Date Issued: June 30, 2021

File: SC-2020-009556

Type: Small Claims

Civil Resolution Tribunal

Indexed as: Lashinski v. Droho, 2021 BCCRT 718

Between:

KEVIN LASHINSKI

Applicant

And:

SUSAN DROHO

Respondent

INTRODUCTION

1.      This dispute is about the amount owing under a loan previously secured by a mortgage. The applicant, Kevin Lashinski, repaid the loan. He says Ms. Droho impermissibly added late fines or penalties to the loan and overcharged him for interest. He seeks repayment of $2,127.74.

2.      Ms. Droho disagrees. She says she was permitted to add these fees under the mortgage terms.

3.      The parties are self-represented.

4.      For the reasons that follow, I find Mr. Lashinski has proven his claims. I order Ms. Droho to repay the amounts set out below.

JURISDICTION AND PROCEDURE

5.      These are the formal written reasons of the Civil Resolution Tribunal (CRT). The CRT has jurisdiction over small claims brought under section 118 of the Civil Resolution Tribunal Act (CRTA). Section 2 of the CRTA states that the CRT’s mandate is to provide dispute resolution services accessibly, quickly, economically, informally, and flexibly. In resolving disputes, the CRT must apply principles of law and fairness, and recognize any relationships between the dispute’s parties that will likely continue after the CRT process has ended.

6.      Section 39 of the CRTA says the CRT has discretion to decide the format of the hearing, including by writing, telephone, videoconferencing, email, or a combination of these. Here, I find that I am properly able to assess and weigh the documentary evidence and submissions before me. Further, bearing in mind the CRT’s mandate that includes proportionality and a speedy resolution of disputes, I find that an oral hearing is not necessary in the interests of justice.

7.      Section 42 of the CRTA says the CRT may accept as evidence information that it considers relevant, necessary and appropriate, whether or not the information would be admissible in a court of law. The CRT may also ask questions of the parties and witnesses and inform itself in any other way it considers appropriate.

8.      Where permitted by section 118 of the CRTA, in resolving this dispute the CRT may order a party to do or stop doing something, pay money or make an order that includes any terms or conditions the CRT considers appropriate.

Jurisdiction over family law matters and this dispute

9.      Under section 10 of the CRTA, the CRT must refuse to resolve a claim that it considers to be outside the CRT’s jurisdiction. Under section 11(1)(a)(i) of the CRTA, the CRT may refuse to resolve a claim or dispute within its jurisdiction if the claim or dispute would be more appropriate for another legally binding process.

10.   Under the Family Law Act, the BC Supreme Court has exclusive jurisdiction to make orders about the division of family property and family debt. The BC Supreme Court also has exclusive jurisdiction to vary or set aside separation agreements.

11.   In this dispute, the parties entered into a separation agreement. As part of its terms, Mr. Lashinski signed a loan agreement and mortgaged his residential property as security. As detailed below, he subsequently sold the property.

12.   In a January 19, 2021 preliminary decision, the CRT decided that it had jurisdiction over this dispute. The CRT held that Mr. Lashinski’s claims did not involve dividing family property or family debt, or varying or setting aside a separation agreement. The CRT also disagreed with Ms. Droho’s objection that this dispute was outside the CRT’s jurisdiction because it involved land. Instead, the CRT held Mr. Lashinski’s claims were for debt or damages. The CRT also found there was no evidence that this dispute was the subject of any ongoing court proceeding. The CRT noted that, given the relatively small amount, the CRT was a more appropriate venue than the BC Supreme Court.

13.   I agree with the reasoning in the January 19, 2021 preliminary decision. This dispute is about the correct amount owing under the loan. No interests in land are at issue. I find that Mr. Lashinski’s claims are entirely within the CRT’s jurisdiction and that this is the most appropriate venue for them. I will consider the merits below.

ISSUE

14.   The issue in this dispute is whether Ms. Droho added impermissible fines or penalties to the loan amount or overcharged Mr. Lashinski for interest, and if so, what is the appropriate remedy.

EVIDENCE AND ANALYSIS

15.   In a civil proceeding like this one, the applicant Mr. Lashinski must prove his claims on a balance of probabilities. I have read all the parties’ submissions, including case law, but refer only to the evidence and arguments that I find relevant to provide context for my decision.

