Injunctions in Power of Sale Proceedings: Arnold v. Bronstein Revisited

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Introduction

Mortgagors have long been considered the “darlings of equity”. Yet, the jurisprudence over the last 20 years has suggested that a mortgagor who resorts to the courts to protect his rights will be treated differently than any other litigant.

Ordinarily, an applicant for an injunction need only satisfy the court that there is a serious issue to be tried, that the applicant would suffer irreparable harm if the application were refused, and that the balance of convenience favours the applicant. (R.J.R. MacDonald v. Canada, [1994] 1 S.C.R. 311) A number of Ontario cases have imposed a blanket rule requiring mortgagors to prove bad faith or fraud on the part of a mortgagee as a necessary requirement to the granting of an injunction.

It is the thesis of this paper that a universal application of the so-called “Rule in Arnold v. Bronstein” has improperly denied mortgagors injunctive remedies and failed to recognize their property rights. Arnold v. Bronstein has been wrongly interpreted as establishing a minimum requirement of proof of fraud or bad faith in all cases regardless of the timing of the application and irrespective of what steps the mortgagee has taken in resorting to its security. It is submitted that where the applicant mortgagor retains his or her right of redemption, the “usual” injunction test should be applied and not the more onerous test of bad faith or fraud.

When is the Equity of Redemption Extinguished

The mortgagor’s right of redemption is triggered by service of the notice of sale. In Municipal Savings & Loan Corp. v. Wilson (1981), 127 D.L.R. (3d) 127 (C.A) the applicant’s mortgage provided for monthly payments of interest only until maturity. The mortgage contained an acceleration clause that was triggered by default. The default provision stated that the principal became payable only at the option of the mortgagee. Upon the mortgagor’s default, the mortgagee commenced power of sale proceedings and served the notice of sale. Before expiration of the date fixed by the notice, the mortgagor tendered the full amount owing for principal, interests and costs and applied for an order discharging the mortgage. The mortgagee argued that the mortgagor was not entitled to accelerate the principal, which had the practical effect of turning the mortgage into an openended mortgage. With respect to that argument, the Court stated as follows: (see p. 130-31)

It is the service on the mortgagor of the notice of the mortgagee’s intention to sell the property that triggers the mortgagor’s equitable right to redeem.The mortgage is security only: the mortgagee’s principal right is to its money…If the mortgagee elects to resort to its security, then equity steps in to protect the mortgagor and, if he is able to pay the money, permits him to do so and get his land back
…

The second thing counsel’s argument overlooks is the aphorism “once a mortgage always a mortgage”. Stemming from the fact that equity viewed the transfer of mortgaged land as security only, the mortgagor continued to be the owner of the property. He could not contract away his equitable right to redeem…

What then is the effect of the contractual provisions in this mortgage?…Can a mortgagee exercise a power of sale without giving the mortgagor an opportunity to redeem? Can he, in other words, say to the mortgagor: I am going to sell your land for your default in the payment of interest and you cannot redeem because I have not exercised my option to accelerate the principal? Clearly he cannot. (emphasis added)

That equity can step in to prevent a sale where the equity of redemption has not been extinguished is clear from the Court’s further comment: (see p. 132)

The whole purpose of a power of sale in a mortgage is to get rid of the mortgagor’s equity of redemption and realize the mortgage debt. It is a more convenient way of doing this than foreclosure and sale. The mortgage cannot therefore survive the exercise of such a power for what is authorized to be sold is the mortgaged land itself, the security for the debt. All the mortgagor is entitled to is the surplus proceeds of the sale. His interest in the land is gone. The mortgagee cannot convey the land subject to the mortgagor’s interest because the very act of selling forecloses that interest unless equity steps in to prevent the sale and indeed, that is why equity steps in to prevent the sale.(emphasis added)

The right of redemption that is triggered by service of the notice of sale is only extinguished when the mortgagee signs an unconditional agreement to sell to a third party under power of sale. This is because the equitable right of redemption is subject to the statutory requirements of s.22(1) of the Mortgages Act. This section provides that:

