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Improvident Sale Not Proven by Third Mortgagee

In Kalfayan v. Stanley the court considered a third mortgagee’s claim that the second mortgagee exercised her power of sale improvidently, effectively leaving no funds from which to realize on his security.

The buyers had purchased the property for $699,000, financed with a first mortgage of $500,000.  The second mortgagee was Stanley, who advanced $89,000.  The third mortgagee was Kalfayan, who loaned $180,000.

When the second mortgage went into default in late 2015, Stanley opted to exercise her power of sale. The property was listed for seven months in early 2016 for $739,000.  No offers were received.  It was re-listed with a new agent in September 2016 and a buyer named Rahman offered $760,000 for it.  He submitted a $20,000 deposit and executed an agreement in November 2016.   The transaction did not close at that time, partly because of disputes over the amounts in the first mortgagee’s discharge statements. Still, Rahman maintained the purchase agreement was binding, and he registered a caution on title after paying another $17,000 in land transfer taxes.

Meanwhile, the original mortgagors declared bankruptcy in 2017. They concurrently obtained an $800,000 offer from another party, Chan, but this was essentially a notional offer since the promised $8,000 deposit was never paid.

Stanley persisted in trying to sell. She got several appraisals in July 2017, and obtained values of between $730,000 and $775,000.  After obtaining a writ of possession she served a second Notice of Sale and continued with her search for a buyer.  Rahman, in the meantime, still insisted that he was entitled to the property under the agreement he signed.  Adding to his $37,000 investment so far, he increased his offer to $780,000 (up by $20,000 from the original) to more closely reflect the most recent fair market value evaluations.   Stanley eventually accepted Rahman’s offer, and the sale closed in October 2017.

As a result of this sale, the first mortgagee was paid out in full, with interest.  As second mortgagee, Stanley realized only part of the $89,000 she had advanced, due to certain fees that had to be deducted.

Kalfayan, who was the third mortgagee, received nothing. He sued Stanley, alleging that she had made an improvident sale and could have obtained a larger sum than the price Rahman paid. Stanley brought a motion for summary judgment, dismissing Kalfayan’s action.

Her motion was granted.  The court began by stating the correct test for whether Stanley conducted an improvident sale.  It involved assessing whether she acted negligently and contrary to her duty of care, in light of the particular facts of the case. That duty of care required her to take reasonable precautions to attempt to obtain the market value of the property.  This in turn involved the court considering whether: (1) she exercised the power of sale in good faith; (2) she obtained appraisals and tried to obtain fair market value; and (3) the property was marketed widely, including the use of a multiple listing service. The court also had to consider how long the property was on the market.

Here, the court rejected Kalfayan’s complaint that Stanley ought to have re-listed the property to solicit other offers during August 2017 when the first listing expired.  At that point, the property had already been listed for six months; this was in addition to the prior six-month listing period in 2016 where no offers were received except from the ultimate buyer, Rahman.  The offer from the other potential buyer, Chan, was only slightly higher; it was also suspect since he offered (but never paid) only a minimal deposit and there were questions about his financial ability to close the deal.

Other facts supported the conclusion that Stanley had acted reasonably. Kalfayan had tendered no evidence that the property sold for below market value. The appraisals Stanley had obtained were not low. Indeed, they were similar to the ultimate purchase price obtained from the buyer, Rahman.  Moreover, a decision not to sell to him at that price would likely have sparked litigation, since he believed he was entitled to buy the property. This would have raised Stanley’s costs as well.

In these circumstances, it was not unreasonable for Stanley to decide there was nothing to gain from listing the property again.  The court concluded that the sale was not improvident and the action against her was dismissed.   See Kalfayan v. Stanley, 2019 ONSC 4680.