R E A S O N S O N M O T I O N (SUMMARY JUDGMENT)

REMOTELY BEFORE THE HONOURABLE MR. JUSTICE P. E. ROGER

on April 21, 2022, for an OTTAWA, Ontario proceeding

30 APPEARANCES:

J. Rabin Counsel for the Plaintiff

S. McGrath Counsel for the Defendants

(i)

SUPERIOR COURT OF JUSTICE

T A B L E OF C O N T E N T S

10 Page

REASONS ON MOTION FOR SUMMARY JUDGMENT 1

Transcript Ordered: April 22, 2022

Judicial Approval Released:

May

2022

Transcript Completed:

May

2022

Notified Ordering Party:

May

2022

1942091 Ontario Inc. v. Firm Capital et al Reasons for Judgment - Roger, J

THURSDAY, APRIL 21, 2022

REASONS ON MOTION FOR SUMMARY JUDGMENT

5 ROGER, J (Orally):

Background facts

This involves two motions for summary judgment.

The defendant seeks the dismissal of the plaintiff's action alleging that there is no issue requiring a trial that the plaintiff has no proper claim for an equitable mortgage. This is

15 opposed by the plaintiff on the basis that it had an equitable mortgage, that the defendants had knowledge of it or that there are issues requiring a trial with regards to the defendants' denial of the required knowledge of this

20 equitable mortgage.

The plaintiff also brings a cross-motion for partial summary judgment asking the court, on consent of the defendants, that regardless of the

25 equitable mortgage issue, the court determine the proper amount of the remaining proceeds of the power of sale, by considering various disputed items deducted by the defendants from these funds that it still holds in trust. It is agreed by

30 the parties and by this court that this court has jurisdiction to determine the proper amount remaining from the power of sale (see for example

the decision of Chong & Dadd v. Kaur, 2013 ONSC 6252, at para. 47). As well, it is agreed by the parties that Rule 20.04(2) of the Rules of Civil Procedure allows such an issue to be decided when

5 the parties agree, as they do, and when the court is satisfied that it is appropriate, which after having reviewed the evidence is the case here.

A Mr. Tworkowski wanted to buy a property that he

10 intended to demolish to construct two

semi-detached in its place. Mr. Tworkowski retained a project manager for the construction of the property, the plaintiff, 1942091 Ontario Inc. (referred to as the plaintiff or as 194).

194 loaned close to $200,000 to Mr. Tworkowski in July 2017 that was expected to be repaid by the end of that year. A mortgage was not registered, and this at the crux of this matter, whether this

20 transaction created an equitable mortgage.

Mr. Tworkowski needed to borrow more money in order to buy and to construct the property. A first lender backed out of the proposed

25 transaction and the closing of October 5, 2017 was delayed. With the ongoing help of a mortgage broker, two other lenders were found but they only agreed to advance funds to purchase the property, not for construction financing. With

30 these funds, Mr. Tworkowski was nonetheless able to close the purchase of the property on October 13, 2017. However, funds were needed to

construct the new houses that he wished to construct on the property.

194 advanced other funds to Mr. Tworkowski on

5 about March 6th and on about March 28th, 2018, to bring the amounts that it advanced to

Mr. Tworkowski up to slightly more than $353,000.

Meanwhile, the mortgage broker connected the

10 defendants, Firm Capital Corporation and Firm Capital Mortgage Funds Inc. (hereinafter Firm Capital), with Mr. Tworkowski. Firm Capital agreed to advance funds to Mr. Tworkowski to pay out the two registered lenders and to fund the

15 construction moving forward. These conversations occurred about the month of February and March 2018.

Firm Capital advanced funding and on April 10,

20 2018, it registered a first-ranking mortgage on title to the property. 194 registered its mortgage on June 6th and 21, 2018.

Mr. Tworkowski never paid and eventually declared bankruptcy. Power of sale proceedings were

25 brought by Firm Capital in June 2018, and it sold the property on November 22, 2018. Construction liens had been registered on the property and to vacate the liens and sell the property, Firm Capital paid required funds into court. The

30 proceeds of sale are not sufficient to make the plaintiff whole on its mortgage and this action was brought seeking an equitable mortgage. Sales

proceeds are currently held in trust by counsel for the defendants.

Issues

The issue on the motion brought by the defendants is whether the plaintiff's action should be dismissed on the basis that there is no genuine issue requiring a trial. This includes whether

10 194 had an equitable mortgage at the time Firm Capital registered its mortgage on April 10, 2018, whether Firm Capital had actual or constructive notice of 194's equitable mortgage, or whether there is a genuine issue requiring a

15 trial about any of this.

