



COURT OF APPEAL FOR ONTARIO

CITATION: Winters v. Hunking, 2017 ONCA 909

DATE: 20171127

DOCKET: C63304

Sharpe, Blair and Epstein JJ.A.

BETWEEN

John David Winters & Margaret Louise Winters

Plaintiffs (Respondents)

and

Ray Harvey Hunking
& The Manufacturers
    Life Insurance Company

Defendants (Appellant)

John A. Tamming, for the appellant, Ray Harvey Hunking

Tim Gleason and Rebecca Glass, for the respondents, John
    David Winters and Margaret Louise Winters

Heard: October 2, 2017

On appeal from the order of Justice Gordon D. Lemon of
    the Superior Court of Justice, dated January 16, 2017.

R.A. Blair J.A.:

[1]

Ray Hunking mortgaged his family homestead farm near Dundalk, Ontario,
    for more than he could afford to repay. Sometime after he failed to do so, the
    mortgagees obtained a default judgment for foreclosure. A motion to set aside
    the judgment failed, and this appeal is the result.

Background

[2]

Mr. Hunking did everything wrong.

[3]

After borrowing $350,000 from the Winters on the security of the farm,
    he made no payments on the mortgage and did not pay all the taxes as he had
    agreed. When the Winters commenced the foreclosure action, he did not defend or
    file a request to redeem or a request for sale. When the Winters afforded him
    time to sell or find re-financing, he took no steps to pursue the latter and, on
    his own admission, stubbornly resisted a sale. Although he received an oral
    offer to purchase the farm, he declined to pursue the offer because he felt it
    was too low. When served with a final order of foreclosure, obtained after he
    was noted in default, he did not move immediately for relief. Instead, he waited
    another 12 months before bringing a motion to set aside the default judgment,
    requesting, at that time, the right to redeem or to convert the foreclosure
    process to a judicial sale. His motion was dismissed.

[4]

From a procedural and strict mortgage-foreclosure perspective, Mr.
    Hunking attracts very little sympathy.

[5]

But there is another side to the story.

[6]

A 61-year old bachelor in ill health, Mr. Hunking is a low-income,
    illiterate, and physically disabled man, clinging unrealistically to his
    heritage and life as a farmer. According to medical information on the record,
    he is also severely mentally challenged and on daily doses of morphine for the
    chronic pain he endures, something that affects his reaction time and ability
    to respond to circumstances. He has lived on the mortgaged family homestead his
    entire life, acquiring it from his parents who, in turn, acquired it from his
    grandparents. It is apparent that he cannot continue in that capacity, and his
    doctor strongly suggests that he move into assisted living.

[7]

It is also apparent that the farm must be sold, and it is on this point
    that the appeal turns, in my view.

[8]

The evidence shows that a sale of the farm would generate a net equity (after
    payment of the mortgage in full, including interest and all costs) of approximately
    $250,000 to $337,000. What this appeal is really about, then, is not whether
    the remedies available to the mortgagees will enable them to recover the monies
    they advanced; it is about whether they  who will be paid in full and suffer
    no prejudice  or Mr. Hunking should receive the benefit of that significant
    equity.

[9]

Over one-quarter of a million dollars must represent a great deal of
    money to someone in Mr. Hunkings circumstances. It is he and his family
    predecessors who have contributed over many years to the build-up of that
    equity, not the mortgagees.

[10]

While I recognize that the motion judges decision was discretionary and
    entitled to deference, the gravamen of a decision whether to set aside a
    default judgment for foreclosure is whether the equities in favour of the
    mortgagor outweigh those in favour of the mortgagee or  to the same effect,
    adopting the language pertaining to setting aside default judgments, generally 
    whether the decision to set aside the order leads to a just result in all the
    circumstances. Respectfully, the motion judges decision does not lead to a
    just result.

[11]

As I shall explain, the motion judge made errors that, in my view,
    warrant appellate intervention. I would allow the appeal.

