effective March 19, 2020. It abandoned the condominium.
[15] On July 6, 2020 Mr. Sebastiano took possession of the condominium without complaint by the trustee in bankruptcy.
[16] Mr. Sebastiano then paid out CIBC and had its mortgage against the condominium discharged. Under the terms of Mr. Sebastiano’s mortgage, the amount he paid to release the prior encumbrance was added to the principal of the defendants’ mortgage and bore interest at the agreed rate in that mortgage.
[17] In the summer of 2020 the world was still in the early days of the pandemic. Mr. Sebastiano testifies that he had to do some work at further cost to himself to ready the condominium for realization. He did some work but, rather than selling the condominium, in February, 2021, he leased the condominium to a residential tenant for a year.
[18] The Savonas evidence is that at the date of the lease, the condominium had enough value to pay Mr. Sebastiano in full had he only sold it then. The rent due under the lease is not enough to cover accruing interest on the mortgage. In fact, the lease baked-in an accruing deficiency of approximately $5,700 per month (or $68,400 per annum).
[19] There is evidence that the value of the condominium rose by more than the amount of the accruing monthly deficiency for a time to as much as $930,000 - $950,000 as of April, 2022. But its value has declined significantly since then.
[20] The Savonas have adduced expert evidence that there is a near invariable practice in Toronto whereby mortgagees in possession sell the mortgaged collateral shortly after taking possession. The expert opines that Mr. Sebastiano’s failure to sell the condominium amounts to a breach of the prevailing standard of care.
[21] In addition, the. Savonas submit that they dealt with a lawyer named Marco Drudi rather than with Mr. Sebastiano directly. Mr. Drudi was formerly the lawyer for Brunello and the Savonas’ son. He had assisted the Savonas and Brunello deal with enforcement efforts by a prior mortgagee. It was in connection with those efforts that Mr. Drudi had initially referred the defendants to Mr. Sebastiano to refinance the prior debt.
[22] Mr. Sebastiano is Mr. Drudi’s brother-in-law.
[23] Ms. Savona gives the following evidence in her affidavit:
I relied on Marco assurances to me as my lawyer, when he indicated that Rocco would rather take the Property as there was equity in it than receive a payout. Marco advised me that once I dropped of the keys, Rocco would discharge the mortgage. That is the only reason why I instructed my son, James Savona Jr. to do so; I thought we were bringing the default of the Mortgage to a conclusion.
In and around early January 2021, my son, James Savona Jr., in reliance upon the advice provided to me by Marco, dropped off the keys to the Condo to Marco. I am advised by my son that Marco, once again, advised him that dropping off the keys would be in satisfaction of the Mortgage. Attached hereto and marked as Exhibit "H" is a copy of the email correspondence between James Savona Jr. and Marco Drudi.
As it turns out, this was not the case. Rocco never discharged the Mortgage.
I believe that, at the time my son dropped off the keys to the Condo to Marco, the value of the Condo was over $850,000.00.
When my son provided the keys to the Condo to Marco in satisfaction of the Mortgage, I believe there was enough equity in the Condo to satisfy the Mortgage. That is why we were able to make such agreement.
[24] Mr. Drudi and Mr. Sebastiano deny that any such deal was made and provide reasons why it would not make any business sense to infer a deal from the parties’ course of conduct.
[25] On the evidence before me at this time, I am unsure of Mr. Drudi’s ongoing role. The Savonas and Mr. Sebastiano had real estate counsel. Mr. Drudi’s continued involvement and precise role is never explained.
[26] It is incumbent upon a lawyer to ensure that his or her role is clear. Without making any findings, I am prepared to assume for the purposes of this motion and analysis that Mr. Drudi may well have owed fiduciary duties to the Savonas through the relevant period.
[27] The email exchange between Mr. Drudi and the Savonas’ son that is referred to by Ms. Savona and is relied upon to support Ms. Savona’s evidence has nothing to do with a deal to limit the mortgage or to release the Tillplain house from the mortgage. Moreover, with lawyers on both sides and litigation ensuing, the lack of contemporaneous documentation of the alleged deal is noteworthy.