16.   I begin with the undisputed background facts. The parties entered into a written loan agreement on October 25, 2019. The loan principal was $606,500. Mr. Lashinski agreed to pay Ms. Droho monthly payments of $2,021.67, entirely for interest. The entire loan matured and became payable on October 25, 2020.

17.   As required by the loan terms, Mr. Lashinski mortgaged his residential property as security. The mortgage was registered in the Land Title Office. The mortgage incorporated the prescribed standard mortgage terms in Schedule B of the Land Title (Transfer Forms) Regulation. It also included additional written terms discussed below.

18.   Mr. Lashinski initially made the monthly payments, some of which were late. He listed his property for sale in September 2020. He defaulted under the loan’s terms by failing to make a payment due on September 25, 2020. He also defaulted again by failing to pay back the loan on the October 25, 2020 maturity date. Ms. Droho added late payment fees to the loan due to the defaults, discussed below.

19.   In early December 2020, Mr. Lashinski sold the property. At the time, Mr. Lashinski’s lawyer emailed Ms. Droho’s lawyer to request a payout statement for the loan. Ms. Droho’s lawyer provided a December 7, 2020 payout statement that included late payment fees. Mr. Lashinski’s lawyer replied in a December 3, 2020 email, objecting to the late payment fees. He added that if Ms. Droho insisted on the fees, his client would pay it under protest and reserve the right to seek recovery later. Mr. Lashinski subsequently paid the payout statement amount, including the late fees. I find it clear from the correspondence that in doing so, he did not waive any right to dispute the amount owing. The submissions and evidence indicate the property sale completed and the mortgage was discharged.

Did Ms. Droho add impermissible fines or penalties to the loan amount or overcharge Mr. Lashinski for interest?

20.   As noted earlier, the parties added additional written terms to the prescribed standard mortgage terms. Under these terms, Mr. Lashinski agreed to pay a “service fee of $150.00” for each month that a payment was received late and for each month thereafter that the payment remained outstanding. The December 7, 2020 payout statement shows Ms. Droho added service fees of $1,500 for 10 late payments from November 2019 to the October 2020 maturity date. She also added $600 in service fees for outstanding payments in November and December 2020. The service fees total $2,100. The payout statement refers to them as late payment fees.

21.   Mr. Lashinski says the service fees are impermissible because of section 8(1) of the Canada Interest Act. Section 8 prohibits lenders from levying any “fine, penalty or rates of interest”’ on “any arrears of principal or interest” that are “secured by mortgage on real property” that “has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears”.

22.   In short, section 8 prohibits extra charges on arrears for loans secured by a mortgage. The purpose of section 8 is to protect real estate owners from charges, regardless of their form, which would obstruct or make it more costly or impossible for owners to redeem or protect their equity: Bankers Mortgage Corporation v. Plaza 500 Hotels Ltd., 2017 BCCA 66 at paragraph 29. If a lender could use fines, penalties, or higher interest rates to practically “balloon”, post default, the amount required to redeem the property and discharge the mortgage, this could render foreclosure “all but inevitable”. Section 8 therefore protects property owners against abusive lending practices, while recognizing that generally speaking parties are entitled to freedom of contract. See Bankers Mortgage Corporation at paragraph 33 and Reliant Capital Ltd. v. Silverdale Development Corp., 2006 BCCA 226, leave to appeal to SCC refused, [2006] S.C.C.A. No. 265, at paragraphs 50 to 56.

23.   I find that section 8 of the Interest Act applies to the parties’ loan as it was previously secured by a mortgage on real property. I find the service fees contravened section 8. This is because the fees became payable once Mr. Lashinski defaulted on his obligation to pay monthly interest payments. As such, I find they were a penalty for late payment, levied on arrears of interest. I find that they had the effect of increasing the cost of redemption, contrary to the purpose of section 8.

24.   Ms. Droho characterized the fees as “administrative fees”. I find that it clear from the payout statement and her submissions that, whatever they were called, they were charged for late payments and are prohibited under section 8 of the Interest Act.