Analysis

(1)

The Applicable Principles

[12]

No one contests that the court has a broad jurisdiction to set aside a
    default judgment and grant relief against foreclosure wherever the equities in
    the mortgagors favour outweigh all that are against him or her. As stated in Walter
    M. Traub,
Falconbridge on Mortgages
, loose-leaf, 5
th
ed. (Toronto:
    Thomson Reuters, 2017), at p. 26-33:

It has been said that a court of equity is always ready to hear
    a meritorious application for relief against a foreclosure, and will open it
whenever good and
    substantial reasons for such a course are shown
to it, provided
    the application is reasonably made. The mere fact that the land has been sold
    to a third person is not alone an insurmountable obstacle, and
the true equitable
    principle is that the mortgagor may be permitted to redeem whenever the
    equities in the mortgagors favour outweigh all that are against him or her.
[Emphasis added.]

[13]

Nor is there much debate that the factors to be considered in the
    exercise of the courts discretion include:

(i) whether the motion to set aside
    was made with reasonable promptness;

(ii) whether there is a reasonable
    prospect of payment at once or within a short period of time;

(iii) whether the applicant has been
    active in endeavouring to raise the money necessary;

(iv) whether the applicant has a
    substantial interest in the property or the property has some special intrinsic
    value to him or her; and

(v) where the property has been sold
    after foreclosure (not the case here), whether the rights of the purchaser will
    be unduly prejudiced.

See generally,
Royal Bank of
    Canada v. Swan
, 1979 CarswellOnt 3420 (Master), at paras. 15-16, affd 1980
    CarswellOnt 3624 (Div. Ct.), at paras. 6-7;
355498 B.C. Ltd. v. Namu
    Properties Ltd.
,

1998 CarswellBC 2815 (S.C.), at para. 41, affd 1999
    BCCA 138, 171 D.L.R. (4th) 513;
Ricard v. Richards
, 1986 CarswellBC
    3757 (C.A.);
Coast-to-Coast Industrial Investment Co.
(2009), 88
    R.P.R. (4th) 86 (Ont. S.C.) at paras. 14-20; Gowling Lafleur Henderson LLP,
Marriott
    and Dunn,

Practice in Mortgage Remedies in Ontario
, loose-leaf, 5
th
ed. (Toronto: Thomson Reuters, 2017 Reissue), at pp. 15-12 to 15-13.

[14]

Various authorities have added a further more all-encompassing factor,
    namely, whether there are special circumstances justifying the reopening of
    the foreclosure or, more generally (as noted above), whether the equities in
    favour of reopening the foreclosure order outweigh the equities against doing
    so: see
Ricard
, at para. 14,
Namu Properties
(S.C), at para.
    41,
Golansky v. Vellucci
, 2006 CarswellOnt 2100 (Ont. S.C.), at paras.
    6-8, affd 2006 CarswellOnt 6504 (C.A.); Marriott and Dunn, at p. 15-14. To
    this I would add that a weighing of the equities cannot be done without taking
    into account the relative prejudice to the respective parties in making or not
    making the order.

[15]

Cases reopening a final order of foreclosure generally depend on their
    own particular facts: Marriott and Dunn, at p. 15-11. Since it is clear that
    this may be done at any time, even after the property has been sold (which is
    not the case here), I would observe as well that the various factors outlined
    above that turn on timeliness, need to be applied with this consideration in
    mind. As this Court has stated, in the context of setting aside default judgments
    generally, the various applicable factors are not to be treated as rigid rules;
    the ultimate task on such a motion is to determine whether the interests of
    justice favour granting the order:
Mountain View Farms Ltd. v. McQueen
,
    2014 ONCA 194, 317 O.A.C. 255, at paras. 47-51.

[16]

All parties accept that the decision to set aside a default judgment for
    foreclosure is discretionary. As such, it is entitled to deference in the
    absence of an error in law or principle, a palpable and overriding error of
    fact, or unless the decision is so clearly wrong as to amount to an injustice:
    see
HSBC Securities (Canada) Inc. v. Firestar Capital Management
    Corporation
, 2008 ONCA 894, 245 O.A.C. 47, at para. 22;
Ontario
    Housing Corp. v. Ong
, (1988) 63 O.R. (2d) 799 (Ont. C.A.). Again, however,
    it is the latter consideration that prevails in the end: the motion judge must
    ultimately determine whether the interests of justice favour granting the
    order:
Firestar,
at para. 30.