On the plaintiff's cross-motion, as agreed by the parties, issues are limited to what amounts may properly be applied to the proceeds of sale by

20 Firm Capital.

Analysis

A defendant may, after delivering a statement of

25 defence, move with supporting affidavits or other evidence for summary judgment seeking to have all or part of the statement of claim dismissed.

Rule 20.04 provides that the court shall grant

30 summary judgment if the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence.

The moving party defendant initially bears the evidentiary burden of demonstrating that there is no genuine issue requiring a trial. It is only

5 after the defendant has met their burden that the onus shifts to the responding party, the plaintiff, to show that the claim has a real chance of success and that there are genuine issues requiring a trial.

In Hryniak v. Mauldin, 2014 SCC 7 or 2014 1 SCR 87, the Supreme Court outlines a two-step procedure for deciding a summary judgment motion. This process is also outlined in an Ontario Court

15 of Appeal decision, Royal Bank of Canada v. 1643937 Ontario Inc., 2021 ONCA 98 at para. 24.

The motion judge must first determine if there is a genuine issue requiring a trial based only on

20 the evidence placed before them, and without using the fact-finding powers provided by the rules. There is no genuine issue requiring a trial where the summary judgment process provides the judge with the evidence required to fairly

25 and justly adjudicate the dispute and is a timely, affordable and proportionate procedure.

If there appears to be a genuine issue requiring a trial, the motion judge should then determine

30 if the need for a trial can be avoided by using the fact-finding powers provided under the rules to weigh evidence, evaluate the credibility of a

deponent and draw inferences from the evidence and which also allows the judge to order that oral evidence be presented. Where it would not be against the interest of justice to do so —

5 where it will lead to a fair and just result and will serve the goals of timely, affordability, and proportionality, in light of the litigation as a whole — the judge may exercise his or her discretion to use those powers.

I note as well that a court should (i) be cautious to ensure that affidavit evidence does not "obscure the affiant's authentic voice" and

(ii) the court should take "great care" to

15 "ensure that decontextualized affidavit and transcript evidence does not become the means by which substantive unfairness enters, in a way that would not likely occur in a full trial where the trial judge sees and hears it all." I quoted

20 from Baywood Homes Partnership v. Haditaghi, 2014 ONCA 450 at para. 44.

Defendants' Motion

25 With regards to the defendants' motion, I am satisfied that there is no genuine issue requiring a trial with respect to the plaintiff's claim of equitable mortgage.

30 The defendants have met their initial burden of demonstrating no genuine issue requiring a trial on the issue of the equitable mortgage, and the

plaintiff has failed to show that its claim for an equitable mortgage has a real chance of success or that there any genuine issue requiring a trial.

The evidence placed before me is sufficient for this purpose, and the process with all of the evidence filed, examination under Rule 39.03, and cross-examination, provide me with all the

10 evidence required to fairly and justly decide this issue of the equitable mortgage in a more timely, affordable, proportionate yet fair procedure.

15 I note in passing that I accepted all of the affidavits that were filed on these motions. I gave that ruling orally at the outset of the motion because a reasonable explanation was provided, the evidence is relevant, and because

20 it does not create any non-compensable

prejudice — I offered an adjournment and this was refused.

An equitable mortgage is created when there is a

25 common intention between the mortgagor and the mortgagee that the loan will be secured by land. This is because equity looks on that as done which ought to be done despite the strict application of the law. However, here, there is

30 no genuine issue requiring a trial that

Mr. Tworkowski and 194's intention was always that 194 would have a second priority charge on

the property, behind construction financing.

It is immaterial that certain witnesses did not file an affidavit as the above is apparent from

5 the evidence presented on this motion. As well, it is not necessary for me to consider the issue of notice of the equitable mortgage as one was not created.

10 Every agreement between Mr. Tworkowski and 194 confirms that their intention was to secure the loans from 194 against the property behind the party providing construction financing.

15 The documents make this clear. The offer to finance the first loan from 194 refers to the priority of its mortgage being second. The promissory note for the second loan of 194 states that 194 will register a mortgage one day after

20 closing with Firm Capital with the mortgage of

194 being registered in second position. The note for the third loan contains similar language.

25 The representative of 194, Mr. Falbo, confirmed during his cross-examination that all of the loans from 194 contemplated 194's mortgage being registered in second position. This was also confirmed during the examination of the mortgage

30 broker.

