Category: Collections and Mortgage Recovery

Defaulting on a mortgage is an extremely stressful event for any property owner. Many consequences can arise in the event of a default. Fortunately for the defaulting party, an interest rate hike on the money owing is not one of them.

Keep reading to learn about the prohibition against mortgagees from charging punitive fees after a mortgagor has defaulted.

Terminology

Before reading on, here’s an explanation of the terms used frequently in this blog:

• Arrears – the state of having a debt that is overdue.
• Mortgagor – the party that has obtained a mortgage.
• Mortgagee – the party that has granted the mortgage.
• Default – non-compliance with the terms of the mortgage agreement; normally, this occurs when the mortgagor fails to pay out the balance of the mortgage at maturity (i.e., when the mortgagor is in arrears).

Section 8 of the Interest Act

The Interest Act is a piece of federal legislation that governs the levying of interest on loans. According to s. 2 of the Interest Act, “any person may stipulate for, allow and exact, on any contract or agreement whatever, any rate of interest or discount that is agreed on.”[1] Note that corporations have the status of legal personhood, so s. 2 applies equally to all individuals and corporations, including banks.

Section 8 sets out the prohibition against punitive fees, and provides that:

No fine, etc., allowed on payments in arrears
8 (1) No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.

Interest on arrears
(2) Nothing in this section has the effect of prohibiting a contract for the payment of interest on arrears of interest or principal at any rate not greater than the rate payable on principal money not in arrears.

In simpler terms, s. 8(1) prevents the mortgagee from raising the interest rate on money that is in arrears. Subsection 8(2) explains that interest can be charged on money in arrears, but it must be at most the same rate that was charged on the principal amount of the mortgage.

Let’s look at a case to illustrate how s. 8 operates.

Krayzel Corporation v Equitable Trust Co., 2016 SCC 18

Facts

A corporation called Lougheed Block Inc. (“Lougheed”) owned an office building in Calgary with multiple mortgages on it, including the one held by the appellant, Krayzel Corporation. In 2006, Lougheed obtained a mortgage from Equitable Trust Co., which is now known as Equitable Bank (“Equitable”). The terms of the mortgage were as follows:

1. Maturity date: June 30, 2008;
2. Amount of loan: $27 million;
3. Interest rate: prime plus 2.875 per annum.[2]
   1. At the time of the mortgage transaction, the prime rate was 6% and at maturity, it was 4.75%, so the rate fluctuated between 8.875% and 7.625% over the course of the mortgage.[3]

The maturity date arrived, and Lougheed defaulted on the mortgage. Equitable did something very commonly employed by mortgagees: it extended the mortgage for a short period of time under what they called a Renewal Agreement.[4] The Renewal Agreement was effective as of August 1, 2008, for a period of 7 months and carried an interest rate of prime plus 3.125 for the first 6 months, and then 25% for the 7^th month.

Again, the agreement matured and Lougheed couldn’t pay. So, the parties entered into a second Renewal Agreement. The terms of the second agreement were quite complex, so the Supreme Court of Canada (“SCC”) broke them down as follows:

1. The 2^nd agreement was effective as of February 1, 2009 – meaning it was retroactive to before the 1^st agreement matured;
2. The yearly interest rate would be 25%;
3. Lougheed was to make monthly interest payments at a “pay rate” of either 7.5% or prime plus 5.25%, whichever was greater;
4. Interest would accrue to the mortgage at a rate of the difference between the amount payable at 25% and the amount payable by Lougheed at the rate in #3; and
5. “[Were] Lougheed to make all payments in full and on time and to pay out the loan when due, it would be excused from paying the amount representing the difference between interest payable at 25 percent and interest actually paid in accordance with the lower rate.”[5]

Unfortunately, they defaulted on the first payment, so Equitable demanded repayment at 25% interest.[6]

Issues

1. Was s. 8 of the Interest Act violated by the imposition of an interest rate effective only where the mortgagor defaulted?[7]
   1. Judgment: YES
2. Is s. 8 violated where the mortgagee raises interest rates solely because of “the mere passage of time”?[8]
   1. Judgment: NO

