2013 ONSC 1487, 2013 ONSC 1487

CITATION : Lourenco v. Elle Mortgage Corporation, 2013 ONSC 1487 COURT FILE NO.: 75195/11 DATE: 20130311 SUPERIOR COURT OF JUSTICE - ONTARIO RE: Kelly Lourenco, Appellant/Plaintiff AND: Elle Mortgage Corporation, Respondent BEFORE: The Honourable Madam Justice C.A. Gilmore COUNSEL: Kyle C. Armagon, for the Appellant/Plaintiff Glenn E.

Cohen, for the Respondent HEARD: February 13, 2013 ENDORSEMENT Overview [ 1 ] This is an appeal from the June 5, 2012 Judgment of the Honourable Deputy Judge Walters of the Ontario Superior Court of Justice (Small Claims Court Division). [ 2 ] The appellant was the second mortgagee with respect to a property located at 15 Kirby Crescent in Whitby, Ontario (the “subject property”). The subject property was sold under power of sale by the first mortgagee (the respondent herein) for $175,000.00.

The appellant sued for damages with respect to an improvident sale, as the sale price resulted in the second mortgagee receiving no proceeds from their mortgage. [ 3 ] Deputy Judge Walters dismissed the appellant’s claim and awarded costs to the respondent in the amount of $4,009.65, inclusive of disbursements and HST. The Small Claims Court judge determined that the sale of the subject property by the respondent was not an improvident sale, and that the appellant did not provide sufficient evidence to establish that the house was worth more than what the respondent sold it for.

Summary of the Facts [ 4 ] The appellant’s charge on the subject property was registered on April 23, 2004, in the amount of $16,000.00 at an interest rate of 14.5% and monthly payments of $193.59. [ 5 ] On November 30, 2004, the respondent acquired the first mortgage on the subject property and took an assignment of it in the amount of $179,549.76. [ 6 ] The appellant received a notice of sale indicating that the respondent was seeking to take possession and exercise a power of sale on the subject property.

The respondent obtained an appraisal on September 22, 2009, valuing the subject property “as is” for $175,000.00. On December 4, 2009, the respondent transferred the subject property to Harvey Naiman for $175,000.00. The purchase price consisted of a vendor take back mortgage of $170,000.00 and a $5,000.00 down payment. [ 7 ] The appellant’s father obtained an appraisal report from Diana Sonego, dated June 30, 2010. Ms. Sonego appraised the property at $245,000.00 “as is” and $285,000.00 based on completion. [ 8 ] Ms.

Sonego’s appraisal indicates that she did an external inspection of the subject property; there was no dispute that Ms. Sonego did not do an interior inspection. She was not present at trial and therefore was not cross-examined on her appraisal. [ 9 ] Mr. Frank Lourenco is the father of the appellant and has been a real estate agent for 38 years. His evidence was that the property was worth between $255,000.00 and $265,000.00. [ 10 ] Mr. Lourenco also obtained, on behalf of his daughter, market valuations from other real estate agents. Mr.

Ken Ford of Sutton Group Heritage Realty Inc. in Ajax valued the property at $255,000.00. Mr. Mike Head of Re/Max First Realty Limited in Whitby valued the property at $295,000.00. Mr. Bill Morrison of Sutton Group Heritage Realty Inc. in Ajax valued the property at $254,900.00. Ms. Monica Ekhart of Sutton Group Heritage Realty Inc. in Ajax valued the property between $245,000.00 and $250,000.00. Mr.

Peter Jones, a real estate agent with Sutton Group Heritage Realty Inc. in Ajax, submitted a comparative market analysis and opined that the value of the subject property was between $250,000.00 and $259,000.00. [ 11 ] Mr. Patrick Smith, an appraiser with Metrowide Appraisal, gave evidence at trial that he prepared an appraisal for mortgage

enforcement. Mr. Smith appraised the property at $175,000.00 “as is”. Mr. Smith was cross-examined on his appraisal at trial. [ 12 ] Mr. Terry Walman gave evidence at trial as a representative of the respondent. He acknowledged at trial that he did not list the house for sale or make any effort to market the subject property to the public. [ 13 ] In his decision, Deputy Judge Walters gave minimal weight to the market valuations prepared by Ken Ford, Mike Head, Bill Morrison and Monica Ekhart, and made a finding that the evidence of Peter Jones was not helpful. He also gave very little weight to Ms.

