COURT FILE NO.: CV-21-667245
DATE: 20221121
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Kathryn Greenspan and JKSD Management Inc.
Applicants
– and –
Alan Van Clieaf, Joanne Van Clieaf, Ruth Weightman and Jaymor Securities Ltd. 1120
Respondents
Ian Klaiman, for the Applicants
Stephen Turk, for the Van Clieafs and Weightman
HEARD: April 12, 2022
REASONS FOR DECISION
P.T. Sugunasiri, J.:
Overview:
[1] This application resolves the parties’ respective entitlement to the proceeds of sale of Units 9 and 10 of 104 West Beaver Creek Road in Richmond Hill. Jaymor Securities Ltd. 1120 owns the property. It pledged the property as collateral for Greenspan’s $250,000 loan to its brother company, Fabco. JKSD, a company controlled by Greenspan, loaned a further $125,000 to Jaymor. The second loan was guaranteed by Jaymor’s principal, Fab Lucchese, and by Fabco, with a maturity date of September 1, 2019. The parties also agreed that if Jaymor failed to repay the loan and accrued interest by the maturity date, Jaymor would grant a fourth mortgage to JKSD. Despite failing to repay the loan, no fourth mortgage was registered. In February of 2020, Van Clieaf and Weightman defendants (“Van Clieafs”) registered writs of execution against Jaymor. The property was sold on consent of all stakeholders with proceeds of sale held in trust pending a decision on distribution.
[2] The underlying transactions are rife with inconsistencies, errors, and imprecision. The registration of the third mortgage reflects a loan from Greenspan of $250,000 with interest calculated monthly at .02%. The registration also states that the terms are governed by a promissory note dated October 26, 2017. The promissory note attached to the registration however is dated October 27, 2017. Further it provides for a monthly interest rate of 2% or $5000 monthly. The Greenspan loan was purportedly assigned to JKSD for tax purposes, but with no assignment documentation. The Greenspan loan could be extended for further loan periods, but the purported extensions changed the debtor from Fabco to Jaymor.
[3] The execution creditors question the interest chargeable on the third mortgage. They submit that the Greenspan loan is either governed by the terms set out in the registration or the promissory note. If governed by the promissory note, the interest rate is limited to 5% annually due to section 4 of the Interest Act. The execution creditors also argue that the equitable fourth mortgage is invalid because its terms are uncertain.
[4] I find that the appropriate interest rate payable to Greenspan on the third mortgage is 2% or $5000 per month for the first six months, and 20% non-compounded interest per annum on the principal and interest that is not paid by April 27, 2018. Further, I decline to grant JKSD an equitable fourth mortgage because its terms are uncertain and Jaymor ultimately had no intention to register a mortgage.
Issues:
[5] There are two issues in this application:
a. What the interest chargeable on the third mortgage?
b. Is JKSD entitled to and equitable fourth mortgage against the property as security for its $125,000 loan to Jaymor?
A. The interest chargeable on the third mortgage is governed by the first promissory note:
[6] The facts are largely agreed. Kathryn Greenspan is a homemaker who sometimes works as a dental assistant and reception. Her husband is a dental surgeon. Greenspan is the sole officer and director of JKSD that was once in the dental hygiene business but after 2012 moved onto other business including lending. Fab is the principal of Jaymor who owns the Beaver Creek Road property. Fab also controls Fabco Holdings Inc.
The First Loan and Third Mortgage
[7] In October of 2017 Fab obtained a $250,000 loan from Greenspan supported by a promissory note dated October 27, 2017 and secured by a third mortgage against the property and guarantees from Fab and Jaymor. The parties to the note are Kathryn Greenspan and Fabco Holdings Inc. The loan matured on April 27, 2018 with 2% interest or $5000 payable monthly. The parties agree that interest was not compounded. Further, if Fabco did not pay the principal by the maturity date, interest accrued at 20% per year. Greenspan also earned a placement fee of $12,500. Fabco could extend the loan period on request and consent of Greenspan. Greenspan’s daughter handled the transaction and registered the mortgage with the attached promissory note in the land titles system. The registration has some errors including misdating the reference to the attached promissory note and putting the interest rate at .02% instead of 2% as contemplated in the note. On October 27, 2017 Greenspan advanced the $250,000 less her placement fee.
The Loan extensions and the flawed assignment
[8] On April 27, 2018 the parties discussed extending the loan. Due to tax advice Greenspan claims she assigned the loan to her company JKSD. She produced no documents supporting the assignment nor did she receive any consideration for the assignment. As is, Greenspan has given JKSD the opportunity to collect a loan it never advanced nor paid for the right to collect. This is not a bona fide assignment.
[9] The other odd feature of the purported assignment is that when JKSD extended the term of the Greenspan loan, it contracted with Jaymor and not Fabco. That second note evidencing an extension of Greenspan’s loan is secured by Fab and Fabco’ personal guarantees, and secondarily by the third mortgage registered on the property. If the second note was meant to record an assignment of the debt, it would have to have been between JKSD and Fabco, unless Fabco alleges that it too assigned its obligations under the note to Jaymor. I have no such evidence. Despite this flaw, Jaymor executed two more notes to extend Greenspan’s loan to April 27, 2019. But for some interest payments, neither Fabco, Jaymor nor Fab have paid the loan.