22(1)
Despite any agreement to the contrary, where default has occurred in making any payment of principal or interest due under a mortgage or in the observance of any covenant in a mortgage and under the terms of the mortgage by reason of such default, the whole principal and interest secured thereby has become due and payable,

  1. At any time before sale under the mortgage; or
  2. Before the commencement of an action for the enforcement of the rights of the mortgagee or of any person claiming through or under the mortgagee,

the mortgagor may perform such covenant or pay the amount due under the mortgage, exclusive of the money not payable by reason merely of lapse of time, and pay any expenses necessarily incurred by the mortgagee, and thereupon the mortgagor is relieved from the consequences of such default.

In Logozzo v. Toronto-Dominion Bank (1999), 45 O.R. (3d) 737 (C.A.) the Court was asked to determine whether the time within which a mortgagor is permitted to redeem pursuant to s.22 may be extended by a provision contained in an agreement between the mortgagee and a third party purchaser. In this case, the agreement stated that the purchaser agreed that the mortgagor had the right to redeem up to the time of waiver of or expiration of rights of termination or fulfillment of conditions.

Borins, J.A., writing for a majority of the Court confirmed that s. 22(1)(a) of the Mortgages Act extends the time to redeem from the time in the notice of sale to the time of the “sale” of the property. (see p. 744) Justice Borins stated that: (see p. 745)

Section 22 of the present Act originally formed part of s.19a of the Mortgages Act, R.S.O. 1950 c. 239, having been enacted in 1953: S.O. 1953, c. 66, s.1. Section 19a was divided into two sections in R.S.O. 1979, c. 279, with s.21 of the 1970 Act being s.22 of the present Act. It has remained unchanged since 1970. The purpose of s.21(1), of the 1970 Act, and its application are outlined in Rayner and McLaren, Falconbridge on Mortgages, 4th ed. (1977), at pp. 721-22:

…it permits the mortgagor to put the mortgage in good standing at any time before sale upon payment of any money due, “exclusive of the money not payable by reason merely of lapse of time” together with payments of costs. Payment must, however, be made or tendered before an agreement for sale as been entered into by the mortgagee with a third party even where the agreement is said to be subject to the right of the mortgagor to redeem or put the mortgage into good standing. Before a mortgagor can obtain the benefit of s.21 he must pay all arrears for such payment is a condition precedent to relief. A vague hope of the mortgagor to find further financing, even where the security is ample is not sufficient reason to stay the sale proceedings.

Citing Lieff, J.’s decision in Mission Construction Ltd. v. Seel Investments Ltd., [1973] 2 O.R. 190, the Court affirmed that “sale” in this context means acceptance of an offer from a third party. (see pp. 745-46)

Borins, J.A. expressly left open the question of whether a conditional agreement of purchase and sale similarly constitute a “sale” for purposes of s.22(1)(a). (see p. 752) That question did not need to be determined on this appeal, as in the opinion of Borins, J.A., the clause at issue did not render the agreement a conditional agreement. (see p. 753)

Accordingly, it is clear that if a mortgagor does not otherwise have a right of redemption (i.e. the mortgage is closed, and not yet matured), a right of redemption arises upon service of the notice exercising power of sale and is not extinguished until such time as a third party purchaser has entered into an unconditional agreement of sale with the mortgagee. Although s.43(1) of the Mortgages Act contemplates payment by the mortgagor of the arrears within the time set by the notice, the expiration of the notice period alone will not serve to terminate the equity of redemption.

The “Rule” in Arnold v. Bronstein

The headnote in Arnold v Bronstein (1971), 15 D.L.R. (3d) 649 (Ont. H.C.) reads as follows:

Except in the most extreme and exceptional cases, a mortgagee, acting in good faith and without fraud, will not be restrained from a proper exercise of his power of sale except upon tender by the mortgagor of the principal moneys due, interest and costs. Accordingly, postponement of a sale on a mortgagor’s vague and indefinite hope of finding new financial backing would be an unwarranted interference with the contractual rights of the mortgagee, even if the mortgaged property is ample security for the loan.

