Scarecrow Capital Inc. and Peng Zhang et al., 2024 ONSC 1852

COURT FILE NO.: CV-23-1856 DATE: March 28, 2024 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

SCARECROW CAPITAL INCORPORATED Plaintiff – and – PENG ZHANG, YANG YANG XUN, GOLDENTRUST CAPITAL CORPORATION, 2544552 ONTARIO INC., HAI WEI CAO and 2604967 ONTARIO INC. Defendants

AND BETWEEN

PENG ZHANG, GOLDENTRUST CAPITAL CORPORATION, 2544552 ONTARIO INC. and 2604967 ONTARIO INC. Plaintiffs by Counterclaim – and – SCARECROW CAPITAL INCORPORATED Defendant by Counterclaim

Counsel: Jonathan Kulathungam Karey Anne Dhirani Lawyers for the Plaintiffs/Defendant by Counterclaim

Gregory Govedaris Lawyer for the Defendants/Plaintiffs by Counterclaim

HEARD: March 8, 2024

J. SPEYER J

JUDGMENT

A. Introduction

1On April 15, 2021, the plaintiff, Scarecrow Capital Incorporated (“Scarecrow”), provided a loan in the amount of $4,920,000 to the defendants. The loan is secured by, inter alia, a mortgage registered against four properties: 146 Old Kennedy Road in Markham, which is a vacant five-acre lot on which the defendants hope to build a number of townhouses, and three properties owned solely by the each of the defendants Zhang, Xun, and Cao. Xun and Cao have been noted in default in this action and they are not parties to this motion.

2The mortgage matured on April 15, 2022, and the defendants did not repay their debt. Renewal letters were entered into. The parties negotiated, and entered into Forbearance Agreements on May 1, 2023, and on July 19, 2023. The latter extended the maturity date to September 13, 2023. The defendants acknowledged in the latter agreement that they owed the plaintiff $5,318,769.13 as of July 15, 2023.

3The defendants have been unable to refinance their debts.

4The plaintiff has taken steps to enforce the terms of the mortgage to collect the money owed to it. Its Statement of Claim was issued on September 29, 2023. The plaintiff has served a notice of motion for summary judgment.

5The defendants, Peng Zhang, Goldentrust Capital Corporation, 254452 Ontario Inc., and 2604967 Ontario Inc., move for an order they characterize as an interim stay of Scarecrow’s ability to take steps to enforce the terms of its agreements with the defendants. The defendants say that in four weeks they can get the necessary financing in place, and then they would pay the amount owed by them to Scarecrow into court, pending resolution of the dispute about how much Scarecrow is owed.

6The defendants do not dispute that they owe the plaintiff the principal amount of the mortgage and accrued interest, in a total amount of about $5.4 million. The defendants do dispute some of the fees included in Notice of Sale that has been served by Scarecrow, alleging that they amount to penalties contrary to the Interest Act, R.S.C. 1985, c.I-15, s. 8. The defendants submit that Scarecrow has acted in bad faith and fraudulently, and that therefore it is disentitled to pursue its remedies to enforce the mortgage.

B. The facts

7There is no dispute that Scarecrow advanced moneys to the defendants, and that the defendants agreed to repay the principal amount of $4,920,000, together with accrued interest. There is no dispute that the defendants provided mortgages on their properties to secure the loans. There is no dispute that the principal and interest owing became due and payable on April 15, 2022, when the mortgage matured. There is no dispute that the defendants and Scarecrow entered into two successive forbearance agreements, pursuant to which Scarecrow did not take action to enforce the mortgage to permit the defendants to refinance their debt. The forbearance agreements expired on September 13, 2023. There is no dispute that the defendants have not repaid the amount they owe Scarecrow, or any part of it.

8At the hearing of the motion, counsel for the defendants advised that they had obtained a new financing commitment, but that their clients had provided instructions not to share it with counsel for the plaintiff unless counsel undertook not to show it to their client. Counsel for the defendants advised that the defendants were concerned that the plaintiff would act to sabotage the defendants’ efforts to obtain alternate financing. I declined to permit counsel for the defendant to provide evidence of that financing commitment to the court and to counsel for the plaintiff in circumstances where counsel for the plaintiff could not get instructions from their client with regard to that evidence.

9Near the end of the hearing, when counsel for the defendants made reply submissions, he advised that his instructions had changed and that he was in a position to provide what he characterized as a commitment letter to the court and to counsel for the plaintiff, without conditions. I permitted the document to be filed and afforded counsel for the plaintiff an opportunity to review the document.

10On review, it was readily apparent that the document did not commit the proposed source of funds to do anything. To the contrary, the document is in the nature of a proposal, for a loan in an amount to be determined, that is subject to more than forty conditions. There is no evidence that the defendants have taken any steps to meet those conditions, or that they can do so.

C. The applicable legal principles

11The starting point for my consideration of the defendant’s motion for an interim stay of the plaintiff’s mortgage enforcement actions is the principle that a mortgagee may not be restrained from exercising its rights if the mortgagee is acting in good faith and without fraud. The decision of Perrell J. in Mao v. Liu, 2024 ONSC 752, at para. 94, sets out the law:

The law, however, is that only in extreme cases will a mortgagee be restrained from exercising its rights unless the mortgagor tenders full payment of the mortgage indebtedness. The rule from Arnold v. Bronstein is that subject to a mortgagor’s right to bring the mortgage into good standing or to redeem pursuant to sections 22 and 23 of the Mortgages Act, a mortgagee acting in good faith and without fraud will not be restrained from a proper exercise of his or her power of sale except upon tender of the amount outstanding.

