Court File and Parties

Court File No.: CV-20-648775 Date: 2023-02-03 Superior Court of Justice - Ontario

Re: 1763806 Ontario Ltd. And: KEB Hana Bank Canada

Before: Justice Chalmers

Counsel: S. D. Hwang for the Applicant R. Choi for the Respondent

Heard: January 12, 2023, by videoconference

Endorsement

Overview

[1] The mortgagee, KEB Hana Bank Canada (KEB) held a first mortgage on the property at 25 Elgin Street, Sudbury (the Property). The mortgagor was 1763806 Ontario Ltd. (176 Ontario). 2227473 Ontario Inc. o/a Huntington Cross Capital (Huntington) was the second mortgagee on title. 176 Ontario defaulted on its loan agreement with KEB, and KEB sold the Property pursuant to a Power of Sale. The proceeds from the sale were not sufficient to satisfy the amount outstanding on the second mortgage. Huntington requisitioned an assessment under section 43(4) of the Mortgages Act, R.S.O. 1990, c. M.40, with respect to the expenses incurred in the Power of Sale, including legal costs.

[2] KEB takes the position that the requisition for the assessment as initiated by Huntington was improper. The form lists the mortgagor, 176 Ontario as the party requesting the assessment. It is conceded that 176 Ontario did not seek an assessment and did not authorize Huntington to make the request for the assessment on its behalf. Huntington takes the position that as an “interested party” it may seek an assessment of the expenses without a court order.

[3] The assessment came before Assessment Officer, Horrocks. He convened a preliminary hearing for December 6, 2020. On the preliminary hearing, the Assessment Officer made a production order requiring KEB to produce documents with respect to the expenses incurred in the Power of Sale proceedings. KEB provided some documentation but did not include documentation with respect to the legal costs. KEB took the position that an assessment of legal costs ought to have been made pursuant to s. 9(1) of the Solicitors Act, R.S.O. 1990, c. S.15. On April 6, 2022, the Assessment Officer found that KEB had failed to comply with his production order. He ordered KEB to pay costs in the amount of $2,000.

[4] KEB brings this motion for an order declaring the Assessment was commenced improperly without lawful authority and is therefore a nullity. KEB also argues that the Assessment Officer did not have the authority to make any order in the proceeding including the cost order made on December 6, 2022, in the amount of $2,000. Finally, KEB seeks a declaration that Huntington may only seek an assessment of the mortgagee’s legal costs pursuant to an application made pursuant to s. 9(1) of the Solicitors Act.

[5] For the reasons set out below, I find that Huntington had the right to pursue an assessment of the expenses incurred by KEB in the Power of Sale proceeding including legal fees pursuant to the procedure set out in s. 43(4) of the Mortgages Act. I also find that the Assessment Officer had jurisdiction to make a cost award for the failure of comply with his production order. I dismiss the motion.

Factual Background

[6] On June 24, 2014, 1763806 Ontario and KEB entered into a loan agreement. KEB secured a first mortgage that was registered on title to the Property. 176 Ontario obtained a $325,000 second mortgage from Huntington. Huntington registered a second mortgage on title, on May 4, 2018.

[7] 176 Ontario breached the loan agreement. On February 15, 2019, KEB commenced Power of Sale proceedings. The Property was sold by KEB on October 28, 2019, for $810,000. The sale was not contested or challenged by 176 Ontario.

[8] Huntington was not advised that the Power of Sale had been completed. Huntington first became aware of the sale when it conducted a title registry search on January 14, 2020. On January 14, 2020, counsel for Huntington spoke to counsel for KEB by phone. He was advised that KEB incurred additional costs on the Power of Sale due to the fact that the Property had been used as a “crack” den.

[9] On January 15, 2020, counsel for Huntington wrote to counsel for KEB and requested a full accounting of the sale. Despite several follow-ups, the accounting was not provided until April 17, 2020. The proceeds from the sale, as per the Statement of Adjustments were $768,843.83. Huntington took the position that there was an unaccounted discrepancy of $97,940.14.

