Ingram v. Dorian
Arlen Ingram, Norman Ingram and 792636 Ontario Limited,
Michael V. Dorian, Les J. Hulka and Lichine U.S.A. Co.,
 O.J. No. 276
22 R.P.R. (2d) 198
31 A.C.W.S. (3d) 832
15 W.C.B. (2d) 429
Action No. 91-GD-17610
Ontario Court of Justice - General Division
January 31, 1992
Mortgages -- Criminal rate of interest -- Whether interest provisions void as offending section 347 of Criminal Code -- Whether finder's fee included in calculating rate of interest -- Whether finders' agreement valid.
This was an application for a declaration that the interest provisions of a mortgage were void as offending section 347 of the Criminal code, that the Finders Agreement between the applicants and L was illegal, void and unenforceable as breaching the provisions of the Mortgage Brokers Act and that D or H could not register a deed or obtain possession of the subject land without following the provisions of the Mortgages Act. The totality of interest, finders fees and legal fees appeared to exceed the 60 per cent rate declared criminal by the Code. The applicant were actively pursuing development of a condominium project when a mortgage matured. A replacement loan was put in place with D through L, an American business. The loan was repayable in full with interest at 58 per cent calculated annually. L charged a finders fees of $100,000.
HELD: The first two declarations sought were denied and the third was granted. D did not benefit from the payment of L's fees. The interest provisions did not contravene the Code. L breached the provisions of the Mortgage Brokers Act. However, the Act did not contain any provision making the receipt of fees by a non-registered mortgage broker illegal. The agreement provided that it was to be construed in accordance with the laws of Michigan.
STATUTES, REGULATIONS AND RULES CITED:
Criminal Code, R.S.C. 1985, c. C-46, s. 347. Mortgages Act, R.S.O. 1990, c. M.40. Mortgage Brokers Act, R.S.O. 1990, c. M.39.
Raymond G. Colautti, for the Applicants.
John Riggs and John Mill, for the Respondents, Michael V. Dorian and Les J. Hulka.
BROCKENSHIRE J.:-- This is an Application for a declaration that the interest provisions of a mortgage are void as offending s. 347 of the Criminal Code, and for other relief. The totality of interest, finders fees and legal fees appeared to exceed the 60 percent rate declared criminal by the Code. The narrow issue, on which I am told there is no authority, is whether that totality is applicable when the amounts making up the total were paid to different persons.
I find the facts, from the various affidavits, documents and transcripts filed, to briefly be that the Applicants own property on the Detroit River in Windsor, valued by one appraiser at $6,000,000.00, were actively pursuing development of a condominium project thereon, involving some 250 units in two high-rise buildings, plus a marina, when an existing $1,000,000.00 mortgage matured. Various attempts to find re-financing were unsuccessful, and at literally the last minute, a replacement loan for $1,000,000.00 was put in place with the Respondent Michael V. Dorian (Dorian) through Lichine U.S.A. Co. (Lichine). The documentation was unusual, but the payment requirements were clear.
Dorian loaned $1,000,000.00 U.S. on February 21, 1991, which on August 21, 1991 was repayable in full together with interest at 58 percent calculated annually. The Respondent, Les J. Hulka (Hulka), the Canadian lawyer for Dorian, and who is a party simply because he acts as a trustee for documents under the loan agreement, charged $11,000.00 for his services with a specific proviso that if his charges should "cause the effective rate to exceed the maximum permitted by law" he would reduce his fee. Lichine charged a finders fee of $100,000.00 Canadian. It is obvious that if the finders fee can be treated as "interest" under the loan, the 60 percent rate has been exceeded.
The Ontario Court of Appeal decision of William E. Thomson Associates Inc., v. Carpenter, 69 O.R. (2d), 545, makes it clear that if illegality is found, the obligation to pay principal and interest can be severed, and the interest provision declared void, as the Applicant is asking here. That case also makes it clear that "interest" as defined in the Code, does indeed include things like legal fees and "facility fees". However in that case, while the legal fees, as here, were for the lender's lawyer, the facility fee was charged by and paid directly to the lender.