There is therefore no genuine issue requiring a

trial that it was never the intention between Mr. Tworkowski and Mr. Falbo that 194 would have a first-ranking mortgage on title to the property. Rather, they understood that 194 would

5 have a second-ranking charge behind construction financing. Construction financing was not initially available but that this was still their intention is apparent from the evidence. This stayed or continued to be their intention until

10 Firm Capital got involved, and continued to be their intention as it is confirmed by 194's loan documentation.

Plaintiff's cross-motion

With regards to the plaintiff's cross-motion, for the following reasons, I find mainly in favour of the plaintiff.

20 The parties agree on the following facts. The property was sold for $1,325,000 under power of sale. Amounts were properly paid to Firm Capital from the sales proceed which brought the balance held in trust to $139,227.63.

During the argument of this motion, it was agreed that amounts paid to secure and insure the property while it was listed for sale and a small additional amount for a per diem interest charge

30 of one day were reasonable. These amounts totalling $8,126.80 bring the balance held in trust to $131,100.83.

The parties disagree over Firm Capital's entitlement to deduct from the proceeds of sale an amount of $23,601.73 for three months'

5 interest. They disagree as well over legal fees incurred prior to the sale of the property which occurred on November 22, 2018, and they disagree about legal fees incurred after the sale of the property. Finally, they disagree over small

10 administrative fees charged by Firm Capital.

It is clear from Section 27 of the Mortgages Act that after payment of various amounts which are listed in that section, subsequent encumbrancers

15 are paid according to their priorities. It is clear from the cases that where a power of sale is exercised by a mortgagee, the proceeds are held in trust for other mortgagees, in priority over a bankrupt mortgagor. It is also clear that

20 these funds cannot be held for an indeterminate and lengthy period of time by a mortgagee while the legal proceedings are ongoing until they are resolved, these funds must be paid to subsequent encumbrancers. If the mortgagee holding the

25 funds wishes to have security for costs, it must rely on the Rules of Civil Procedure: See for example the decision of the Supreme Court of Canada in 1427814 Ontario Ltd.

30 Standard charge terms, despite the broadness of their language, still require mortgagees to incur reasonable amounts. Amounts claimed must be

reasonable and properly incurred.

Dealing firstly with the $23,601.73 three-month charge by Firm Capital, I find that this amount

5 is not claimable as this would be contrary to Section 8 of the Interest Act.

The decision of the Supreme Court of Canada in

Krayzel Corp. v. Equitable Trust Co., 2016 SCC 18

10 is applicable. Here, the effect of this

three-month charge is to increase the charge on the arrears beyond a rate of interest payable on principal money not in arrears, which is what is prohibited by this section.

This is obvious from the following. As of the time of the sale of the secured property under power of sale, on November 22, 2018, the interest owing to Firm Capital under the loan by

20 Mr. Tworkowski, the mortgagor, was in the amount of $44,134.87. This interest accrued over a period of about seven months at the agreed upon rate of interest that was of about nine percent. By contrast, the three-month charge of $23,601.73

25 represents an additional charge of 53 percent of the arrears of interest that were owed at the time under Section 27 of the Mortgages Act, and obviously increase the charge on the arrears then owing beyond the agreed upon interest payable on

30 principal money not in arrears.

This is similar to the facts in the BMMB decision

reported at 2020 ONSC 7999. The facts here are different from those in the Northern Bear decision found at 2021 ABCA 91, which dealt with a very different clause and different set of

5 facts involving a receivership. Here, the interest cannot be charged over the full period of the loan as Section 27 of the Mortgages Act applies to the interest then owing. The

three-month charge clearly imposed a rate of

10 interest, relating to arrears of principal or interest as this is what is charged under Section

27 of the Mortgages Act, which increases the charge on arrears beyond the agreed upon interest rates on principal money not in arrears.

This case did not involve facts or clauses with capitalized future interest being actualized, still within the rate of interest payable on principal money not in arrears.

Interestingly, quite aside from the above, I also agree with the plaintiff's arguments that the defendants' clause is a "prepayment" clause which would have been available not for the defendants'

25 benefit but for the benefit of the mortgagor, not the mortgagee. The three-month charge was not the result of a prepayment by the mortgagor and is therefore not available on this ground alone irrespective of my findings above.