Reasoning

The Purpose and Scope of Section 8

The Supreme Court of Canada (“SCC”) first looked into the true purpose of s. 8 of the Interest Act. Brown J., writing for the majority, agreed that the holding of the BC Court of Appeal in Reliant Capital Ltd. v Silverdale Development Corp. that this clause exists “to protect the owners of real estate from interest or other charges that would make it impossible for owners to redeem, or to protect their equity.”[9]

Brown J. then turned to the wording of s. 8 and noted that it is directed at “the effect of the [particular] mortgage term” and not merely the explicit term itself. Section 8 is concerned with the consequences flowing from the operation of the term. Brown J. therefore concluded that if the term’s effect “is to impose a higher rate on arrears than on money not in arrears, then s. 8 is offended”.[10] Even if the term is presented by the mortgagee as a discount, if the discount is effectively punitive to the mortgagor, then that term violates s. 8 of the Interest Act.[11]

The First Renewal Agreement

Recall that the first renewal agreement implemented the higher rate of 25% only after 6 months had passed, and was to occur regardless of Lougheed’s level of compliance therewith. Brown J. held that this increase was “triggered by the mere passage of time” rather than purely because Lougheed defaulted. In light of this, there was no violation of s. 8 under the terms of the first renewal agreement.[12]

The Second Renewal Agreement

The second renewal agreement was where the rate increase lost its legitimacy. Recall that under term #5, if Lougheed made good on all its mortgage payments, it would pay the lower rate, or what Equitable labelled as the “pay rate”. However, once Lougheed defaulted, Equitable drastically increased the interest rate and demanded repayment carrying a 25% interest rate. Brown J. held that the second renewal agreement had the effect of placing a higher charge on arrears than what Equitable was charging on the principal money owed.[13] The “pay rate” was actually a discounted rate, and once Lougheed was in arrears, the rate rose to 25%, the real rate. Brown J. thus concluded that to label “one charge as an ‘interest rate’ and the other as a ‘pay rate’ is of no consequence,” because the effect was to punish Lougheed for defaulting.[14]

Conclusion

There are myriad reasons – legal and financial – to make your mortgage payments in full and on time. However, mortgagees cannot fiddle with the interest rates as a way to incentivise or punish you for paying or defaulting.

Whether you’re a lender or a borrower, it’s essential to have legal advice to assist you with drafting, negotiating, interpreting, and enforcing (or contesting!) your mortgage loan terms. Contact a DSF lawyer today for assistance.

This blog was co-authored by articling student Rachel Weitz.

Disclaimer: This blog is for educational purposes only and does not constitute legal advice. If you are in need of assistance, please contact a lawyer. Each case is unique, and a lawyer with the proper training and sound judgment can provide you with advice tailored to your specific situation and needs.

[1] Interest Act, RSC 1985, c I-15, s 2 [Interest Act].

[2] Krayzel Corporation v Equitable Trust Co., 2016 SCC 18 at para 4 [Equitable].

[3] Bank of Canada, “Interest rates posted for selected products by the major chartered banks,” 2005-2010, retrieved on September 20, 2024, <https://www.bankofcanada.ca/rates/banking-and-financial-statistics/posted-interest-rates-offered-by-chartered-banks/>.

[4] Equitable, supra note 2 at para 5.

[5] Ibid at para 6.

[6] Ibid at para 7.

[7] Ibid at para 1.

[8] Ibid at para 2.

[9] Ibid at para 21.

[10] Ibid at para 25.

[11] Ibid at para 31.

[12] Ibid at para 33.

[13] Ibid at para 35.

[14] Ibid.

One of the unfortunate circumstances of defaulting on mortgage obligations is the possibility of foreclosure or power of sale. These terms are often, but incorrectly, used interchangeably. Both foreclosure and power of sale result in repossession and sale of the home, but the manner in which the repossession occurs differs depending on which process is used.

Power of Sale

A power of sale is the most common forced sale process. A power of sale occurs when the mortgagee (the lender), obtains the legal right to evict the occupants of a property due to a default in their mortgage payment. The mortgagee then sells the property to recover any funds owing.

The power of sale process begins with the issuance of a Notice of Sale by the mortgagee. Once that is granted, there is a 35-day redemption period in which the mortgagor (the borrower), can bring mortgage arrears current.