[28] However, there was no cross-examination on any of the affidavits before the court. I am not comfortable that I have a basis to make credibility findings on this motion and I decline to do so on the written record. As explained below, the next fact renders this dispute irrelevant to the issue before me today.
[29] On April 21, 2021, Associate Justice Short granted default judgment in this action in favour of Mr. Sebastiano for possession of the house on Tillplain and costs. Mr. Sebastiano did not seek default judgment on the Savonas’ debt covenant at that time.
The Defendants’ Position
[30] Mr. Bisceglia submits that this is not a proper case for payment of the Tillplain proceeds to Mr. Sebastiano. While Mr. Sebastiano may well be entitled to the funds in court, he cannot show any entitlement to the funds today.
[31] Mr. Bisceglia raises essentially four points:
a. Mr. Sebastiano’s claim for the proceeds of the house on Tillplain merged in the default judgment for possession. Procedurally therefore, he cannot collect on the mortgage debt without re-opening the judgment under Rule 59.06 or otherwise;
b. Mr. Sebastiano’s agreement to take the condominium keys released the mortgage on the house;
c. Mr. Sebastiano and Mr. Drudi violated their duties to the Savonas and the payment of any deficiency should await the outcome of a quantification of their liability; and
d. Mr. Sebastiano and Mr. Drudi violated the duty of good faith.
(a) No Requirement for Judgment
[32] I am unaware of any requirement for a mortgagee or a secured creditor to obtain a monetary judgment before enforcing its security. Contests of liability and quantum frequently occur. Usually they are dealt with by motions for directions; often in a receivership or bankruptcy proceeding. They can go to trial. But Mr. Bisceglia points to no requirement that they must.
[33] Section 27 of the Mortgage Act provides t:
27 The money arising from the sale shall be applied by the person receiving the same as follows:
Firstly, in payment of all the expenses incident to the sale or incurred in any attempted sale;
Secondly, in discharge of all interest and costs then due in respect of the mortgage under which the sale was made;
Thirdly, in discharge of all the principal money then due in respect of the mortgage;
Fourthly, in payment of the amounts due to the subsequent encumbrancers according to their priorities;
Fifthly, in payment to the tenants of the mortgagor of the rent deposits paid under section 106 of the Residential Tenancies Act, 2006 where the rent deposit was not applied in payment for the last rent period,
and the residue shall be paid to the mortgagor.
[34] That section applies to sales under power of sale. Although CIBC and Mr. Sebastiano had both delivered notices of sale, the sale of Tillplain was conducted by the Savonas with the consent of the mortgagees as embodied in a court order.
[35] As noted above, Associate Justice McGraw’s consent order specifically provides for payment of the proceeds of sale to be determined by further order of the court.
[36] In my view the process followed on this motion meets the terms agreed between the parties and ordered by the court. It is consistent with the rights of mortgagees and secured creditors at law generally. The default judgment for possession preceded the sale order and is not a bar to it or to this proceeding.
(b) The Alleged Deal cannot bind the Proceeds of Sale in Court
[37] Assuming that in January, 2021 Mr. Drudi agreed that Mr. Sebastiano would waive the mortgage on Tillplain if the Savonas gave him keys to the condominium (that Mr. Sebastiano had already taken possession of six months earlier), in para. 39 of her Affidavit, Ms. Savona recognized that whatever deal she might have thought existed was never implemented:
- As it turns out, this was not the case. Rocco never discharged the Mortgage.
[38] Then, on April 21, 2021, the Savonas allowed default judgment to be issued. Associate Justice Short enforced the mortgage against the Tillplain house three months after the alleged agreement by Mr. Sebastiano to waive his security.