In this case, the evidence is clear that Lichine is in the business of brokering funds in the U.S., of bringing together lenders and borrowers. It was approached by the Applicants to find the needed $1,000,000.00, and to put together a loan. It did so. In so doing it performed agency services for both the borrowers and the lender, and by an agreement separate from the loan agreement, the borrower agreed to pay $100,000.00 Canadian for such services. Dorian swears that he has no relationship with Lichine, and had never beard of Lichine before it contacted his U.S. lawyer with this loan proposition. He further swears that the only deduction authorized from his loan was for the legal fees of his lawyer.
I have considered the broad provisions of s. 347 of the Criminal Code, and the outline of the history of that section given by Blair, J.A., in the Thomson case supra. Section 347 includes in "interest" all "charges and expenses...paid or payable for the advancing of credit... irrespective of the person to whom such charges and expenses are...paid or payable". In my view the key to understanding the intended evil attacked by the extension of the definition to persons other than the lender is contained in the quote of the speech of the Honourable J.L. Ilsley, at pg. 348 of Thomson, supra, referring to "charges primarily payable by the lender, but required by the lender to be paid by the borrowers".
Section 347 makes it a an offence to "receive interest" at the criminal rate, and it appears clear to me that the intent of the drafters of the section was to broaden "receive" to include "receive the indirect benefit of".
In this case, it is clear that Dorian was never responsible to Lichine for the $100,000.00, or for fees at all, and so did not benefit from the payment by the applicants of Lichine's fees. The loan may have cost the Applicants more than 60 percent in total, but the interest, even including the legal fee of Mr. Hulka, received or receivable by Dorian, was carefully arranged at less than 60 percent.
I therefore find that the interest provisions of the mortgage loan do not contravene s. 347 of the Criminal Code and refuse the application for a declaration that such provisions are void and unenforceable.
The Applicants seek a further declaration that the Finders Agreement between the Applicants and Lichine is illegal, and as such is void and unenforceable as breaching the provisions of the Mortgage Brokers Act. Lichine was not represented by counsel, and had not filed any material. I am advised that Lichine had contacted several lawyers in Windsor, had repeatedly sought adjournments to obtain counsel, and had been warned that if counsel were not instructed, the matter would nevertheless proceed.
On this hearing a Mr. Collins, a principle of Lichine appeared to advise the Court that Lichine is an American business, involved in arranging letters of credit for Americans. It has never before been involved in a loan into Canada, nor in a mortgage loan. It regarded this as an American transaction, as it was asked to find a lender in the U.S.A., the lender found was American, and Arlen and Norman Ingram are Americans.
All this may well be true. However, the security offered for this loan was Ontario real estate, in this instance Lichine undertook the business of providing the financing for that real estate, the funds were advanced to the office of the Ontario lawyer for the Applicants, the deal was negotiated and the documents executed in that office, with Lichine taking part, and Lichine was clearly not resident in Ontario, registered in Ontario as a Mortgage Broker, or within the exemptions to registration. I find that Lichine breached the provisions of the Ontario Mortgage Brokers Act.
However, that statute is a mere licensing statute, and does not contain any provision making the receipt of fees by an non-registered Mortgage Broker illegal. While the services of Lichine fell within the broad terms of the Ontario Statute, they also included work performed in Michigan including the finding of the lender, which was the specific service for which Lichine was to be compensated under the agreement. The agreement specifically provides that it is to be construed in accordance with the laws of the State of Michigan, and I have no evidence before me of illegality or impropriety under such law.
I therefore refuse the Application for a declaration that the Finders Agreement is illegal and as such void and unenforceable.
The Applicants sought a further declaration that Dorian and/or Hulka may not register a deed or obtain possession of the subject land without following the provisions of the Mortgages Act. Part of the security for this loan was an executed deed to the land, delivered to Mr. Hulka in trust, with terms as to registration. It was conceded that despite the terms of the loan agreement, this constituted an equitable mortgage by way of delivery of title documents, and is subject to the Mortgages Act. A declaration shall issue that Dorian and/or Hulka may not register the deed or obtain possession without following the provisions of the Mortgages Act.
The Respondents Dorian and Hulka shall have their costs of this Application.