Greenspan’s debt of $250,000 is still owing
[10] Regardless of the flawed assignment and the Greenspan loan extensions from JKSD to Jaymor, what is clear is that Greenspan loaned $250,000 to Fabco who secured the debt with a third mortgage against Jaymor’s property. Greenspan did not assign the third mortgage as required under section 101 of the Land Titles Act and remains the “owner” of the charge pursuant to paragraph 101(5) of the Land Titles Act. Neither Fabco nor its guarantors, Jaymor and Fab, has paid the debt. Greenspan is therefore entitled to payment from the proceeds of sale as the holder of the third mortgage. The interest she can charge on that mortgage is the larger issue.
The mortgage v promissory note debate is a red herring
[11] The parties disagree on which instrument governs the interest rate recoverable by Greenspan. If the loan is governed by the promissory note, the Van Clieafs argue that section 4 of the Interest Act applies and limits the interest payable to 5% because Greenspan did not make the annual interest rate clear. If it is governed by the mortgage registration, then the .02% interest rate that appears on the face of the registration applies. A third alternative is that the interest rate is as set out in the October 27, 2017 promissory note with interest calculated at 2% per month for an annual interest rate of 24% as claimed in Greenspan’s Notice of Sale Under Mortgage dated February 21, 2021.
[12] In my view, none of these theories quite fit the loan transaction because of the anomalies and flaws I have noted above. Clearly the .02% interest rate is a mistake – I do not need evidence to so conclude because the mortgage registration is expressly based on the terms of the underlying promissory note. The terms of the first promissory note apply.
[13] The Van Clieafs argue that because the mortgage terms are governed by the note, section 4 of the Interest Act applies. That section states that except for mortgages, in a printed or written contract, whenever interest is made payable at a monthly percentage, the lender shall not charge interest higher than 5% per year unless the contract expressly states the yearly percentage to which the monthly percentage rate is equivalent. In this case, they state that none of the promissory notes set out the annual interest rate and as per Elcano Acceptance Ltd. v. Richmond, Richmond, Stambler & Mills, 1991 CanLII 7195 (CA).
[14] Greenspan argues that the loan is in pith and substance a mortgage and is therefore exempted from section 4 of the Interest Act. This however does not free Greenspan for the requirement for an annualized interest rate nor does it remove the principle that a lender should make this information clear. Sections 6-8 of the Interest Act govern mortgages. Section 6 requires a mortgagee to contain a statement showing the amount of the principal money and the rate of interest chargeable on that money, calculated yearly or half-yearly, not in advance.
[15] I need not resolve which section of the Interest Act apply because regardless, Greenspan is required to set out the annual interest rate on the loan. The point of the legislation to ensure that borrowers know the effective annual interest rate of the loan or mortgage. I conclude that the effective annual interest rate is clear in the October 27, 2017 promissory note because unlike in Elcano, it states that the annual interest rate is 20%. The fact that interest is $5000/month in the first six months also shows that there is no hidden interest, unlike in Elcano.
The annual interest rate for the first loan is 2% for the first six months and 20% per annum thereafter
[16] Greenspan’s loan for $250,000 matured on April 27, 2018 and remains largely unpaid but for some interest payments. Pre-maturity interest is fixed at 2% or $5000/month. After six months, any amount that remains outstanding is subject to an annual interest rate of 20%. This is not contrary to section 4 or section 6 of the Interest Act, nor does it contradict the principles set out in Elcano. The annual rate is clear with no hidden interest. To the extent that Greenspan’s loan is in substance a true mortgage, the provision is also not contrary to Section 8 of the Interest Act because it does not penalize Fabco for failing to pay the debt upon maturity – in fact it reduces the annual interest rate from 24% to 20% if the loan remains unpaid after six months.
[17] I conclude that Greenspan can recover from the proceeds of sale, $250,000, plus a fixed monthly interest amount of 2% ($5000) from October 27, 2017 to April 27, 2018 less interest payments made, and non-compounding 20% annual interest on any amounts outstanding thereafter.
B. JKSD does not have a valid equitable mortgage
[18] On July 30, 2019, Fab approached Greenspan’s daughter about her parents allowing additional capital. To facilitate a further loan, Fab and Jaymor provided a property appraisal. On the force of a formal appraisal done by Appraisal Hub Inc., Greenspan agreed that JKSD would lend Jaymor $125,000. Jaymor executed a promissory note in favour of JKSD on the same terms as the First Loan Greenspan made to Fabco, except that the primary security for this loan were the personal guarantees of Lucchese and Fabco who are parties not named in this application. In the event that Jaymor or the guarantors did not pay the loan by September 1, 2019 and did not cure the default within 30 days, it agreed to register a fourth mortgage against Jaymor’s West Beaver Creek property.