If the mortgagor is unable to pay the arrears, the mortgagee will receive an issuance of judgment by the court. At that point, the mortgagee can obtain a Writ of Possession and proceed to sell the home.

Foreclosure

In a foreclosure, the mortgagee takes the legal title to the property. In other words, the mortgagee has complete ownership and control over the property and can sell the property as they see fit. Foreclosures may be preferable to lenders when the real estate market is down, and the value of the property is not currently high enough to repay the mortgage debt.

To commence an action for foreclosure, the mortgagee files a Notice of Intention to Redeem. Upon receiving a final order of foreclosure, the mortgagee is free to deal with the property however they want.

This process is lengthier and typically does not begin until several months of missed payments.

A court of equity is willing to hear a meritorious application for relief and set aside a final order of foreclosure. Banbury v Tahir outlined five requirements that must be satisfied:

1. reasonable promptness on the part of the applicant;
2. reasonable prospect of payment at once or in a short period of time;
3. activity on the part of the applicant to raise the money necessary to redeem on time;
4. the applicant must have a substantial interest in the property; and
5. where the property has been sold after foreclosure, the rights of the purchase will not be unduly prejudiced.

Below is a list of key differences between the two terms.

This blog was co-authored by summer law student, Barbara Attia.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.”

What is garnishment?

Garnishment is a legal process often initiated when individuals default on their financial obligations. Garnishment orders allow creditors to seize assets – typically a person’s wages – from third parties. These orders can also be used to access funds in a debtor’s bank account. This financial recourse is usually pursued by creditors when they have exhausted other means of debt collection. In most cases, garnishment can only be sought after a creditor has obtained judgment against a debtor. However, in some instances, like with debts owed to the Canada Revenue Agency (CRA), garnishment can occur without the necessity of obtaining a court order.

Who can seek an order for wage garnishment?

Various types of creditors and institutions can obtain a garnishment order to recover the money owed to them. These entities encompass a wide range of financial institutions and government bodies, including credit card companies, collection agencies, government agencies (such as the Family Responsibility Office or CRA), entities responsible for collecting student loans, payday lenders, banks, and private lenders.

To what extent can wages be garnished?

The extent to which wages can be garnished varies based on the type of debt and the jurisdiction in which you reside. Generally, if someone owes debt in Ontario, the maximum percent of their wages that can be garnished is 20%. However, when it comes to the enforcement of an order for support or maintenance, a maximum of 50% of a person’s wages can be garnished. Ultimately, a court has the ability to determine the amount to be garnished based on each individual’s finances.

What cannot be garnished?

Not all types of income are subject to wage garnishment. The Ontario Works Act, provides that basic financial assistance is not subject to garnishment, attachment, execution, or seizure. This safeguard ensures that individuals who are already in vulnerable financial situations can maintain access to essential support. Similarly, government pension income, such as the Canada Pension Plan and Old Age Security, is shielded from garnishment from standard creditors. However, it should be noted that such income can be seized by the CRA.

Can you stop a garnishment?

The short answer is no. One of the only ways to stop a wage garnishment order is to pay off the debt. Otherwise, if your financial situation calls for it, you can make a consumer proposal or file for bankruptcy, both of which create an automatic stay of proceedings.

Conclusion

Garnishment is a legal process implemented to facilitate the repayment of debts when other avenues have been exhausted. It is a tool used by creditors and government agencies. The regulations governing it can vary by jurisdiction and the type of debt. Understanding the limits on garnishment and the protections in place for certain types of income can help individuals navigate the complexities of debt repayment and maintain their financial stability during challenging times.

For more information regarding Bankruptcy, Collections, Fraud, and/or Trusts related topics, please contact Hyland Muirhead at Devry Smith Frank LLP at (416) 446-5092 or hyland.muirhead@devrylaw.ca.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.”

This blog was co-authored by Articling Student, Toni Pascale.

In the recent case of Ontario Securities Commission v. Camerlengo Holdings Inc., 2023 ONCA 93, the Ontario Court of Appeal (ONCA) determined that when property is conveyed with a general intent to defraud creditors, the transfer can be contested by subsequent creditors, irrespective of their creditor status at the time of the transaction.

