DATE: 2024-07-08 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: ZHIZHAO YE, Applicant AND: F. SCOTT TURTON AND THE BANK OF NOVE SCOTIA, Respondents

BEFORE: Parghi J.

COUNSEL: Stephen Jackson, for the Applicant Christopher Staples, for the Respondent, The Bank of Nova Scotia F. Scott Turton, self-represented Respondent

HEARD: June 7, 2024

Endorsement

[1] The Applicant seeks a declaration of interest in land under Rules 14.05(3)(e), (g), and (h) of the Rules of Civil Procedure. The land at issue is a property in Kleinberg, Ontario (“the Property”) in respect of which the Applicant is the third mortgagee and the Respondent Turton is the second mortgagee. The second mortgage is a solicitor’s mortgage: Turton is the former Property owner’s solicitor, and states that the second mortgage serves as security for the former Property owner’s unpaid legal fees and disbursements.

[2] At issue in this application is the appropriate allocation of the surplus funds that remain after the Property was sold by its first mortgagee, the Bank of Nova Scotia. That sale took place under Power of Sale in October 2022, after the Property owner defaulted on the first mortgage. $637,069.90 in surplus funds remain after the sale. The Applicant seeks a settling of the priority interest of Turton and himself in the surplus funds, and the payment of the surplus funds to himself as third mortgagee, “notwithstanding” the second mortgage, “subject to amounts proven to have been advanced pursuant to the second mortgage”.

[3] The Applicant asserts that Turton has no interest in any portion of the surplus funds. He states that the second mortgage is invalid and, in any event, there is no evidence that monies were actually advanced to Turton under to the second mortgage. Accordingly, he says, the surplus funds should be paid to the Applicant in their entirety. He has tendered no evidence on the amount he says is owed to him under the third mortgage.

[4] Turton states the second mortgage is valid and monies were properly advanced under it. He states that he is the next in priority after the Bank of Nova Scotia, and accordingly should receive his share of the surplus funds before the Applicant receives his. Turton states that the amount of his unpaid legal fees and disbursements, for which the second mortgage serves as security, is currently $316,002.08. He has tendered no evidence as to the amount of his unpaid fees and disbursements as at the date of the sale of the Property.

[5] For the reasons that follow, I dismiss the application. I do so without prejudice to the Applicant’s ability to bring a fresh application that complies with the requirements I discuss below.

Facts

[6] In order to explain my dismissal of the action, and put my concerns in context, it is helpful to provide a chronology of the events surrounding the various mortgages, and a brief discussion of the evidence that the parties have, and have not, tendered on the application.

[7] In June 2015, the Property was transferred to the Property owner. At that time, a mortgage in favour of a numbered company not party to this litigation (“the numbered company”), in the amount of $1,450,000, was registered. I have referred to this mortgage as the “original mortgage” in this judgment.

[8] In May 2017, what the parties call the first mortgage, held by the Respondent Bank of Nova Scotia, was registered on the Property. Its principal amount was $2,050,000.

[9] In June 2017, a second mortgage, held by the numbered company, was registered on the Property. Its principal amount was $160,000. Turton’s evidence is that the second mortgage reflected the portion of the original mortgage of $1,450,000 that had not been paid off.

[10] In March 2018, a third mortgage, held by the Applicant, was registered on the Property. Its principal amount was $600,000.

[11] In June 2018, the numbered company advised the Property owner that she was in arrears in respect of the second mortgage.

[12] In July 2018, Turton advised the numbered company that he was acting for the Property owner in respect of discharging the second mortgage, that he was in funds, and that he did not want a discharge of the second mortgage to be registered until he confirmed whether the second mortgage was to be discharged or assigned. His evidence was that he made this request due to the possibility that his client might assign the second mortgage to him to cover his ongoing legal fees.

[13] Later in July 2018, the funds owed under the second mortgage were remitted to the numbered company in full.

[14] Turton’s evidence was that the second mortgage was then assigned to him by the Property owner via oral agreement. At the time, Turton was the Property owner’s solicitor. He continues to be her solicitor today. His evidence was that he provided, and continues to provide, legal services to the Property owner, and that his unpaid legal fees and disbursements are secured by the second mortgage.

[15] Turton gave evidence that the assignment of the second mortgage to him in 2018 was not registered on title because an unrelated entity, not involved in this application, had commenced a legal action against the Property owner in 1997. In the course of the litigation, the entity had made various claims against the Property. Turton was concerned that registering the assignment would provide the entity with a pretext for adding Turton as a defendant to the litigation, thus preventing Turton from continuing to act for the Property owner. As such, says Turton, he and the Property owner proceeded via an oral assignment agreement only, and did not formally register the assignment of the mortgage to him.

[16] In support of the existence of the oral assignment agreement, Turton has tendered his own affidavit evidence, but no evidence from the Property owner herself. Indeed, the Property owner is not a party to this application, and there is no suggestion that she has been given notice of the application. I discuss this further below.

[17] In March 2021, the Property owner defaulted under the first mortgage.

[18] In March 2022, Turton advised the numbered company that the second mortgage was to be assigned to him, and not discharged. A Transfer of Charge was accordingly issued in respect of the transfer of the second mortgage to Turton.

[19] The issue of what, if any, funds were advanced under the second mortgage looms large in this application. The Applicant states there is no evidence that any monies were advanced by Turton to his client, the Property owner, in the form of unpaid legal services. He states that, in the absence of clear evidence of such advancements, Turton is not entitled to any of the surplus funds.

