Debtor need not pay amount due on mortgage after paying sum for promissory note: Ontario case

The creditor was not entitled to advance or maintain a claim under the security and to enforce a judgment on that security when the debtor had already paid the principal debt, the Ontario Court of Appeal said in a recent case.

In Grewal v. 102095 P.E.I. Inc., 2022 ONCA 636, the individual appellant – sole shareholder of the appellant 2151488 Ontario Inc. – borrowed money from the respondent to fund his purchase of shares in the appellant 102095 P.E.I. Inc. He signed a promissory note and secured it via a collateral mortgage that 2151488 Ontario Inc. took over certain property. Later, he defaulted on the promissory note’s payments.

The respondent brought an action against the appellants relating to the promissory note and the collateral mortgage. The amount due on the collateral mortgage was significantly larger than the amount owing on the promissory note, given the difference in interest rates. The respondent then filed a summary judgment motion.

The motion judge found no genuine issue for trial and granted summary judgment on the promissory note and the collateral mortgage. He ordered the individual appellant and 102095 P.E.I. Inc. to pay the respondent $474,396.05. He also directed 2151488 Ontario Inc. to pay the respondent $532,804.80. The respondent took possession of the property that the collateral mortgage covered.

The individual appellant paid the respondent the amount for the promissory note. On the respondent’s demand, he later paid the additional amount awarded on the collateral mortgage so that he could regain possession of the property given as security for the promissory note. The appellants appealed the summary judgment and asked to return the additional paid amount.

Ontario Court of Appeal allows appeal

The appellate court set aside the judgment against 2151488 Ontario Inc. and ordered the respondent to repay $244,572.89.

The appellate court explained that the respondent had no right to demand payment of the additional amount awarded on the collateral mortgage. The respondent was not entitled to claim on the security – specifically, the collateral mortgage – after the individual appellant paid the amount due on the principal debt, as represented by the promissory note, the court said.

The Court of Appeal ruled that the motion judge improperly granted what was essentially two separate judgments relating to the same obligation. Instead, the judge should have made the judgment on the collateral mortgage contingent upon a failure to pay the judgment on the promissory note, considering that the collateral mortgage obligation would only arise if the principal debt were unpaid, the appellate court concluded.

This conclusion was in line with the security’s fundamental purpose, as supported by the word “collateral,” the court said.