[39] In June, 2021, the Savonas tried to bring a separate lawsuit to discharge the mortgage based on the alleged deal. By order dated June 23, 2021, Sharma J. struck out the new proceeding holding it to be an abuse of process. He wrote:
Default judgment was obtained for non-payment of a mortgage. The mortgage was registered to title to two parcels of land - a condo and a matrimonial home.
The applicants dropped off keys [to the condominium] believing it would be in-satisfaction of their mortgage. However, the mortgage remains registered on title to the matrimonial home. The applicants have sold the matrimonial home, with a closing on September 29, 2021. As there is a judgment and an order for possession in an existing action, the defendants in that action (and applicants in this application) must first seek to have that judgment set aside on a motion before a master.
This new application would appear to be a collateral attack on an existing judgment, and therefore an abuse of process. Accordingly, the application will not be scheduled.
[40] Taking up Justice Sharma’s invitation, the Savonas moved to set aside the default judgment for possession. That motion was settled with the result being the order of McGraw AJ.
[41] Paragraph 1 of the consent order made by McGraw AJ recited the abandonment of the motion to set aside the default judgment. The default judgment remains therefore as a subsisting judgment of this court enforcing the mortgage against the Tillplain property.
[42] Moreover, as recited above, the order of McGraw AJ undergirds this motion. They key paragraphs say:
THIS COURT ORDERS that upon payment of the Net Proceeds into court, the Plaintiff shall discharge his mortgage registered as instrument AT5186249 as against title described in Schedule "A" hereto but the Mortgage registered as instrument number AT5186249 registered against title to [the condominium] shall not be discharged and shall remain a charge secured over title to [the condominium] and the Net Proceeds with all of the terms and provisions contained in the said Mortgage, subject to further Order of the Court.
THIS COURT ORDERS that for the purposes of determining the nature and priority of any claims, the Net Proceeds from the sale of the Home shall stand in the place and stead of the Home and that the Plaintiff's Mortgage shall attach to the Net Proceeds from the sale of the Home with the same priority as the Plaintiff had with respect to the Home immediately prior to the sale , as if the Home had not been sold and remained in the possession or control of James Savona and Marina Savona immediately prior to the sale.
[43] The requirement in paragraph 5 for Mr. Sebastiano to discharge his mortgage over the Tillplain property would not have been necessary unless the charge remained a valid charge on title. Moreover, para. 5 recited the parties’ agreement that the mortgage subsisted over the condominium too. There was no foreclosure.
[44] Para. 6 of the order specifically recognizes the ongoing validity of the security of the mortgage charge against the Tillplain proceeds in court. The parties agreed and the court ordered that the mortgage continued in force.
[45] The Savonas brought a proceeding to enforce the alleged deal and settled on the terms in the consent order. They wanted to maintain control of the sale of their Tillplain home despite Mr. Sebastiano’s power of sale proceeding. They weighed their priorities and made their agreement accordingly.
[46] Just as it was an abuse of process for the Savonas to challenge the mortgage after its enforcement by Short AJ in the default judgment, it is doubly so now after it was enforced again, with their assent and agreement, in return for consideration, as evidence by the order of McGraw AJ.
[47] It is therefore no longer open to the Savonas to challenge the enforceability of the mortgage against Tillplain based on the alleged January deal even if their evidence is accepted.
[48] There is an additional point that goes to this issue and to the next one as well.
[49] At the time that the Savonas say they exchanged the keys to the condominium in return for a waiver of the mortgage against Tillplain, the Savonas had no rights or equity in the condominium. While they might have saved Mr. Sebastiano the price of a locksmith to open the storage locker, the Savonas say that when they gave the keys to the lender, they were, in essence, consenting to a foreclosure against the condominium. But, in January, 2021, Brunello was bankrupt. There are $1.4 million in creditors plus the government waiting to take whatever remains after the mortgage enforcement by Mr. Sebastiano. As shareholders of Brunello, the Savonas had no economic or legal interest in the condominium.