Sonego’s appraisal, as Ms. Sonego did not give evidence at trial and accordingly there was no opportunity to cross-examine her on her appraisal. At trial, appellant’s counsel treated the market valuations as letters of opinion and did not submit them as expert reports.

In his reasons, the trial judge stated that the real estate agents who provided the market valuations were not qualified to appraise homes, they did not appear at trial, their reports were of little assistance to the Court and accordingly no weight was attached to any of the reports. [ 14 ] The Small Claims Court judge accepted the appraisal of Metrowide Appraisals as the best evidence of the true value of the property as of September 2009.

He did not accept the appellant’s submission at trial that it was imperative that the property be listed on MLS as a necessary way to comply with a mortgagee’s duty to obtain the best possible price. [ 15 ] The respondent objected to the market valuations being admitted as any form of opinion evidence, because they did not contain a

summary of the author’s qualifications as required by Small Claims Court rule 18.02(3)(b). [ 16 ] The Small Claims Court judge also rejected the evidence of Peter Jones because he found that it did not appear to contain an in-depth analysis, but was “just a computer printout based on the information he had plugged in”. [ 17 ] Both parties conceded that the property was in a deplorable condition. At trial, Mr. Walman described the property as “a shambles”. This was accepted by the trial judge as there were photos submitted at trial confirming the substandard condition of the subject property.

The Positions of the Parties The Appellant [ 18 ] The appellant takes the position that Mr. Smith’s appraisal was intended to crystallize the fair market value of the property and, in fact, Mr. Smith confirmed this in his evidence. The respondent argues that the appraisal was not intended by Mr. Smith to be the price at which the property should be listed, but was to establish a market value and that this concept was expressly defined in the appraisal. [ 19 ] The appellant complains that Mr.

Smith’s appraisal cannot be relied upon because he valued the property at $260,000.00 assuming there was no mould and the subject property was structurally sound and completely finished. He then deducted $60,000.00 for completion of those measures and a further $25,000.00 for what he called a “risk factor”. The appellant complains that with these deductions, the property was then sold to a friend of Mr. Walman. [ 20 ] The appraised value of $175,000.00 does not represent the true market value because it was never listed on the open market.

The appellant concedes that if the property had been listed on the open market for $175,000.00 and sold for less, they would not be seeking damages. However, selling a property based only on an appraiser’s opinion for that exact amount does not pass the good faith test. The first mortgagee has a duty to obtain the best price for the property and it is unacceptable for them to simply transfer the property based on an appraised value which the appellant submits was only a baseline. The appellant argues that Deputy Judge Walters made a palpable error by relying on Mr.

Smith’s report for the true market value, when the property had never been exposed to the market. [ 21 ] The appellant argues that there was sufficient evidence to demonstrate that the property was worth in the range of $250,000.00 and that there was evidence from six (6) different sources to confirm this; namely the evidence of Mr. Lourenco, the letter of opinion from Ken Ford, the letter of opinion from Bill Morrison, the letter of opinion from Monica Ekhart, the comparative market analysis of Peter Jones and the appraisal of Ms. Sonego.

The appellant argues that it was an error for Deputy Judge Walters to reject all of that evidence and not to consider that the respondent had failed to discharge their burden of good faith to the second mortgagee on the sale of the subject property. [ 22 ] The respondent’s position at trial was that the property was not listed for sale because there was no chance of full recovery for the respondent (Elle Mortgage Corporation was owed $227,000.00 at the time of sale, and as such, they suffered a loss on their mortgage as well).

Further, the respondent did not wish to retain the property for sale, as they did not wish to accrue realty taxes, heat, hydro, property management costs for attendances and high insurance premiums for a vacant property. They also saved the cost of real estate commission. [ 23 ] The appellant also argued that the sale to Mr. Naiman was not arms length.