[10] The accounting letter from counsel for KEB did not include any supporting documentation with respect to the costs claimed by KEB for the Power of Sale. Huntington requested full particulars and supporting documentation for the costs and expenses claimed in the accounting letter. Counsel for KEB responded by e-mail on April 1, 2020. Counsel for Huntington took the position that the documentation provided was deficient.

[11] On October 5, 2020, Huntington requisitioned an assessment under section 43 of the Mortgages Act. Huntington completed the Notice of Assessment form which requires the name of the mortgagor and mortgagee. 176 Ontario is identified on the form as the mortgagor and KEB is identified as the mortgagee. Huntington is not identified on the form.

[12] A preliminary appointment was held on December 15, 2021, before Assessment Officer Brian Horrocks. In his endorsement, the Assessment Officer stated that the appointment of the assessment was rightfully taken out by Huntington as an interested person. He ordered KEB to produce all supporting documents relating to the accounting summary. The deadline for production was February 15, 2022.

[13] On February 15, 2022, KEB produced documentation with respect to the realty taxes, real estate commission, management fees and legal fees. KEB did not provide all supporting documentation with the respect to the extra costs. Also on February 15, 2022, KEB’s counsel took the position that the assessment proceedings had been properly brought in the correct jurisdiction by the proper party.

[14] In response to the position taken by KEB, Huntington delivered a civil motion request form to schedule a motion for an order requiring KEB to produce the documentation ordered by the Assessment Officer. Alternatively, Huntington sought an order that a judge assess the costs relating to the Power of Sale of the Property. Huntington also sought a declaration that KEB’s costs on the Power of Sale was rightfully commenced by Huntington pursuant to s. 43(4) of the Mortgages Act.

[15] On February 28, 2022, Justice Myers directed that the motion proceed to a case conference before the motion would be scheduled.

[16] In the meantime, the matter returned before Assessment Officer Horrocks on April 6, 2022. Huntington argued that the productions received from KEB did not comply with the production order made on December 15, 2021. The Assessment Officer found that KEB had not complied with the production order. He stated that KEB, “has acted in a way to unnecessarily stall and delay these proceedings.” On May 24, 2022, Assessment Officer Horrocks issued an amended order which included a declaration that KEB did not comply with the production order. He awarded costs fixed in the amount of $2,000, plus H.S.T. payable forthwith by KEB to Huntington. He adjourned the assessment sine die pending the direction of Justice Myers.

[17] On July 29, 2022, the matter proceeded to a case conference before Justice Centa. On the case conference, counsel for KEB stated that all documents upon which he intends to rely have been produced. On that basis, Huntington was prepared to proceed with the assessment hearing. However, KEB stated that it intended to seek an order from a Superior Court Judge declaring that the assessment process commenced by Huntington was improper.

[18] Justice Centa scheduled the motion for January 11, 2023. In his endorsement, he notes that KEB seeks an order that the assessment process that was commenced under the Mortgages Act was a nullity, and that the only jurisdiction to review the legal accounts is under the Solicitors Act.

The Issues

[19] The issues to be determined on this motion are as follows:

(a) Did Huntington, as a second mortgagee have lawful authority to commence the assessment under the Mortgages Act?

(b) Is the requisition for the assessment a nullity because it identifies 176 Ontario as the Mortgagor and does not identify Huntington’s as the party seeking the assessment?

(c) Does an Assessment Officer on an assessment under the Mortgages Act have jurisdiction to assess legal costs incurred in a Power of Sale proceeding? and

(d) Did the Assessment Officer have the jurisdiction to make the cost order of $2,000?

Analysis

Authority of a Second Mortgagee to requisition the Assessment Proceedings

[20] Section 43(4) of the Mortgages Act provides as follows:

Costs, taxation

(4) A mortgagee’s costs of and incidental to the exercise of a power of sale, whether under this Part or otherwise, may, without an order, be assessed by an assessment officer at the instance of any person interested.