With regards to the legal fees, the evidence filed is not very convincing. I agree that fees

are regularly resolved by looking at costs outlines and similar documentation without evidence, but this is in circumstances where the judge heard the matter and is familiar with the

5 facts of the matter. Here, I was not involved in these earlier procedures and more evidence would have been helpful. I am nonetheless able to fairly adjudicate on this issue based on the documentation provided and the submissions of

10 counsel, but I note that the weakness of the evidence on the reasonableness of these amounts does not assist the defendants. When I look at the accounts provided and the submissions of counsel on this point, I find that these amounts

15 are not reasonable.

While there is no doubt that these amounts were incurred, and the opposite is not alleged, these amounts are high and slightly out of proportion

20 for what was essentially pro forma, unopposed proceedings. I will therefore reduce these amounts to more reasonable amounts.

Consequently, the legal costs to vacate the nine

25 construction liens are reduced to $13,500 all inclusive.

The legal costs for the power of sale proceedings are reduced to $12,000 all inclusive.

And the costs to defend the construction lien claim are reduced to $4,000 all inclusive.

The amount of $2,200 for various administrative fees is allowed because the evidence of the defendants, in their answers to undertakings, is

5 sufficient to establish that these were estimates or pre-estimates of the costs actually incurred.

This leaves the legal fees incurred by Firm Capital after the November 22, 2018 sale of the

10 mortgage property.

Here, the language of the charge terms contradicts the defendants' arguments. Although I agree that the language in the charge terms is

15 indeed broad, it is apparent that it is limited in time to the period when the mortgage indebtedness is secured under the charge. This is obvious from the last paragraph of that clause where reference is made to "shall be added to

20 mortgage indebtedness secured hereunder." This has to be for the period of time before the land is sold because there is no mortgage indebtedness secured thereafter.

25 The above interpretation of the defendants' charge terms makes sense because it mirrors provisions of Section 27 of the Mortgages Act which refers to amounts "then do", in reference to the sale of the property. Finally, the above

30 interpretation of their charge clause is also in line with the reasoning of the Supreme Court of Canada in the 1427814 case.

Consequently, the legal fees incurred after the sale of the property, that is after November 22, 2018, shall not be deducted.

Conclusion

Consequently, the following amounts may be subtracted from the amount indicated above of

10 $131,100.83:

— $13,500 all inclusive for the legal fees associated with the nine construction liens;

15 — $12,000 for the legal fees associated with the power of sale;

— $4,000 for the fees associated with the construction lien claim; and

— $2,200 for various administrative fees, for balance of $99,400.83.

25 The defendants, Firm Capital Corporation and Firm Capital Mortgage Funds Inc., shall pay to the plaintiff the balance of the residual proceeds of the power of sale calculated as per the above to be in the amount of $99,400.83.

If the parties are unable to agree on the issue of costs, set-off, or prejudgment interest,

within the next 15 days, then brief written submissions not exceeding 12 pages and 12 enclosures shall be sent to my attention by the defendants by May 24, 2022, by the plaintiff by

5 May 31, 2022, and any brief reply by June 7, 2022. I ask the parties to advise me if they resolve the issue of cost, but I will assume that the issue of cost has been resolved if I do not receive any written submissions, or hear

10 differently, by May 31, 2022.

The Honourable Mr. Justice P. E. Roger.

FORM 3

ELECTRONIC CERTIFICATE OF TRANSCRIPT

Evidence Act, R.S.O. 1990, subsection 5(2)

I, Lisa Ruggiero, certify that this document is a true and accurate transcript of the recording of 1942091 Ontario Inc.

v. Firm Capital et al in the Superior Court of Justice held at

10 161 Elgin Street, Ottawa, Ontario, on April 21, 2022, taken from Recording No. 0411_CR35_20220421_084844 10_ROGERP.dcr which has been certified in Form 1 by K. Park.

15 May 4, 2022

Date Lisa Ruggiero, ACT 6593951121 Certified Court Reporter

*This certification does not apply to the Reasons for Judgment which was judicially reviewed and/or edited.

1942091 Ontario Inc. v. Firm Capital Mortgage Fund Inc., 2022 ONSC 7373

Case Summary

R E A S O N S O N M O T I O N (SUMMARY JUDGMENT)

REASONS ON MOTION FOR SUMMARY JUDGMENT

Background facts

Issues

Analysis

Defendants' Motion

Plaintiff's cross-motion

Conclusion

Judge

Counsel

Parties

Areas of Law

Fact Patterns

Financial Outcomes

Issues

Statutory Provisions 3

Legal Tests 1

Legislation 3