(2)

The Motion Judges Decision

[17]

The motion judge touched on the principles and factors outlined above. He
    reviewed the background facts. He dealt at some length with an argument that
    was a particular focal point of the parties concerning the application of the
Farm
    Debt Mediation Act
, S.C. 1997, c. 21, (
FDMA
) to which I will
    return later. He outlined the positions of the parties and he conducted his
    analysis, bearing in mind most of, if not all, the relevant legal
indicia
.
    Generally, I would be disinclined to interfere with the exercise of discretion
    in such a case.

[18]

However, the motion judge made four errors that, taken together, tainted
    his reasoning and, in my view, warrant appellate intervention. I do not think it
    matters whether they are viewed as errors in principle or of mixed fact and law
    because, in the end, the result reached does not meet the ultimate weighing of
    the equities/justness of the case threshold.

[19]

First, the motion judge mischaracterized the nature of the appellants
    mental frailties in his analysis, treating them as simply a matter of his mental
    competence to participate in the proceeding. As a result, he gave little, if
    any, consideration to whether those mental frailties, together with the
    appellants obvious physical limitations and the effect of his medications,
    could have provided some explanation for the appellants relative inaction and
    failure to respond to the foreclosure process. Instead, the motion judge fastened
    on Mr. Hunkings admitted stubbornness.

[20]

Secondly, the motion judge erred in his consideration of the substantial
    interest factor referred to above. Although he accepted that the appellant had
    a substantial interest in the farm, the motion judge appears to have viewed
    that substantial interest solely as a matter of the appellants sentimental
    attachment to the property, rather than focussing on the appellants interest
    in the form of the substantial equity that remained in the property after all
    mortgage payments and costs are paid.

[21]

Thirdly, the motion judge erred in confining his analysis of the
    reasonable prospect of repayment factor to Mr. Hunkings inability, or
    unwillingness, to refinance the mortgage, when the record shows that, on a sale
    of the farm, the mortgagees would be fully repaid.

[22]

Finally, the motion judge failed to analyse the true nature and significance
    of the magnitude of the windfall to the respondents in the context of the
    appellants circumstances and the prejudice to him of not setting aside the
    default judgment for foreclosure, and to weigh it against the virtual lack of
    prejudice to the respondents, who would be completely reimbursed and paid in
    full had a sale of the property been ordered.

[23]

The motion judge stated he was not persuaded that the arguments of
    notice and windfall strongly outweigh[ed] the other equitable factors in play.
    As I shall explain, however, given the foregoing errors in his analysis of the relevant
    equitable factors, his conclusion is not entitled to the deference it would
    otherwise attract, in my view.

(3)

Mr. Hunkings Mental and Physical Health Issues

[24]

It is conceded that the Mr. Hunking was at all material times frail, in
    poor health and in need of assisted living. His doctor reported that he is
    severely mentally challenged with significant cognitive impairment, and
    described him as a very simple man. The morphine he takes daily for chronic
    pain causes him to experience side effects of drowsiness and slowed reaction
    time. None of this is contested.

[25]

In outlining the positions of the parties, the motion judge acknowledged
    Mr. Hunkings submissions regarding these health-related issues. However, in
    his analysis of the applicable criteria  particularly the factors relating to
    timely response and to the failure to take steps to put the mortgage in good
    standing  the motion judge limited his assessment of those frailties to his
    conclusion that the appellant was mentally competent in what I have described
    as the legal sense, i.e. he was able to cope with the questions put to him on
    cross-examination and give responsive answers. The motion judge dismissed the
    appellants mental issues (saying nothing of his physical limitations) in the
    following single paragraph:

There is no argument that Mr. Hunking was in any way mentally
    incompetent; his counsel was at pains to confirm that. On cross-examination,
    Mr. Hunking had little difficulty with the questions and was clear with his
    answers.