[21] This section refers to “any person interested” and is not restricted to only mortgagors having the right to seek an assessment under s. 43(4) of the Mortgages Act.

[22] A second mortgagee is entitled to the proceeds from the sale of the Property, less the payments to prior encumbrances and the reasonable costs of the Power of Sale proceedings. Huntington argues that as a subsequent encumbrancer on the Property, it has an interest in the accuracy and validity of the accounting of the mortgagee’s costs and expenses. Huntington states that as a second mortgagee it is “an interested person”.

[23] In Color Cove Ltd. v. Canada Permanent Trust Co., 1986 CarswellOnt 424 (Div. Ct.), the second mortgagee brought an assessment with respect to the exercise of a Power of Sale. The Divisional Court held that the second mortgagee was an “interested person” and could seek an assessment of costs incurred by the first mortgagee on the Power of Sale. The court also held that the assessment under s. 43(4) of the Mortgages Act included all expenses in the sale proceedings, including legal costs: at para. 7.

[24] In Kalfayan et al v. Stanley et al, 2019 ONSC 4680, the third mortgagee sought an assessment of the costs and expenses incurred by the second mortgagee who exercised a Power of Sale. The court held that a third mortgagee is an “interested person” entitled to seek an assessment of the second mortgagee’s accounting on a Power of Sale pursuant s. 43(4) of the Mortgages Act.

[25] Assessment Officer Horrocks determined in his endorsement dated December 15, 2021, that “an appointment for this assessment was rightfully, according to law, taken out by the Interested Party 2227473 Ontario Inc.” The legal finding of Assessment Officer Horrocks that Huntington properly brought an assessment is not binding on me. However, I am of the view that the opinion of the Assessment Officer “commands consideration”. As noted by Quinn J. in Cassels Brock v. 1578838 Ontario Inc., 2013 ONSC 4194, at paras. 50, 51:

[50] Although the question-of-law finding by assessment officer Ittleman that a mortgagor, in power of sale proceedings, is not the “client” under s.3 of the Solicitors Act, is not binding upon me, it seems illogical to suggest that one who toils daily in the Solicitors Act, his “home statute”, should not have the ear of this court.

[51] The opinion of the assessment officer in the Petersons case commands consideration even if, in law, it does not demand deference.

[26] I am satisfied that Huntington as a second mortgagee is an “interested person” and is entitled to requisition an assessment of the costs and expenses incurred in the Power of Sale proceedings, under s. 43(4) of the Mortgages Act.

Is the requisition for the assessment a nullity because it identifies 176 Ontario as the Mortgagor and does not identify Huntington’s as the party seeking the assessment?

[27] KEB argues that the assessment is a nullity because on the requisition form, the mortgagor is identified as 176 Ontario, and KEB is identified as the mortgagee. There is no reference to Huntington on the requisition form. KEB argues that 176 Ontario is identified as the party initiating the proceeding. 176 Ontario did not initiate the assessment and did not authorize Huntington to initiate the assessment. Therefore, the proceeding was commenced without authority and is a nullity.

[28] The assessment of expenses under the Mortgages Act is initiated by requisition. The form used by Huntington’s to requisition the assessment was provided by the Assessment Office. It has space to identity the mortgagor and mortgagee for the mortgage under which the Power of Sale took place. The form does not have a space for any interested persons to be identified.

[29] The assessment was requisitioned with respect to the mortgage in which 176 Ontario was the mortgagor and KEB was the mortgagee. Those parties to the mortgage are properly identified on the requisition form. Although not identified on the form, KEB knew the requisition for the assessment was being made by Huntington as an interested person. Assessment Officer Horrocks also knew the assessment was requisitioned by the second mortgagee, as an interested party.

[30] KEB argues that the requisition is a proceeding and therefore cannot be commenced by Huntington in the name of 176 Ontario. KEB argues that to legally commence an action in the name of a party, it requires that party’s authorization and consent. KEB refers to R. 15 of the Rules of Civil Procedure which provides that proceedings that are commenced without legal authority may be stayed or dismissed.