However, the trial judge found that the sale price was supported by the appraisal, which reflected the true value of the home, given that its substandard condition would appeal only to an investor who was seeking to achieve a profit on his investment. [ 24 ] The fair market value of the property should therefore be assessed at $250,000.00. Elle Mortgage Corporation was owed $227,000.00 at the time and the balance should be remitted to the appellant. The appellant argues that the balance would therefore be $22,097.00. The Respondent

[ 25 ] The respondent submits that there is a two pronged test with respect to the first mortgagee’s obligations. They must establish a market price, but need not obtain that market price on sale as long as they have taken reasonable steps. If they do not take reasonable steps, the appellant must show that if the mortgagee had taken additional steps, a higher price could have been obtained. [ 26 ] The respondent argues there was no palpable or overriding error, as there was ample evidence to support the trial judge’s findings.

Further, even if the fair market value was $250,000.00, the cost of sale would have left no surplus. [ 27 ] In this case, the respondent acknowledged that they did not take steps beyond obtaining the appraisal from Mr. Smith. However, as of September 2009, there was a $224,000.00 mortgage debt owed to the respondent, the property was unlivable, had mould, no front steps and was completely basically unmarketable in its condition at that time. [ 28 ] It was properly based on the evidence presented at trial, for Deputy Judge Walters to find that the evidence as a whole was not convincing.

Deputy Judge Walters considered the Sonego appraisal and the fact that there was no adjustment for location, that the basement apartment was illegal and that she was not present in Court to be cross-examined. Further, while Ms. Sonego describes the condition of the property as “fair”, all the other evidence was consistent that the property was uninhabitable. As well, Ms.

Sonego did not inspect the interior of the property and provided no explanation of how she reduced the value from $285,000.00 to $245,000.00, based on what was required to complete the property; that is, there was no breakdown about the type of work to be done or the cost of it. [ 29 ] At trial, Mr. Smith was asked about the Sonego appraisal and gave detailed evidence about why the comparables used by Ms. Sonego were not suitable in his view. After reviewing all of the comparables, Mr. Smith’s assessment was that he would not have signed off on the appraisal if Ms.

Sonego worked for him. [1] [ 30 ] The trial judge did not err in giving no weight to the letters of opinion from the real estate agents. He reviewed the letters of opinion and noted that they were admitted into evidence, notwithstanding that a

summary of their qualifications was not provided pursuant to rule 18.03 of the Small Claims Court Rules , O. Reg. 258/98 . Deputy Judge Walters noted that many of the opinions of value had identical wording and that three out of four were from the same brokerage as Mr. Lourenco. [ 31 ] The trial judge also carefully reviewed the evidence of Mr. Jones and found that it was not helpful. The basis for this conclusion was partly the cross examination of Mr. Jones, which revealed a flawed analysis with respect to his comparables. For that and other reasons, Deputy Judge Walters found that Mr.

Jones’ evidence did not provide any in-depth analysis for the Court and he placed no weight on it. [ 32 ] The respondent submitted that even if the fair market value of the property were $250,000.00, if it had been sold on the open market, there would be approximately $14,000.00 payable in commission and legal fees of $1,500.00, which would net $236,000.00. Interest on the mortgage during a sale cycle of four (4) months would be $6,000.00, another $1,200.00 for realty taxes and a $3,500.00 quarterly insurance premium because it was a vacant and derelict property.

Even without including heating, hydro and inspection costs, there would still be a deficiency at a sale price of $250,000.00, or a minimal recovery given the costs of maintaining the property during a sale cycle. [ 33 ] The appellant argues that the respondent cannot calculate the damages in that manner, and that in order to quantify damages pursuant to Wilf Rieck Inc. v. Gordon J. Holdings Limited (1994), 42 R.P.R. (2d) 311 (Ont. Ct. Gen. Div.) the respondent is not entitled to deduct the carrying costs.

Standard of Review on Appeal [ 34 ] The standard of review on appeal with respect to a trial judge’s findings of fact and

interpretation of evidence is “palpable and overriding error” . With respect to the application of the law to the facts the standard is “correctness”. In Huisman v. MacDonald , 2007 ONCA 391 , 280 D.L.R. (4th) 1, the Court characterizes a palpable error as one which is so overriding as to discredit the result (para. 56). Issue One: Did the trial judge err in his conclusion that the market value of the property as of September 2009 was $175,000.00? [ 35 ] I do not find that the trial judge erred in this conclusion.