25.   I reach these findings despite the terms of the parties’ agreement. This is because, as stated above, section 8 is an exception to the general rule that lenders and borrowers are entitled to freedom of contract. See Bankers Mortgage Corporation at paragraph 29 and P.A.R.C.E.L. Inc. v. Acquaviva, 2015 ONCA 331.

26.   The mortgage incorporates section 8(6) of the prescribed standard mortgage terms. It says the borrower will pay to the lender on demand all expenses and costs incurred by the lender in enforcing the mortgage. Ms. Droho says she essentially added the service fees under this provision as costs incurred for enforcing the mortgage.

27.   I find that Ms. Droho could have added the costs of enforcing the mortgage to the loan amount. I do not find such costs would be a fine, penalty, or rate of interest under section 8 of the Interest Act. However, I disagree that the service fees are the same as the costs of enforcing the mortgage. They are not connected to any invoice or statement of account for legal services. Further, Ms. Droho submitted that she decided to charge Mr. Lashinski the service fees instead of her actual legal fees from enforcing the mortgage.

28.   Mr. Lashinski also disputed whether some of his payments were actually late. I do not find it necessary to decide this as I have found all the service fees are prohibited.

29.   I find the appropriate remedy is for Ms. Droho to reimburse Mr. Lashinski all the service fees charged. This equals $2,100. I order Ms. Droho to pay Mr. Lashinski this amount as damages for breach of contract.

30.   I considered whether a setoff might be appropriate. However, the payout statement and Ms. Droho’s submission indicate she never added any legal costs to the loan, though she could have done so. Ms. Droho also did not counterclaim for the legal fees. For those reasons, I have decided not to order a setoff.

31.   Mr. Lashinski also claims for interest charged by Ms. Droho on these fees which he submits is $29.06, which Ms. Droho did not expressly dispute. I find Mr. Lashinski’s claim must be reduced to $27.74, as his total claims may not exceed the claimed amount in the Dispute Notice. I order Ms. Droho to pay the interest amount as well, for a total of $2,127.74 in damages, which is the total Mr. Lashinski claimed in the Dispute Notice.

32.   The Court Order Interest Act applies to the CRT. Mr. Lashinski is entitled to pre-judgment interest on the damages award from December 7, 2020, the date of the loan payout, to the date of this decision. This equals $5.39.

33.   Under section 49 of the CRTA and CRT rules, the CRT will generally order an unsuccessful party to reimburse a successful party for CRT fees and reasonable dispute-related expenses. I see no reason in this case not to follow that general rule. I find Mr. Lashinski is entitled to reimbursement of $125 in CRT fees. Mr. Lashinski did not claim reimbursement for any dispute-related expenses, so I order none.

ORDERS

34.   Within 14 days of the date of this order, I order Ms. Droho to pay Mr. Lashinski a total of $2,258.13, broken down as follows:

a.    $2,127.74 as damages,

b.    $5.39 in pre-judgment interest under the Court Order Interest Act, and

c.    $125 in CRT fees.

35.   Mr. Lashinski is entitled to post-judgment interest, as applicable.

36.   Under section 48 of the CRTA, the CRT will not provide the parties with the Order giving final effect to this decision until the time for making a notice of objection under section 56.1(2) has expired and no notice of objection has been made. The time for filing a notice of objection is 28 days after the party receives notice of the CRT’s final decision. The Province of British Columbia has enacted a provision under the COVID-19 Related Measures Act which says that statutory decision makers, like the CRT, may waive, extend or suspend mandatory time periods. This provision is expected to be in effect until 90 days after the state of emergency declared on March 18, 2020 ends, but the Province may shorten or extend the 90-day timeline at any time. A party should contact the CRT as soon as possible if they want to ask the CRT to consider waiving, suspending or extending the mandatory time to file a Notice of Objection to a small claims dispute.

37.   Under section 58.1 of the CRTA, a validated copy of the CRT’s order can be enforced through the Provincial Court of British Columbia. A CRT order can only be enforced if it is an approved consent resolution order, or, if no objection has been made and the time for filing a notice of objection has passed. Once filed, a CRT order has the same force and effect as an order of the Provincial Court of British Columbia.