The so-called “rule” in Arnold v. Bronstein has focused on only the good faith and absence of fraud aspects of the above statement of the law.

In understanding why the “rule” has been misapplied, it is important to understand fully what the court was trying to accomplish in Arnold v. Bronstein. It was clear on the evidence of the mortgagor that the mortgage had come due and that the mortgagor had made several abortive attempts to refinance. The mortgagee had not yet entered into an agreement of purchase and sale with a third party and a date had been fixed for an auction sale. The mortgagee had obtained appraisals and received inquiries from potential purchasers. The applicant was attempting to postpone the sale. In formulating the general rule, the court stated that:

The general rule developed from numerous cases is that a mortgagee, acting in good faith and without fraud, will not be restrained from a proper exercise of his power of sale, except upon tender by the mortgagor of the principal moneys due, interest and costs. This is of course subject to the statutory relief provided by s. 20 [rep. & sub. 1970, c. 54, s. 1] of the Mortgages Act, R.S.O. 1960, c. 245, which is not here invoked. (emphasis added)

Several points need to be stressed about the above statement. First, given the facts of the case, it is clear that the court was commenting only about a mortgagee’s conduct in respect of a sale. The court made no comment about enjoining a mortgagee’s conduct in simply resorting to their security. Accordingly, the bad faith/fraud requirement should be interpreted as applying only in respect of the conduct of the sale and should have no application to circumstances where a mortgagor is simply seeking to restrain conduct short of a sale.

Second, the court expressly preserved a mortgagor’s right in exceptional circumstances to restrain a mortgagee who is acting improperly (ie: where the mortgagee acts fraudulently or in bad faith) whether that conduct is in respect of the conduct of a sale, or by some other means of enforcing its security.

Third, the formulation of the “rule” also takes into account the overarching right of redemption in cases where it is evident that the mortgagor is factually in a position to exercise his or her right of redemption. In fact, the court goes on to quote from the reasons for judgment of Cotton, L.J. in Macleod v. Jones (1883), 24 Ch.D. 289 at pp. 299-300:

This is an application to restrain a mortgagee from exercising his power of sale. Now under ordinary circumstances the Court never interferes unless there is something very strong; it does not interfere on any suggested case without requiring the Plaintiff applying to pay into Court not what the Judge or the Court on hearing the evidence is satisfied will probably be the amount due, but what the mortgagee, the accounts not having been yet taken, swears is due to him on his security. And that is perfectly right, because we ought not to prevent mortgagees from exercising the powers given to them by their security without seeing that they are perfectly safe.

In Arnold v. Bronstein, the mortgagor had a right of redemption, but unfortunately, he didn’t have the money necessary to redeem the mortgage. The case is often cited as standing for the principle that the injunction was refused for lack of evidence of exceptional circumstances of fraud or bad faith. In fact, the court ordered the following:

Upon payment into Court of the principal amount, accumulated interest and costs, the proposed sale will be restrained. Otherwise, this application will be dismissed with costs to be paid by the applicant to the respondent David Bronstein in any event of the cause.(emphasis added)

The “Rule” Misapplied

For many years Ontario courts have wrongly interpreted Arnold v. Bronstein as requiring a mortgagor to establish minimum requirements of bad faith and fraud in addition to the ordinary requirements for an interim injunction. Such requirements have been applied in all circumstances, whether the conduct complained of is a sale or simply the act of resorting to the security.

A number of cases demonstrate that the “rule”, if it exists, has not been consistently applied and has been subject to judicially created exceptions. (See for example: Hotel California Holdings Ltd. v. Grossman (1980), 11 R.P.R. 66 (H.C.); MacKan Holdings Inc. v. Papadopolous (1977), 16 O.R. (2d) 164 (H.C.))

