Restraining a mortgagee from exercising its power of sale?

Mao v Liu, 2024 ONSC 752 
In what circumstances can you restrain a mortgagee from exercising its power of sale?

Overview: In this case, the court considered a request by a shareholder to restrain a mortgagee from exercising its power of sale over a gas station’s property and for the appointment of a receiver/manager or an investigative receiver. The court refused to grant the request, ruling that only in extreme cases will a mortgagee be restrained from exercising its rights and that there was no basis to do so in this case. The mortgagor had defaulted on repayment of the principal amount of the loan and the mortgagee had given the requisite notices providing the mortgagor with an opportunity to redeem. The company was not financially capable of redeeming the mortgage, while the shareholder had no right to redeem it (and had not offered to do so in any event).

The Plaintiff had a 14% shareholder interest in the defendant corporation, Ecounion. Ecounion operated an Esso gas station and a convenience store in Brantford, Ontario. The Plaintiff brought a motion to enjoin the sale of the gas station’s property and for the appointment of a receiver and manager for the gas station business. Alternatively, he sought the appointment of an investigative receiver. The motion was opposed by the two individual defendants—one of whom, Zhen Liu, had a 56% shareholder interest in Ecounion, and the other, Jun Liu, was the general manager of Ecounion. Ecounion itself was unrepresented.

From the time of Ecounion’s acquisition of the gas station in 2017 until July 2020, the Plaintiff managed the business—having had signing authority and overseeing the day-to-day operation of the business. In July 2020, Zhen Liu increased his shareholdings in Ecounion to a majority interest (56%), and the management of the business transitioned to Jun Liu. The Plaintiff’s oversight over the business operations continued until February 2023, when he stopped working at the gas station.

In November 2021, the Royal Bank of Canada, which was Ecounion’s lender, refused to renew the mortgage it had on the gas station business for, among other reasons, Ecounion’s failure to satisfy the debt service ratio required under the mortgage. Under the direction of the Plaintiff, Jun Liu subsequently arranged for a refinancing with The Toronto-Dominion Bank to replace the lost financing from RBC. On January 27, 2022, the TD Bank transaction closed, and it made a $3.6 million first mortgage loan to Ecounion with a $70,000 line of credit. However, in July 2022, TD Bank terminated Ecounion’s credit facility, which then had an outstanding balance of approximately $3.6 million.

The parties decided, for the third time, to refinance Ecounion’s first mortgage indebtedness. Having lost two conventional lenders, Ecounion was no longer able to find conventional replacement financing. To solve the problem, in October 2022, Zhen Liu personally made a $3.8 million mortgage loan to Ecounion to replace the TD Bank’s financing. The first month’s mortgage payment was made on Zhen Liu’s loan as a holdback from the mortgage advance. No mortgage payments were made thereafter.

Zhen Liu was not prepared for this state of affairs to continue and wished to sell the business as a going concern for $4.4 million. A real estate agent secured an offer to purchase, but the Plaintiff did not wish the business sold for less than $5.0 million and he refused to proceed with the sale. In May 2023, the Plaintiff commenced this action for an oppression remedy pursuant to s. 41 of the Canada Business Corporations Act, and he brought a derivative action on behalf of Ecounion. Undeterred, in August 2023, Zhen Liu commenced a mortgage enforcement action for payment on the covenant and for possession of the mortgaged property, and issued a Notice of Sale under Mortgage. The outstanding debt was $4,176,092 of which $3.8 million was the principal indebtedness. The notice indicated that Ecounion, as mortgagor, had until September 22, 2023 to repay the indebtedness or the mortgagee, Zhen Liu, intended to sell the property by power of sale.

There were two branches to the Plaintiff’s motion. One branch was to restrain a mortgagee from exercising its power of sale. 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. 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.

The mortgagor defaulted on repayment of the principal amount of the loan. The mortgagee gave the requisite notices providing the mortgagor with an opportunity to redeem. Ecounion was not financially capable of redeeming the mortgage. The Plaintiff was not the guarantor of the indebtedness, and, practically and technically speaking, personally had no right to redeem the mortgage. In any event, he had not offered to redeem the mortgage.

There was also no basis for the Plaintiff to enjoin the enforcement of the mortgage qui timet, based on some bizarre allegation that Zhen Liu would sell the property improvidently. Typically, in a mortgage enforcement situation, the mortgagee has no incentive to recover more than its indebtedness because it must account for any surplus to the mortgagor and because the mortgagee can be sued for an improvident sale. Thus, the law imposes a duty of care on the mortgagee to take reasonable care in the exercise of its power of sale. Here, the mortgagee actually had an incentive to sell the property at the highest possible price. After all, Zhen Liu was a 56% shareholder in the mortgagor, and he had more invested than just his mortgage in Ecounion’s business. In contrast, the Plaintiff had already been repaid several hundreds of thousands of dollars for his loan investment in Ecounion and his 14% interest in Ecounion was a quarter of Zhen Liu’s 56% interest.

Moreover, the Court noted that the Plaintiff and Ecounion personally benefited from Zhen Liu’s mortgage loan, which retired the indebtedness to the TD Bank and discharged the Plaintiff from his personal guarantee of that indebtedness. The terms of Zhen Liu’s secured loan were more favorable than the existing line of credit. Without the mortgage loan, Ecounion would have been out of business.

The Plaintiff was mischievously interfering with Zhen Liu’s efforts to recover even the first mortgage indebtedness. The request for an interlocutory injunction was, accordingly, denied, and the motion was dismissed with full indemnity costs in accordance with the standard terms of Zhen Liu’s mortgage.

Judge: Justice Perell

Counsel: Oleg Roslak of Himelfarb Proszanski for the Plaintiff; Rory McGovern for the Defendants Zhen Qiang and Jun Liang Liu; and Ronald Allan of Ronald Allan Professional Corporation for Zhen Qiang Liu as mortgagee of the property owned by the Defendant Ecounion International Ltd.