His reasons were well supported by the evidence and I find that he applied the correct principles of law with respect to the duties of a mortgagee to a mortgagor and subsequent encumbrancers. [ 36 ] Specifically, Deputy Judge Walters found that there was no evidence that the property was undervalued. He found that Mr. Smith’s evidence on cross examination was never seriously challenged and he accepted that appraised value of the property. [ 37 ] The trial judge, quite correctly, put little or no weight on the opinions of value from real estate agents or from Mr.

Lourenco himself. [ 38 ] With respect to the appraisal of Ms. Sonego, I do not find that it was an error to give little weight to Ms. Sonego’s report since she was not cross-examined upon it, nor was she cross- examined on her knowledge or experience in the appraisal business. According to Deputy Judge Walters, Ms. Sonego relied upon Mr. Lourenco to confirm details as to the interior and lot size. He quite reasonably accepted Mr. Smith’s evidence that Ms.

Sonego should not have taken the basement apartment into account because it was illegal, did not show an adjustment for location, nor was there any estimate as to the cost of repairs to bring the value up to the $285,000.00 level. I find no error in Deputy Judge Walters arriving at such a conclusion based on the evidence. [ 39 ] Equally, I find that Deputy Judge Walters did not err in rejecting the evidence of Peter Jones on the basis that Mr. Jones had

no designation as an appraiser and did not prepare an in-depth analysis. [ 40 ] While I accept the appellant’s argument that the Small Claims Court may decide cases on the basis of hearsay evidence to avoid additional cost and technical procedures, [2] this does not mean that a trial judge must accept evidence upon which there has been no cross-examination or where the documentary evidence does not accord with the Small Claims Court Rules . [ 41 ] I find that the trial judge’s reasons were extensive and considered all of the relevant evidence and all of the applicable legal principles.

I agree with the respondent that it cannot be said that Deputy Judge Walters did not articulate his reasons or provide insight into his reasoning process. This is not a case such as Huisman v. MacDonald , 2007 ONCA 391 , 280 D.L.R. (4th) 1, at para. 56 , in which the reasons can be described as deficient. Issue Two: Did the trial judge err in determining that the respondent satisfied its duty of good faith? [ 42 ] The respondent conceded that it did not take additional steps other than obtaining the appraisal.

The respondent did not engage a real estate agent, list the property on the open market or consider offers.

It had specific reasons for choosing this course, namely, that as first mortgagee, they were already in a position of expecting a considerable loss on their mortgage and they wanted to sell the property and obtain some return without the burden of having to pay real estate commission, insurance premiums, property taxes, utilities or inspection costs. [ 43 ] I do not find that a higher price would have been obtained, but for any alleged breach of good faith on the part of the mortgagee selling under power of sale. In the case of Dhaliwal v. Plantus (2007), 64 R.P.R. (4th) 83 (Ont.

S.C.) at para. 39 , the court held that a mortgagee is entitled to sell for his own purposes when he chooses to do so… “The mortgagee acting under a power of sale is not required to continue to carry the increasing debt for an unlimited period of time. As long as the mortgagee does not do anything to devalue the property or create adverse factors which would result in an adverse selling market for the property, he or she can accept the best offer that he or she can get.

Even if the mortgagee fails to take reasonable precautions, a mortgagor or subsequent encumbrancer challenging the sale as being improvident and seeking damages as a result, must show on cogent evidence that a higher price would have been obtained but for the breach.” [ 44 ] In the case at bar, I find that the appellant did not provide the “cogent” evidence required by the Dhaliwal v. Plantus case.

As such, the appellant has failed to demonstrate that the sale of the subject property was improvident and that, as a result, they are entitled to damages. [ 45 ] The appeal is therefore dismissed. [Intentionally Left Blank] Costs [ 46 ] The parties may provide written submissions on costs of no more than two (2) pages in length, exclusive of any bill of costs or offers to settle on a seven (7) day turnaround, commencing with the respondent on March 15, 2013. Justice C.A. Gilmore Released: March 11, 2013