The following cases represent a sampling of Ontario decisions in which the Arnold v. Bronstein “rule” has been misapplied. These cases can be conveniently grouped into two categories: those cases in which the rule was invariably applied without taking into account any other injunction test; and those cases in which evidence of fraud or bad faith was considered as a condition precedent to the granting of injunctive relief

Cases Applying the Invariable “Rule” in Arnold v. Bronstein

In Kopyto (Litigation guardian of) v. Royal Bank of Canada [1993] O.J. No. 2168 (Gen. Div.) the court applied the Arnold v. Bronstein test, even though no third party agreement had been executed. A notice of sale was issued on June 7, 1993. The injunction motion was heard on August 20, 1993. It is also important to note that in this case no arrears had been tendered before the mortgagor sought injunctive relief.

The Arnold v. Bronstein criteria were applied by Ground, J. in Hristovski v. Krpan, [1996] O.J. No. 2238 (Gen. Div.) affd. on other grounds [1996] O.J. No. 3358 (C.A.) and Maier v. Keevil, [1996] O.J. No. 433 (Gen. Div.) even though it does not appear from the reasons that in either case any agreement of purchase had been reached with a third party. Justice Ground dismissed the Hristovski motion upon finding simply that there was no evidence of fraud and that disputed statements contained in affidavits could not be accepted as an evidentiary basis for a finding of bad faith. (see paragraph 23 Hristovski. See also paragraph 3 Maier)

Cases Taking the “Condition Precendent” Approach

A number of cases demonstrate that although the usual injunction test may be cited by the court, bad faith and fraud remain paramount considerations tantamount to conditions precedent. For example, in Wills v. Regina’s Fine Foods Ltd., [1999] O.J. No. 542 (Gen. Div.) the mortgagor sought a discharge of the mortgage held by Regina’s Fine Foods upon payment into court of the disputed amount owing on the mortgage. The mortgagor also sought an injunction restraining Regina’s from taking any steps or proceedings to enforce the terms of its mortgage. The mortgagee had issued a power of sale notice but it does appear that any agreement for sale had been reached with a third party. While the decision might be justified on the tripartite injunction test, the court’s reasoning demonstrates the long-held misapprehension that bad faith or fraud are conditions precedent to the granting of an injunction: (see paragraph 9)

The law is clear that except in the most extreme and exceptional cases, a mortgagee, acting in good faith and without fraud will not be restrained from the proper exercise of his power of sale except upon tender by the mortgagor of the principal moneys due, interest and costs: Arnold v. Bronstein, [1971] 1 O.R. 467. In any event, in this case, damages would be an adequate remedy so as to preclude injunctive relief. The balance of convenience favours Regina’s because the mortgage has been in default for a very long time, and I have reservations about the ability of Wills to satisfy his undertaking to pay damages.

In 754223 Ontario Ltd. v. R-M Trust Co., [1997] O.J. No. 282 (Gen. Div.). Madam Justice Epstein concluded that the Arnold v. Bronstein criteria were preconditions to the granting of an injunction unless the case fell within certain recognized exceptions. In that case it does not appear that any enforceable agreement had been entered into with a third party. The mortgagee sought to enforce the provisions of a collateral mortgage and the mortgagor disputed the enforceability of the mortgage. Epstein, J. in assessing the test to be applied to the mortgagor’s motion for an injunction stated as follows: (see paragraphs 18-24)

Generally, on a motion for an interlocutory injunction the court must be satisfied that there is a serious issue to be tried. If there is a substantial issue for trial, the court must then determine whether the moving party would suffer irreparable harm if the injunction is refused and that damages would not be an adequate remedy for its loss. Finally, the court must determine the balance of convenience as between the parties by inquiring into which of the parties would suffer greater harm from granting or refusing an injunction pending the resolution of the matter on the merits: see RJR Macdonald v. Canada (A.G.), [1994] 1 S.C.R. 311, at page 334; and American Cyanamid Company v. Ethicon Ltd., [1975] 1 All E.R. 504.