[50] One needs to understand the actual economic issues at play in this motion. Mr. Sebastiano’s choice of which mortgaged property he collects from first affects the rights of those with claims behind him.
[51] If Mr. Sebastiano takes the proceeds of the Tillplain property sale first, he will not need as much from the condominium to pay him in full. In that case, the creditors of Brunello will likely see some recovery from the condominium.
[52] If Mr. Sebastiano collects from the condominium first, then there will be little, if anything left for the trustee on behalf of Brunello’s creditors. But the Sebastiano’s would likely then receive some value from the Tillplain home sale proceeds.
[53] But neither Savonas nor the creditors of the Brunello estate has the right to require a senior creditor to enforce his security against a specific piece of the secured collateral. The creditor has the right to choose. The choice may give marshalling rights to one set of subordinate creditors or another. But that does not preclude or limit the senior creditor from choosing the pot of collateral from which he seeks recovery.
[54] Moreover, it does not appear that the Savonas are guarantors of Brunello’s liability to Mr. Sebastiano. They are either joint debtors with Brunello or Brunello was guarantor of the Savonas’ primary liability. It is not clear to me therefore that the Savonas have a right to subrogate against Brunello or the condominium in the event that Mr. Sebastiano collects against the Tillplain proceeds first. Assuming, for the sake of argument, that the Savonas have a right of subrogation against Brunello for anything they pay to the mortgagee, they have to actually pay something for that right to arise. A right of subrogation does not become an enforceable right until the person with the right actually makes a payment for which it holds its right to claim over against another.
[55] The upshot of this is that the Savonas had nothing to offer when they gave over the keys apart from their trifling value as actual keys to a locker. The effort to invoke a broader inference from the metaphor of “giving the keys to the bank” is not apt at all. The Savonas had no interest in the condominium. They had no standing or legal interest to bargain. The fact that the Savonas may later claim a right of subrogation against the estate does not entitle them to bargain away the rights of the bankrupt estate or its creditors.
(c) Improvident Realization
[56] The Savonas claim that Mr. Drudi and Mr. Sebastiano violated duties owing to the Savonas. Mr. Bisceglia argues that as lawyers, Messrs. Drudi and Sebastiano bore higher duties of care as mortgagees-in-possession. [^1]
[57] For example, he criticizes Mr. Sebastiano for failing to take an assignment of CIBC’s first mortgage when Mr. Sebastiano paid it out. The answer, quite simply, is that the second mortgage already dealt with that outcome expressly. It is not surprising that the interest rate available to Mr. Sebastiano under the second mortgage exceeds the rate charged by CIBC in its first mortgage. But that is what the Savonas and Brunello agreed with Mr. Sebastiano when he refinanced their debt (reducing their interest burden from the 15% they owed the prior lender to the 10% accepted by Mr. Sebastiano).
[58] Mr. Sebastiano does not undertake a duty to minimize the Savonas’ liability or to waive his legal rights because he is a lawyer.
[59] Having said that, Mr. Sebastiano’s decision to hold and lease the condominium may subject him to review for providence and reasonableness. Mortgagees-in-possession are duty-bound to providently try to maximize recovery among other things.
[60] If the Savonas have causes of action, they are not before the court today. They have not sued. There is no motion by them seeking relief. They cannot challenge the validity of Mr. Sebastiano’s mortgage against Tillplain as discussed above. They have no rights in respect of the condominium unless or until they acquire a subrogation right. They are far out of the money on the condominium even if Mr. Sebastiano’s mortgage is wholly unenforceable against it due to improvidence or other wrongdoing.
[61] Nothing in s. 27 of the Mortgages Act, the order of McGraw AJ, or any legal principle of which I am aware (or that was submitted by Mr. Bisceglia) entitles the Savonas to raise allegations in the air to undermine the enforcement of the mortgage security against the proceeds in court pursuant to the consent order made by McGraw AJ. The Savonas essentially seek execution before judgment on claims that have not yet been brought let alone succeeded. Their standing will be in issue at minimum. Whether there is any loss ultimately or improvidence or breach of any duty known to law may be decided one day. But nothing raised by Mr. Bisceglia is a basis to hold up the distribution of the proceeds of sale of Tillplain.
