Hitting the Brakes: Analyzing Accelerated Interest Clauses in the Appellate Decision of First National Financial GP Corporation

THE BIG PICTURE

On August 31, 2022, the Ontario Court of Appeal overturned a trial decision in First National Financial GP Corporation v. Golden Dragon Ho 10. Inc., 2022 ONCA 621. The trial judge had found that First National Financial GP Corporation (“FN”) was entitled to accelerated interest due to a default arising from the court-ordered sale of certain properties of Golden Dragon. The trial judge opined that this entitlement arose from the common law rule that “a mortgagee is entitled to all accelerated interest owing to the date of maturity when a closed mortgage is vested off title before the end of term.”

On appeal, the three-judge panel unanimously held that when a contract is silent on an issue, absent contradicting contractual provisions, a mortgagor must provide additional consideration to amend the agreement to receive a right to prepay and discharge a mortgage. The panel also held that FN was not entitled to accelerated interest, and to imply an entitlement to accelerated interest as a term in the FN mortgages would be inconsistent with what was expressly provided for therein.

BACKGROUND                                                 

Facts

Golden Dragon purchased two residential buildings and assumed three closed mortgages, all of which were held by FN. Golden Dragon subsequently placed a second mortgage on one of the properties, which was held by an entity known as Liahona.

Golden Dragon became insolvent and defaulted under the Liahona mortgage, and Liahona obtained a default judgment in excess of $3 million. Golden Dragon also defaulted on its FN mortgages, and after failing to remedy its defaults, FN successfully applied to appoint Deloitte as the interim receiver. Deloitte was able to recover what was owed under the FN mortgages, but no further funds remained to remedy the monies due to Liahona.

For Liahona to receive the money it was owed, it sought FN’s cooperation to an order that Deloitte market and sell the properties. FN discharged the Liahona mortgage for the properties, making prepayment penalties of approximately $1.8 million.

The court granted the second order to widen the parameters of Deloitte’s receivership to market and sell the properties. When Deloitte obtained an offer to purchase the properties, FN opposed it on the basis that its agreement had been predicated on the understanding that FN would receive accelerated interest to the end of the terms of its mortgages, which it referred to as “yield maintenance penalties.” Despite FN’s resistance, the court authorized the sale of the properties and directed to trial FN’s claimed entitlement to the payment of yield maintenance penalties.