[26]

That was not the issue, however. The issue was whether Mr. Hunkings
    mental traits and his physical health problems, together with the side effects
    of his morphine treatment, could have had an impact on his responsiveness, or
    lack of responsiveness, to the mortgage issues, including his ability to
    understand and respond to whatever advice he received from his lawyer, and
    could have provided an explanation as to why his responses were not timely in
    all the circumstances. There was no such analysis.

[27]

Yet all of the mental and physical frailties put forward in the
    appellants submission, set out above, were supported by the evidence. In my
    view, the motion judge erred in failing to consider them in his assessment of
    Mr. Hunkings delay in bringing the motion and of his unresponsiveness to the
    foreclosure proceedings.

(4)

Substantial Interest/Reasonable Prospect of Repayment

[28]

These factors may be considered together.

[29]

Although the motion judge accepted that Mr. Hunking had a substantial
    interest in the farm, he appears to have equated that substantial interest
    with Mr. Hunkings sentimental attachment to the farm. Concluding that the
    farm will have to be sold, the motion judge therefore discounted Mr. Hunkings
    substantial interest. But he failed to take into account that, when the farm
    is sold, there will be a substantial equity remaining after the mortgagees are
    paid in full and that Mr. Hunkings substantial interest lay in that equity
    as well.

[30]

Similarly, having acknowledged that the farm will have to be sold, the
    motion judge should have taken into account that its value would be sufficient
    to repay the mortgagees and that, therefore, there was a reasonable prospect of
    repayment. The reasonable prospect of repayment factor is not confined to the
    mortgagors ability to refinance, or otherwise pay out the mortgage, absent a
    sale.

[31]

For these reasons, the motion judge erred in discounting the
    substantial interest and reasonable prospect of repayment factors in his
    analysis of the equities favouring the mortgagor.

(5)

The Substantial Equity/Windfall Issue

[32]

There is uncontested evidence in the record that there is a very
    substantial net equity in the farm, after payment of the mortgage principal,
    interest and all related costs in full. There are no other encumbrances against
    the property.

[33]

Two expert appraisals place the value of the farm at between $825,000
    (the low appraisal) and $887,000 (the high appraisal). On cross-examination,
    Mr. Hunking acknowledged that he had received an oral offer to purchase the
    farm in the amount of $600,000, but that he had not pursued it because he
    thought that price was too low. It turns out his opinion is supported by the
    evidence. If Mr. Hunking had accepted that offer, as the Winters argued before
    the motion judge he should have in order to pay off the mortgage and have money
    left over for himself, he would have been leaving a good deal of his lifes
    equity behind.

[34]

At the time of the hearing on December 22, 2016, the respondents
    estimated the outstanding mortgage account to be around $500,000 plus costs of
    the application. The mortgage calls for monthly payments of $2,783.77 per
    month, which is roughly the 8.5% interest payable. Even allowing for the build-up
    of additional interest and costs by the end of 2017, the amounts outstanding
    might rise to, say, $550,000 - $575,000, leaving a net equity of between a low
    of $250,000 and a high of $337,000. Even if those estimates are off by a few
    percentage points, and taking into account that there would be costs associated
    with a judicial sale, there is a significant amount of equity in the property.

[35]

It is important to recall that
a mortgage operates as security for
    the payment of a debt
. While at common law a mortgage constituted the
    conveyance of legal title to the mortgagee, subject to re-vesting in the
    mortgagor upon payment of the debt, equity long ago overtook the law in that
    respect, and began treating a mortgage as security only. This is
    well-summarized in the oft-cited passage from the decision of Jessel M.R. in
Campbell
    v. Holyland
(1877), 7 Ch.D. 166, at pp. 171-172:

The principle in a Court of Equity has always been that, though
    a mortgage is in form an absolute conveyance when the condition is broken,
in equity it is
    always security
; and it must be remembered that the doctrine
    arose at the time when mortgages were made in the form of conditional
    conveyance, the condition being that if the money was not paid at the day, the
    estate should become the estate of the mortgagee; that was the contract between
    the parties;
yet
    Courts of Equity interfered with actual contract to this extent, by saying
    there was a paramount intention that the estate should be security, and that
    the mortgage money should be debt; and they gave relief in the shape of
    redemption on that principle.