Background

The personal respondents, Fred and Mirella Camerlengo, are spouses who purchased a family home in 1988 as joint tenants. Fred is the sole director and shareholder of the corporate respondent, Camerlengo Holdings Inc. (“HoldCo”).

In February 1996, Fred and his business partner established Gridd Electrical Services Inc. (“Gridd”), an electrical contracting business that operated through various corporations such as HoldCo. Both Fred and his business partner transferred their family homes to their respective spouses without any consideration. The transfers were facilitated by the same lawyer, and on the same day. Following the transfer, Fred continued residing in the family home, which Mirella occasionally mortgaged to support Fred’s business endeavours.

Fred and Mirella allegedly made the transfer due to concerns about Fred’s potential exposure arising from their rapidly expanding electrical services business, which involved undertaking high-risk projects.

In 2011, financial troubles arose for Fred and to address this, Fred obtained a $200,000 loan through Bluestream International Investments Inc. (“Bluestream”).

Bluestream came under scrutiny from the Ontario Securities Commission (OSC) when its business associate was discovered to be engaging in fraudulent activities, including trading without registration, and unlawfully distributing securities in an investment scheme. In 2018, the OSC issued a disgorgement order against Bluestream on behalf of the defrauded investors, leading the OSC to initiate a lawsuit against Fred, Mirella and HoldCo to recover the loan amount.

The OSC challenged the 1996 transfer of Fred’s interest in the family home to Mirella, alleging that the transfer was made fraudulently, with the intent of avoiding future creditors.

Motion to Strike

Fred and Mirella brought a motion to strike the statement of claim on the basis that the OSC’s pleadings did not disclose a reasonable cause of action. The motion was dismissed, except with respect to the claims of fraudulent conveyance.

The motion judge considered section 2 of the Fraudulent Conveyances Act (FCA), which states:

Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.

The motion judge concluded that because Bluestream, and consequently OSC, were not creditors when Fred transferred his interest in the home to Mirella, they did not fall under the category of “creditors or others” per section 2 of the FCA.

Court of Appeal overturns Lower Court Decision

The Court of Appeal (ONCA) overturned the motion judge’s decision, ruling that the law against fraudulent conveyances can still apply to transfers made to avoid potential future debts. Citing IAMGOLD Ltd. v. Rosenfeld, [1998] O.J. No. 4690, the ONCA clarified that a subsequent creditor, one who was not a creditor at the time of the transfer, can challenge the transfer if it was intended to “defraud creditors generally, whether present or future.”

To support the inference of an intention to defraud creditors, the ONCA outlined various “badges of fraud,” such as the debtor’s precarious financial state at the time of the transaction, the existence of family or close relationships between parties, divestment of a substantial portion of assets, and evidence of defeating, hindering, or delaying creditors.

The OSC presented several relevant facts in their plea, which the ONCA found compelling in inferring an intention to defraud creditors:

• Fred transferred the property to his wife without consideration;
• The transfer occurred after 16 years of joint ownership and 4.5 months after incorporating Gridd with his business partner;
• Fred and his business partner used the same lawyer to transfer their family homes to their wives simultaneously;
• The transfer coincided with Fred’s concerns about personal liability from his rapidly expanding high-risk electrical contracting business; and
• Despite the transfer, Fred continued treating the property as his own.

Based on the above, the ONCA found sufficient grounds to support the inference of an intention to defraud creditors, allowing the OSC’s claim to proceed.

Conclusion

The ONCA’s ruling has significant implications for cases where individuals or entities attempt to shield assets from potential liabilities by transferring them to others (such as spouses and children), and it highlights the importance of considering the broader intent behind such transfers when assessing their validity.

It is important to note that during the oral hearing, the respondents attempted to raise an argument about the statute of limitations. However, since this argument was not presented in the lower court, new arguments can only be introduced on appeal with special permission. The ONCA, in this case, declined to grant permission for the introduction of the new argument.

For more information regarding Bankruptcy, Collections, Fraud, and/or Trusts related topics, please contact Hyland Muirhead at Devry Smith Frank LLP at (416) 446-5092 or hyland.muirhead@devrylaw.ca.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.”

This blog was co-authored by Articling Student, Owais Hashmi.

Sources: Ontario Securities Commission v. Camerlengo Holdings Inc., 2023 ONCA 93