I say “generally” that is the test. However, in circumstances where the object of the injunction is to restrain a mortgagee from exercising its contractual rights under a mortgage, the test has been approached somewhat differently.

In Arnold v. Bronstein, [1971] 1 O.R. 467, the court set out the law that except in the most extreme and exceptional cases, a mortgagee acting in good faith and without fraud, will not be restrained from a proper exercise of its power of sale.

An exception to this principle has been recognized in circumstances where the mortgagor raises a triable issue as to the validity of the mortgage itself: see MacKan Holdings Inc. v. Papadopolous (1977), 16 O.R. (2d) 164 (H.C.); and Hotel California Holdings Ltd. v. Grossman (1988), 11 R.P.R. 66 (Ont. H.C.).

In my view, on the facts before me, there is no supportable suggestion of bad faith on the part of the mortgagee. The mortgagors do not like the mortgagee’s rigidity with respect to the way the mortgagee is standing on its legal rights. However, there is evidence that the mortgagee has, on occasion, attempted to resolve matters, albeit from a position of strength. The mortgagee may be difficult to deal with, may well be a so-called vulture fund but merely enforcing legal rights does not constitute bad faith.

There is certainly no suggestion of fraud. What is complained of by the mortgagor are certain steps the mortgagee is trying to take that the mortgagor says are not authorized on a proper interpretation of the collateral mortgage.

However, in this case, the mortgagor has attacked the enforceability of a critical aspect of the mortgage document. Although the argument raised does not seek to impugn the mortgage itself, to me there is no meaningful difference between attacking the instrument itself and attacking its enforceability.
Accordingly, the principles set out in Arnold v. Bronstein should not apply to this case. Instead, resort must be had to the standard tests for the determination of whether an interlocutory injunction should be granted. (emphasis added)

Although the actual result is justifiable on other grounds, 967305 Ontario Ltd. v. North American Trust Co. (1996), 28 O.R. (3d) 212 (Gen. Div.) is another example where the requirement of bad faith or fraud remained the paramount consideration. The notice of sale had been issued, but the mortgagor had not tendered any arrears before bringing the motion for injunctive relief. Sharpe, J. commented that: (see pp. 90-91)

In my view, this case falls within the principle established by Arnold v. Bronstein. There is no suggestion of fraud or want of good faith and I have concluded that the Notice of Sale itself is valid….

In any event, I am also satisfied that damages would be an adequate remedy so as to preclude injunctive relief. This is an income producing property. The plaintiff’s interest is purely financial. There is no question but that adequate records are being kept and that if the plaintiff is correct in its assertions, it will be readily able to calculate the damages…

In addition, the balance of convenience strongly favours the defendants. The plaintiff has been in default for a period of many many months…The plaintiff appears to be insolvent or close to insolvent and offers no more than its hope that it could do a better job of managing the property than the defendants…

It would require exceptional circumstances to justify an order that party in default under a mortgage be permitted to remove the mortgagee in possession and take over the property on the hope that it could do better managing the property.(emphasis added)

It is submitted that Sharpe, J. (as he then was) applied the correct RJR injunction test and in the particular circumstances of that case there was no need to resort to the rule in Arnold v. Bronstein.

The Current State of the Law

Following the recent decision of Madam Justice Charron in Berlianco Inc. v. Wee Rent It Ltd. [1999] O.J. No. 4081 (C.A.) it should now be clear that the “rule” in Arnold v. Bronstein does not displace the tripartite injunction test and that bad faith and fraud are not necessary preconditions to the granting of an injunction. In Berlianco it was common ground between the parties that the governing test for an interim injunction was that prescribed by the R.J.R. case. However, relying on Arnold v. Bronstein, the mortgagee argued that because this was a mortgage enforcement case it was necessaryfor the court to make a preliminary finding that the mortgagee has acted either in bad faith or fraudulently, before it could consider whether the tripartite test had been satisfied. Charron, J.A. concluded that: (see paragraph 3)