Citing: National Bank of Canada v. Guibord, 2021 ONCA 864; Bilbija v. 2513630 Ontario Inc., 2021 ONSC 571; Sibyl Investment Holding Inc. v. Vlachich, 2020 ONSC 2191; Armanino v. Linderwood Holdings Inc., 2016 ONSC 1605; 1175945 Ontario Ltd. v. Michael Wade Construction Co., 2010 ONSC 3732; Hornstein v. Gardena Properties Inc., [2005] O.J. No. 3302 (S.C.J.), aff’d. , [2006] O.J. No. 2757 (C.A.); Girard v. MCAP Service Corp., [2004] O.J. No. 1518 (S.C.J.); Testa v. GTA Savings & Credit Union Ltd. (2001), 43 R.P.R. (3d) 121 (Ont. S.C.J.); Arnold v. Bronstein, [1971] 1 O.R. 467 (H.C.J.).

12In National Bank of Canada v. Guibord, 2021 ONCA 864, at para. 6, Nordheimer J. A., sitting as a motions judge considering a motion to stay the writ of possession obtained by a mortgagee, noted that “the enforcement of security validly given by a party, who is in default, should not be interfered with absent compelling reasons. Otherwise, the essential functioning of these type of commercial arrangements would be undermined”.

13The plaintiff submits that the test to be applied on this motion is the test set out in Arnold v. Bronstein, and not the test set out in RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311. I do not need to decide this issue, because I am satisfied that on either test, the defendants’ motion fails.

14The defendants submit that the plaintiff is acting fraudulently and in bad faith. I reject that claim. The defendants submit that the plaintiff’s actions in relation to one of the properties that secure the debt, by entering on the property and changing the locks without having a writ of possession, is evidence of bad faith. The plaintiff responds that it took possession of a vacant property pursuant to the standard charge terms of the mortgage contract. While the parties may disagree about the plaintiff’s legal entitlement to possession of the property, this legal dispute is not evidence of bad faith or fraud. The defendants also submit that the inclusion of penalty clauses in the mortgage agreement evidence the plaintiff’s bad faith. This submission overlooks that the defendants, who are sophisticated borrowers, and who received legal advice, agreed to the inclusion of the disputed terms in the mortgage agreement and the two forbearance agreements when they wanted the plaintiff’s money. The plaintiff’s efforts to enforce these clauses does not amount to bad faith. Finally, the defendants offer the hearsay evidence of Mr. Zhang to the effect that the plaintiff interfered with the defendants’ earlier negotiation with another lender to refinance their debt. This allegation fell apart and I reject it. Apart from the fact that the allegation makes no sense from a commercial perspective, the plaintiff has provided an affidavit from the purported source of Mr. Zhang’s information, that demonstrates his allegations to be false. There is no credible evidence that the plaintiff has acted fraudulently or in bad faith.

15In National Bank of Canada v. Guibord, Nordheimer J.A. applied the well-known test on a motion to stay the execution of a writ of possession, as set out in RJR-MacDonald. The test requires the court to consider three factors: (i) whether there is a serious issue to be tried; (ii) whether the moving party will suffer irreparable harm; and (iii) an assessment of the balance of convenience between the parties.

16There is not a serious issue to be tried in this case. The defendants admit that they entered into a mortgage commitment with the plaintiff in 2021, and that they provided four properties as security for the mortgage. The defendants admit that the plaintiff provided the funds for the mortgage. The defendants admit that they have defaulted on the mortgage since April 2022, and that the plaintiffs twice deferred their right to recover the monies owed to them by entering into forbearance agreements. While there may be some dispute about some of the fees charged by the plaintiff, those amounts are insignificant relative to the amount of the principal and interest owed by the defendants.

17The defendants will not suffer irreparable harm if the stay is not granted. There is no dispute as to the amount of the principal and interest owed by the defendants. The defendants have had ample time to re-finance their debt to the plaintiff and have been unable to do so. There is no reason to believe that they have the capacity to re-finance their debt to the plaintiff. The Old Kennedy Road property is not a home. It is vacant land that the defendants hope to develop. The plaintiff could, and is willing to, pay the disputed amounts into court pending a determination by the court of the amount owing.

18The balance of convenience between the parties overwhelmingly favours the plaintiff. The plaintiff is owed a substantial amount of money and has demonstrated patience in negotiating the forbearance agreements with the defendants. The plaintiff has paid over $500,000 to the holder of the first mortgage on the Old Kennedy Road property to prevent enforcement action by the first mortgagee. The evidence before me compels the conclusion that the defendants are not able to re-finance the debt they admittedly owe.

19The plaintiff is entitled to pursue its remedies under the mortgage, in accordance with the promises made by the defendants. The motion is dismissed.

20I will receive costs submissions, in writing, not to exceed three pages in length in addition to any bill of costs, emailed to my assistant at Lauralee.mildon@ontario.ca, and to be filed with the Oshawa Civil Filing Office. The plaintiff’s submissions are to be provided by April 18, 2024, and the defendants’ submissions are to be provided by May 3, 2024.