... In [a] foreclosure suit the Court made various
    ordersinterim orders fixing a time for payment of the moneyand at last there
    came the final order which was called foreclosure absolute,
that is, in form,
that the mortgagor should not be allowed to redeem at all;
but it was form
    only, just as the original deed was form only
; for the Courts of
    Equity soon decided that, notwithstanding the form of that order, they would
    after that order allow the mortgagor to redeem. That is, although the order of
    foreclosure absolute appeared to be a final order of the Court, it was not so,
but the mortgagee
    still remained liable to be treated as mortgagee and the mortgagor still
    retained a claim to be treated as mortgagor, subject to the discretion of the
    Court
. [Emphasis added.]

[36]

Foreclosure is a remedy available to a mortgagee upon default in which,
    as Laskin J. put it in
Rushton v. Industrial Development Bank
, [1973]
    S.C.R. 552, at p. 562, there has always been close regard for the rights of
    the mortgagor. The rationale for foreclosure is not to punish a defaulting mortgagor
    for being obdurate or stubborn, or to express the courts reservations about
    the conduct of the mortgagor. Its underlying rationale is to enable the
    mortgagee to recover payment of the debt for which it stands as security, to
    the extent the value of the property permits. A mortgagee has no inherent right
    or, absent prejudice, any equitable right to benefit from foreclosure to a
    greater extent than that, in my view.

[37]

The motion judge did address the appellants argument with respect to
    windfall and the law pertaining to it. He acknowledged that there were cases
    where final orders of foreclosure have been set aside where there has been a windfall,
    but observed that in those cases there were also factors other than windfall
    that led to the order being set aside: see, for example,
Namu
(S.C.),
    and
Ontario Housing Corp. v. Ong
(1987), 58 O.R. (2d) 125 (Ont. H.C.),
    affd (1988), 63 O.R. (2d) 799 (Ont. C.A.). He was not satisfied that windfall,
    together with other circumstances, was sufficient to outweigh the other factors
    in play that favoured dismissal.

[38]

I have given careful consideration to the motion judges reasons in this
    respect because I accept that the decision was made in the exercise of his
    discretion, to which considerable deference is ordinarily due. In outlining the
    positions of the parties, he acknowledged Mr. Hunkings claim that the farm was
    worth between $825,000 and $900,000. I am troubled, however, by the lack of any
    apparent recognition in the motion judges analysis of the magnitude of the
    potential windfall in this case  possibly almost as much as the principal
    amount of the mortgage. And I am particularly troubled by the lack of such an
    analysis in circumstances where, in the event of a sale based on their security,
    the respondent mortgagees will recoup the debt in full and suffer no prejudice,
    whereas Mr. Hunking will be severely prejudiced by the loss of what are, in
    effect, his lifes savings.

[39]

The respondents point out that they have taken steps to maintain the
    property, but they have provided no indication of what, if any, costs they have
    incurred in the taking of those steps. They quarrel mildly with one aspect of
    the real estate appraisals  the attribution of a value of $20,000 to the barn
     but have produced no expert evidence contradicting the appraisals. They
    submit, correctly, that Mr. Hunking had sources of income, albeit modest
    sources, from which he could have made some payments on the mortgage: he lived
    on a disability pension of $600 per month, together with a small rental income
    from 25 acres of land farmed by another individual (at $50 per acre) and rental
    income of up to $21,000 per year from a wind turbine lease. But none of this
    detracts from the fact that there is a very significant equity in the property.

[40]

A windfall in itself may not be dispositive of a motion to set aside a
    final order of foreclosure, but it remains an important factor in the analysis:
    see, for example,
Namu
(B.C.C.A.), at para. 17;
Coast-to-Coast
    Development Co.,
at para. 19;
Ontario Housing Corp.
(H.C.), at
    pp. 127-128;
Platt v. Ashbridge
(1865), 12 Gr. 105 (U.C. Ch.). Where the
    analysis fails to take into account the magnitude of a windfall in the context
    of the circumstances, including any prejudice or the lack of prejudice to the
    mortgagee, the windfall factor has not been property assessed. It cannot be
    simply a matter of the weight to be given to the windfall factor when the
    significant magnitude of that factor has not been addressed in context.