In my view, the case law, including the case relied upon by the respondent, does not support this proposition. It is clear from the cases that, under ordinary circumstances, a court will not interfere with the proper exercise of a mortgagee’s power of sale except upon tender by the mortgagor of the principal moneys due, with interest and costs, or without ensuring that the mortgagee is otherwise fully protected. However, there are exceptions. Bad faith or fraud on the part of the mortgagee are but two examples of circumstances where the test for injunctive relief will usually have been met. A finding of bad faith or fraud is not a condition precedent to the granting of injunctive relief as contended. (emphasis added)

The injunction was made conditional upon the mortgagor paying all monies owing under the mortgage into court and making further accruing interest payments into court.

Despite the above decision, lower court decisions continue to display a reluctance to part with the bad faith and fraud test. Testa v. Greater Toronto Area (GTA) Savings & Credit Union Ltd. [2001] O.J. No. 2928 (Sup. Ct.) is a recent example where the court cites the RJR test and the Berlianco case, but applies the more stringent test of bad faith and fraud.

The applicants moved to strike out five Notices of Sale dated January 10, 2001 on the ground that the amounts stated in the notices were not correct. The court suggested that the applicants were seeking a remedy comparable to enjoining the mortgagee’s right to sell the mortgaged properties. The applicants acknowledged that no payments were made as required under the three mortgages after June, 2000. On the basis of the evidence the court was not persuaded that the amounts in the Notices of Sale were incorrect. Any defect in the amount would require a trial to determine the amount.

Although noting that the RJR test was “an appropriate consideration” the court then went on to apply Arnold v. Bronstein: (see paragraph 16-19)

Under the law of Ontario, except where there are extreme or unusual circumstances, in the absence of fraud and bad faith, the court will not interfere with the proper exercise of a mortgagee’s power of sale except upon tender by the mortgagor of the principal monies due, with interest and costs or otherwise ensuring that the mortgagee is otherwise protected: Arnold v. Bronstein, [1971] 1 O.R. 467 (H.C.J.); Berlianco v. Wee Rent It Ltd., [1999] O.J. No. 4081 (C.A.).

There is no evidence of fraud by the GTA. There are allegations of bad faith by the Testas extending back to 1996 and allegations of breach of agreement on both sides. I see no motive for GTA to act in bad faith. It is a professional lender. It agreed to the restructuring of the Testas’ debt in 1998 to save them over $250,000 cash flow each year.I am not persuaded of bad faith by GTA going to the issues of liability and amounts stated to be owing under the three mortgages. There are issues of breach of contract and accounting as to the amounts owing which must be dealt with in a trial.

I am not persuaded of extreme or exceptional circumstances militating against the exercise of the power of sale. (emphasis added)

Conclusions

Arnold v. Bronstein stands for the proposition that unless there is a legitimate reason for doing so, a court will not interfere in a sale that is being conducted by a mortgagee under power of sale. It was never intended to state a general rule that would make mortgage cases different from any other type of commercial case. Nor was it meant to apply to the exercise of rights under a mortgage. However, the case has been misapplied for so long that a “rule” has evolved. This rule suggests that mortgagors ought to be treated differently than other applicants seeking injunctions. There is no good reason to justify that different treatment.

In fact there may be every reason why a mortgagor should be treated precisely like other injunction applicants. Mortgages are contractual in nature. They are not conveyances. The Land Registration Reform Act changed the character of charges from “conveyances” to”contracts with security.” As such, it makes good sense for mortgage cases to be treated similarly to any other contract case.

It is hoped that in light of the Berlianco Inc. v. Wee Rent It Ltd case, courts will rethink their approach to the so-called “rule” in Arnold v. Bronstein and begin to consider evidence of bad faith and fraud as nothing more than factors in determining whether there is a serious issue to be tried. What Berlianco leaves unaddressed is the underlying basis for reconsideration of the long-held view that mortgage injunction applications should be held to a different test than other commercial cases. The RJR test is the test for other interlocutory injunctions. It should be the test for mortgage cases as well.