[31] KEB’s argument is based on the premise that the requisition to assess expenses under the Mortgages Act, is equivalent to a proceeding as that term is defined in the Rules of Civil Procedure. The Rules define a proceeding as an action or an application. A requisition for an assessment by an interested person is not, in my view, either an action or an application. There is no evidence that Huntington represented that the assessment was at the request of 176 Ontario. At all times, Huntington identified itself as the second mortgagee and that it was pursuing the assessment as an interested person.

[32] I am satisfied that under Mortgages Act, an interested person may requisition an assessment. In requisitioning the assessment, Huntington correctly identified the mortgagor and mortgagee for the mortgage in issue. Huntington identified itself to KEB and the Assessment Officer as the second mortgagee and an interested person. In my view, Huntington acted appropriately in proceeding in this manner.

[33] I note that Assessment Officer Horrocks was not concerned about the form of the requisition. He stated that the appointment for the assessment was rightfully taken out by the second mortgagee as an interested person. As noted above, this conclusion is not binding on me, but his view “commands consideration”.

[34] I conclude that the assessment was properly requisitioned by Huntington. I find that the assessment proceeding before Assessment Officer Horrocks is not a nullity.

Does the Assessment Officer have a right to Assess Legal Costs incurred in a Power of Sale?

[35] KEB argues that the Assessment Officer does not have the jurisdiction to assess costs pursuant to an assessment under s. 43(4) of the Mortgages Act. It is KEB’s position that legal costs may only be assessed by a non-party, under s. 9(1) of the Solicitors Act, which provides as follows:

Where a person, not being chargeable as the principal party, is liable to pay or has paid a bill either to the solicitor, his or her assignee, or personal representative, or to the principal party entitled thereto, the person so liable to pay or paying, the person’s assignee or personal representative, may apply to the court for an order referring to assessment as the party chargeable therewith might have done, and the same proceedings shall be had thereupon as if the application had been made by the party so chargeable.

[36] KEB argues that the Solicitors Act provides the complete codification for how legal fees may be assessed by a non-party, and the more general Mortgages Act cannot displace the more specific Solicitors Act to confer a right on Huntington to assess legal fees without obtaining the court order.

[37] The issue of whether the expenses to be assessed on an assessment pursuant to s. 43(4) of the Mortgages Act, including legal costs, was considered in Royal Trust v. ER Kwinch, (1984), 44 O.R. (2d) 593 (SC Master). Master Sandler stated as follows:

In my view the phrase “costs of and incidental to the exercise of a power of sale” includes all legal costs in connection with exercising the power of sale, both before and after a sale is actually made and whether a sale is made or not.”

Master Sandler went on to state:

I should also add that if the mortgagee incurs legal costs other than those incidental to the exercise of a power of sale, then these would not be taxable under s. 41(4) [now s. 43(4)] but might well be payable under the terms of the mortgage. In this event, before action, an account should be sent by the mortgagee’s solicitors to the mortgagee, who can pass the same on to the mortgagor, for payment, who can either pay the account or have it referred for taxation under s. 8 of the Solicitors Act [now s. 9].

[38] I note that the Assessment Officer took the same approach as Master Sandler. In his endorsement dated December 15, 2021, he stated that KEB is to produce records with respect to all expenses, including legal costs related to the Power of Sale. He stated that if the parties are looking for relief related to anything other than legal costs and incidental costs of the Power of Sale, they need to seek relief from a Judge of the Superior Court.

[39] Legal fees are properly the subject matter of a review of costs and expenses under s. 43(4) of the Mortgages Act. As noted by Lemay J., in C.M.T. Financial Corporation v. David McGee, 2015 ONSC 3595, “legal fees can be set in one of a number of ways, including an assessment flowing out of section 43 of the Mortgages Act.”: at para. 67.