[19] Jaymor did not repay the loan by the October 1, 2019 nor did it or its guarantors cure the default. In November of 2019 Jaymor listed the property for sale and Fab refused to register a fourth mortgage. Jaymor entered into an agreement of purchase and sale in March of 2020 but the deal fell through due to the onset of the Covid pandemic. By that time, the Van Clieafs had obtained judgment againt Jaymor and registered their writ on March 4, 2020. Ultimately Jaymor sold the property leading to the disputed proceeds.
[20] I decline to grant JKSD an equitable fourth mortgage in the property. I agree with the principles set out in both Elias Markets Ltd., Re.(2006 CanLII 31904 at paras. 63-65 (ONCA)) and Emmott v. Edmonds, 2010 ONSC 4185 at para. 64 that an equitable mortgage can arise from a written agreement providing for the registration of a legal mortgage and that it can be created in several ways. As Justice Brown notes, an equitable mortgage can for example be created when the mortgagor may have signed the document in the form of a legal mortgage, but for some reason of want of formality the document is not sufficient. These cases also state that the concept of an equitable mortgage seeks to enforce a common intention to secure the property.
[21] The circumstances of this case again do not square with the jurisprudence. Here, Jaymor refused to execute the fourth mortgage and at the time of maturity, had no intention of granting one. The appropriate remedy in that case is to sue for breach of contract and/or negligent misrepresentation rather than impose an equitable mortgage that interferes with the rights of pre-registered execution creditors. This is not a case where both parties intended to register a mortgage but the formalities could not be done or a mistake was made. Clearly Jaymor refused to register a mortgage and had no intention of doing so at the time any right JKSD might have had to request a mortgage, crystallized. Prior to that the only bargain JKSD had struck was the promise of a potential fourth mortgage on Jaymor’s property as secondary security for non-payment from the debtor or its guarantors. Further, apart from the fourth mortgage, JKSD has other remedies – a breach contract claim against Jaymor and claims against Fab and Fabco as guarantors. The execution creditors have no other pocket to pursue. They took all the necessary steps even within the pandemic restrictions, to solidify and register their interest. In my view, these considerations are also relevant to whether the court should grant JKSD an equitable remedy.
[22] I also agree with the Van Clieafs that contract principles requiring certainty of terms apply to equitable mortgages. In this case, JKSD purports to secure two different loans with the fourth mortgage. On September 23, 2019, JKSD loaned Jaymor an additional $30,000 with the same secondary security of a fourth mortgage. Once again, the primary security was the personal guarantees of Fab and Fabco who are not parties to the application. This leaves open the quantum of the fourth mortgage – is it $125,000 or $30,000? The fact that the $30,000 was paid shortly after the loan does not take away from the fact that the fourth mortgage lacks certainty of what amount it is intended to secure. I also accept Jaymor’s submissions that the rate of interest could not be ascertained on the face of the note underlying the fourth mortgage. It stated that it was 2% or $5000/month. Two percent on $125,000 does not equate to $5000/month. Further JSKD’s affiant agreed that the parties had not completely settled on an interest rate for this loan and were still discussing it.
[23] Finally, I accept that JKSD took few or no steps to give notice of its potential claim or pursue it. Despite Covid19, it could have registered a caution on title for example. I have no evidence that the land titles system was down at the beginning of the pandemic and not open for electronic registration. Equitable charges are based on the maxim that “equity looks on that as done which ought to be done.” In this case, equity favours the innocent execution creditors.
Conclusion:
[24] From the $548,437.08 currently held in trust, Greenspan is entitled to repayment of her $250,000 loan at a monthly fixed interest rate of $5000 until April 27, 2018 and at an annual non-compounded rate of 20% on the unpaid amount of principal and interest outstanding as at April 27, 2018. Even though I have indicated the flaws in the assignments and various extension of this loan, I do not place the consequences of those flaws on the shoulders of the Van Clieafs. For example, of the $250,000 loaned by Greenspan, JKSD received:
a) $30,000 on May 18, 2018;
b) $30,000 on November 2, 2018;
c) $15,002.50 on February 4, 2019;
d) 15,002.50 on May 21, 2109; and
e) $15,002.50 on August 1, 2019.
[25] Regardless of the payor (i.e. whether it was the originally named debtor, Fabco, or Jaymor as named in the loan extensions) and the lender (i.e whether it is Greenspan or JKSD under a purported assignment) or whether it was Greenspan or her company JKSD who received the payments, Greenspan shall reduce the amount owing to her by these payments. The Van Clieafs (which as defined includes Weightman) are owed the balance. I dismiss JKSD’s application.
Costs:
[26] The parties have divided success and shall bear their own costs.
Justice P. Tamara Sugunasiri
Released: November 21, 2022
COURT FILE NO.: CV-21-667245
DATE: 20221121
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Kathryn Greenspan and JKSD Management Inc.
Applicants
– and –
Alan Van Clieaf, Joanne Van Clieaf, Ruth Weightman and Jaymor Securities Ltd. 1120
Respondents
REASONS FOR JUDGMENT
P. Tamara Sugunasiri J.
Released: November 21, 2022