[20] Turton has provided affidavit evidence giving examples of the legal services he has provided to the Property owner, including representation in the Bank of Nova Scotia mortgage enforcement action, the Applicant’s mortgage enforcement action, and the litigation commenced against the Property owner in 1997, discussed above. Turton says he cannot provide additional detail about the work he has done under these or other mandates due to solicitor-client privilege.

[21] He has also provided narrative evidence in his affidavit about the monies advanced to the Property owner – that is, the unpaid legal fees and disbursements he says he has provided to the Property owner – as at May 28, 2024. He states he cannot provide any specifics about these amounts, such as the associated dates or docket entries, due to solicitor-client privilege.

[22] The Applicant disagrees with Turton’s claim of privilege. He states that it was open to Turton, and incumbent upon him, to provide particulars of his legal services in a way that protects the confidentiality of the solicitor-client relationship – for example, with sensitive information redacted, or with certain information made available to the judge alone – but he has not done so. He notes that Turton failed to provide invoices, dockets, or other documentation. Nor has he provided affidavit evidence from the Property owner confirming that Turton provided legal services to her under the second mortgage or describing what the services entailed. In the result, says the Applicant, there is no evidence of moneys being advanced under the second mortgage.

[23] In October 2022, the Bank of Nova Scotia sold the Property under Power of Sale. The sale closed in November 2022. The sale price was $2,425,000. After the amounts outstanding to Bank of Nova Scotia under the first mortgage were paid, $637,069.90 in surplus funds remained. I am being asked to determine how those surplus funds, or, more precisely, the net surplus funds from that amount, are to be allocated as between Turton and the Applicant.

[24] I note that the correct valuation date for any such analysis is presumably the date on which the sale of the Property closed, in November 2022. It is as of that date that the first mortgage was discharged, and, consequently, all debts owing to Turton or any other mortgagees crystallized. It is as of that date that the remaining surplus funds are to be calculated. The Applicant agrees that this is the correct date of valuation, and Turton has not taken a position to the contrary.

[25] Importantly, however, there is no evidence before me on the moneys advanced under the second mortgage as at that date. The evidence that Turton has provided on this issue is current as at May 28, 2024, shortly before the hearing of this application and almost a year and a half after the sale of the Property. There is no evidence as to how much he had advanced to his client at the time the Property was sold.

[26] Moreover, there is no evidence at all on the value of the third mortgage. Although the Applicant seeks a distribution of the net surplus funds, he has provided no information on what share of that distribution he says is rightly his. The only evidence before me is of the original sum advanced under the third mortgage. There is no evidence as to how much of that original principal has been paid down or what balance remains as at the November 2022 date of valuation or at all. It is suggested that the value of the third mortgage is a disputed matter that is subject to separate litigation. That may be the case. But it is essential information for the purposes of this application.

Reasons for dismissing application

[27] I am dismissing the application for three reasons.

[28] First, the application seems to have been brought without notice to the Property owner, Turton’s client. She is not a party to the application. Nor is there any evidence to suggest that she has been notified of the application. It is a great understatement to say that her interests are directly at stake in this application. The court is being asked to make factual findings about moneys purportedly advanced by her solicitor to her under the second mortgage. Had she been provided with notice, the Property owner may have wished to seek standing to address some of the issues raised in the application, including, for example, what Turton describes as the oral assignment of the second mortgage to him by the Property owner in 2018, whether Turton provided her with legal services during the time frame at issue, and what the costs associated with any such legal services are. It was, in my view, improper for the application to have been brought, and pursued, without the Property owner being given notice of it, being given the opportunity to seek independent legal advice in respect of it, and, if she so wished, being given the opportunity to seek standing to participate in it.

[29] Second, and relatedly, the court lacks an appropriate evidentiary foundation on which to make decisions regarding material issues that involve the Property owner. These issues include the alleged oral assignment agreement (which is relevant to the issue of when Turton became the second mortgagee), whether Turton in fact provided legal services under the second mortgage, and what the monetary value of those services really is. The only evidence on these important issues is affidavit evidence from Turton himself. There is no evidence from the Property owner. Nor is there documentary evidence in the form of docket entries or invoices.

[30] Third, as discussed above, there is no evidence on the value of the third mortgage.

[31] In the result, I am faced with an application that was brought without notice to the required parties, and a request to allocate the surplus funds between two mortgagees, neither of whom has tendered the evidence required to enable the court to identify their respective shares of the surplus funds.

[32] I therefore dismiss the application. However, I do so without prejudice to the Applicant to bring a fresh application, subject to the following requirements:

a. Notice of the fresh application is to be provided to the Property owner; and b. The Applicant is to provide evidence on the value of the third mortgage of sufficient particularity to enable the court to assess its value as at the closing date of the Property sale in November 2022. Such evidence shall include, at a minimum, evidence as to the amounts advanced and paid down, any additional charges, and the balance remaining, all as at the November 2022 date of valuation, together with supporting documentation.

[33] I conclude by returning to the issue of Turton’s failure to tender enough evidence to enable the court to ascertain his share, if any, of the surplus funds. Turton’s position during the hearing of the application seemed to be that it was not his evidentiary burden to adduce this evidence, because he is not the one who brought the application. I do not agree. The issue is not who brought the application. The issue is whether each party provides enough evidence to enable the court to ascertain the party’s respective share of the surplus funds. Neither party satisfied this burden before me. However, if a fresh application is brought, in which the Property owner is properly put on notice and the Applicant adduces the required evidence about the third mortgage, the court may well revisit the Applicant’s request for relief. In that circumstance, the evidence that Turton has, and has not, adduced will almost certainly matter.

[34] Given that neither party discharged its evidentiary burden before me, I decline to award costs on the application.

Parghi J. Date: July 8, 2024