[40] The position of KEB on this point suggests that the expenses related to a Power of Sale proceeding could be the subject matter of an assessment under s. 43(4) of the Mortgages Act, but that the legal expenses incurred in the Power of Sale proceeding would be subject to a different proceeding under the Solicitors Act. In my view, this would result in duplication and waste of resources.

[41] I am satisfied that the legal fees incidental to the exercise of the Power of Sale are included in the phrase “costs of and incidental to the exercise of a power of sale”. The legal costs incurred in the Power of Sale proceedings are properly the subject matter of an assessment under s. 43(4) of the Mortgages Act.

Does the Assessment Officer have the Jurisdiction to award costs?

[42] Section 43(5) of the Mortgages Act grants to the assessment officer the power to make a cost order. The section provides:

Discretion as to costs

(5) The costs of the assessment shall be in the discretion of the assessment officer.

[43] KEB argues that assessment officers are not members of the court and therefore they do not have power to award costs on a case conference. R. 50.13(6) sets out the powers of a judge or associate judge on a case conference to make an order for interlocutory relief including costs. In argument, KEB also argues that the power to award the costs of an assessment can only be made when the assessment has been completed. Here, the cost award was an interim award of costs for a failure to comply with a production order and not costs of the assessment.

[44] Huntington notes that the cost award was not made on a case conference, but instead was made on a Preliminary Appointment, which is part of the assessment procedure under the Mortgages Act.

[45] It is my view that KEB’s interpretation of s. 43(5) of the Mortgages Act, is too narrow and not supported by the language used. The section does not restrict the term, “costs” to final, as opposed to interim costs. The section does not restrict the award of costs to the conclusion of the assessment.

[46] The Mortgages Act provides jurisdiction to the assessment officer to make an award of costs of an assessment, which in my view, includes cost awards with respect to production orders. If the assessment officer could not award costs for failure to comply with production orders, parties may be able to frustrate the process by not providing documentation, without fear of any cost sanctions. This would inevitably lead to parties asking the Superior Court to intervene and make production orders for an assessment. Again, would result in duplication and a waste of resources.

[47] I am satisfied that assessment officers have the jurisdiction to make cost awards in an assessment hearing under the Mortgages Act, without restriction. This gives Assessment Officers the ability to control the process of the assessment and to ensure compliance with their production orders.

Disposition

[48] For the reasons set out above, I conclude as follows:

(i) Huntington as second mortgagee, is an “interested person” and entitled to requisition an assessment of the costs incurred in the Power of Sale proceedings;

(ii) The assessment was properly requisitioned by Huntington, and is not a nullity;

(iii) The legal costs incurred in the Power of Sale proceedings may be assessed in an assessment under s. 43(4) of the Mortgages Act; and

(iv) The assessment officer had the jurisdiction to make the cost award of $2,000 for failure to comply with the production order.

[49] KEB’s motion is dismissed. Huntington was fully successful on the motion and is entitled to its costs.

[50] Both parties submitted Bills of Costs. KEB seeks an award of its partial indemnity costs of the motion in the amount of $14,352.77, inclusive of counsel fee, disbursements and H.S.T. Huntington seeks its full indemnity costs of the motion in the amount of $9,610.65, inclusive of counsel fee, disbursements and HST. The award of full indemnity costs is to be limited to the circumstances where a party has engaged in reprehensive and scandalous conduct. I am not satisfied that KEB engaged in such conduct. It is my view that Huntington is entitled to its partial indemnity costs of the motion.

[51] The award of costs must be fair and reasonable and within the expectation of the parties: Boucher v. Public Accountants Council for the Province of Ontario, [2004] O.J. No. 2634, 71 O.R. (3d) 291 (CA). I award partial indemnity costs in favour of Huntington, fixed in the amount of $5,750, inclusive of counsel fee, disbursements and H.S.T. The costs are payable within 30 days of the date of this endorsement.

Released: February 3, 2023 Chalmers J.