[62] It is significant, for example, that the trustee is not currently siding with the Savonas to advance an improvident realization claim against Mr. Sebastiano based on his failure to sell the condominium as yet. The trustee may advance such a claim later or not. But, for now, its interest is to see Mr. Sebastiano paid the proceeds of Tillplain as soon as possible to limit the ongoing accrual of interest at 10% under his mortgage.
[63] One would have though that the Savonas too would want to stop interest accrual as well. But it does not matter to them because they know that they have no economic interest in recovery on the condominium. They can only get paid if they receive money from the sale of Tillplain. Realistically, holding up Mr. Sebastiano hurts only the recovery of the creditors behind him on the condominium. Mr. Sebastiano blames the Savonas’ litigation positioning for the delays that have been suffered to date. That too is not before me today.
[64] There is law deferring a distribution in face of an improvidence claim that would immediately impact a mortgagee’s recovery. But that is not the case here. Nothing done by Mr. Drudi purportedly for Mr. Sebastiano or by Mr. Sebastiano in taking possession of the condominium, paying out CIBC, renovating, and leasing the condominium relates to the proceeds in court. Even if Mr. Sebastiano has waited unreasonably long to sell the condominium and is held to be responsible for reduced recovery due to a market drop, that will come from his recovery on the condominium.
[65] I am not to be taken to be agreeing that the Savonas have any cause of action whether for improvident realization or otherwise. They may have claims against Mr. Drudi and they may argue that Mr. Sebastiano is liable on those claims.
[66] Mr. Sebastiano submits, without cross-examining or digging into the merits of those allegations, that any such claims are simply not before me on this motion. I agree.
(d) Bad Faith
[67] The claim for bad faith is similar to the improvidence claim. It focuses on Mr. Drudi having some duties to the Savonas while actually helping his brother-in-law Mr. Sebastiano.
[68] This is a “throw it at the wall and see what sticks” claim. Bad faith execution of a contract is essentially lying in carrying out a contract. Bad faith is not a tort committed by characterizing peoples’ conduct as unworthy.
[69] Lawyers have important fiduciary duties to be sure. If Mr. Drudi is called upon to do so, he may have to answer for whether he committed any act for which he may be held liable as a lawyer.
[70] Mr. Sebastiano is not alleged to have ever spoken to any of the defendants. His role as a lawyer is just colour.
[71] If the Savonas claim that they relied on something said or done by Mr. Drudi that was to be in their interest and it turns out not to have been so, there may be fiduciary duty claims. But it has nothing to do with the house proceeds in court. It is not yet alleged. And if it has to do with the condominium, then, as discussed previously, the Savonas have a long way to go to show that they have any standing or any economic interest that could possibly have been impacted.
[72] There is no issue of good faith execution of the mortgage enforcement proceeding in respect of the house proceeds as agreed by the Savonas and ordered by McGraw AJ.
Order
[73] There is no claim with priority to Mr. Sebastiano’s claim to the Tillplain property proceeds under his mortgage. The mortgage has previously been enforced by this court. Nothing said by the Savonas in response to this motion can affect Mr. Sebastiano’s enforcement of his secured rights as against the proceeds as preserved by the order of McGraw AJ and all interest accrued thereon.
[74] Order to go as set out in paras 72 (a) and (b) of the factum of the plaintiff dated June 10, 2022 at Caselines page A319.
[75] The 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 16, 2022
[^1]: I disclosed to the parties that from 1986 to 2003, I practised law as an associate and then as a partner at Osler, Hoskin & Harcourt LLP. Mr. Sebastiano commenced practising in a different department of the firm in 1993 and remains a partner there today. Both sides expressly consented to my hearing the matter after I disclosed my prior association with Mr. Sebastiano.