[41]

Here  based on the appraisal evidence  there is every likelihood that,
    through a sale of the property, the respondent mortgagees will be completely
    reimbursed and thereby suffer no prejudice, other than a certain inconvenience.
    The property has not been sold, and there are no other third-party rights that
    may be adversely affected. On the other hand, the appellant will suffer severe
    prejudice. He will lose over one-quarter of a million dollars in equity built
    up on the family homestead by him and his parents and grandparents for over a
    century. Over one-quarter of a million dollars that would provide a much-needed
    source of support over the rest of his life. Over one-quarter of a million
    dollars that would fall as a complete windfall to the respondent mortgagees who
    will have suffered no prejudice.

[42]

Respectfully, viewed together with the other factors outlined above, I do
    not accept that such a result is what the justice of the case requires.

(6)

The Farm Debt Mediation Act

[43]

At the hearing and on the appeal, much attention was focussed on an
    issue relating to the
FDMA
. The issue arises because if Mr. Hunking
    were a farmer as defined at the relevant time  i.e., a person farming for
    commercial purposes  the respondents were required by s. 21(1) of the
FDMA
to give him written notice of their intention to enforce their remedy against
    the property and advise him of his rights to apply for a stay of proceedings
    under the
Act
. They gave no such notice, and their failure to do so
    would render the foreclosure proceeding null and void, pursuant to s. 22(1),
    and provide a complete answer to the appellant in defence of the foreclosure.

[44]

There was considerable debate before the motion judge, and before us,
    about the applicability of the
FDMA
. Most of it focussed on whether
    the appellant qualified as a commercial farmer, but there was also an issue
    regarding the material date for the operation of the provisions (the date the
    mortgage was granted, December 2012, or the date of the commencement of
    proceedings in January 2015?).

[45]

Given the appellants inability to continue his farming operations and
    his receipt of a disability pension based on that state, and the fact that he
    presently has no livestock on the farm, there was support for the argument that
    he was not a commercial farmer. On the other hand, in November, 2013  11
    months after the mortgage was granted  the appellant purchased a small herd of
    16 cattle from a livestock yard, and incurred veterinary expenses in relation
    to the cattle.
[1]
His initial application for a disability pension was denied in 2013 on the
    grounds that, although his physical health was failing, he was still able to do
    some work; it was subsequently granted in 2014, after his physical health
    deteriorated further.


[46]

I do not think much turns on this debate for purposes of the appeal,
    however. The motion judge accepted that there existed a live issue as to
    whether the Act applie[d] and an arguable defence for the appellant based on
    the
FDMA
, and proceeded in his analysis on that basis. My conclusions
    concerning the motion judges treatment of the impact of the appellants mental
    and physical health issues and of the significant windfall to the respondent
    are sufficient to dispose of this appeal and I express no view as to whether
    the motion judge erred in finding that the appellant raised an arguable defence
    based on the
FDMA
.

Disposition

[47]

For the foregoing reasons, I would allow the appeal, set aside the
    default judgment for foreclosure and the noting in default, and order that the
    foreclosure proceedings be converted to an immediate judicial sale pursuant to
    rule 64.03(22) of the
Rules of Civil Procedure,
R.R.O. 1990, Reg. 194.

[48]

In accordance with the agreement of counsel, the respondents shall pay
    the appellants costs of the appeal, fixed in the amount of $12,000, inclusive
    of all taxes and disbursements. The appellant shall also be entitled to the
    costs below in the amount previously fixed in favour of the respondents.

Released: November 27, 2017

R.A. Blair J.A.

I agree Robert J.
    Sharpe J.A.

I agree Gloria
    Epstein J.A.





[1]

According to the appellants CPP disability benefit file, all
    but two of the cattle died because the appellant forgot to feed them  a
    further indication of his unclear state of mind.


