Executive Summary: Key Legal and Evidentiary Issues

• Default judgment was granted after the plaintiffs' pleadings were struck due to non-payment of a significant cost award.

• Two commercial mortgage loans were central to the counterclaim, with amounts and interest deemed admitted by procedural default.

• Protective disbursements incurred before a specific date were accepted as proven; those afterward required evidence.

• A $6M portion of protective disbursements was rejected for lack of sufficient supporting detail.

• Defendant's allegations of fraud, duress, and intent of equity investment were dismissed as legally insufficient.

• Enforcement of the judgment was stayed temporarily pending appellate review to avoid prejudice.

Background and procedural history

The dispute stems from two large mortgage loans advanced by Cannect to Condoman, secured against various real estate assets. The plaintiffs (Condoman Developments Inc., 1808176 Ontario Inc., and Howard Youhanan) initiated litigation and also defended against a counterclaim filed by the defendants (Cannect entities and Marcus Tzaferis). Early in the proceedings, Condoman sought an injunction which was denied, resulting in a significant cost award of $268,500 against them. When Condoman failed to pay that award, their statement of claim and defence to the counterclaim were struck by Justice Morgan. This procedural development left Cannect free to pursue default judgment on their counterclaim.

Loan claims and deemed admissions

Cannect’s counterclaim was based on two mortgage loans. The first, issued by Cannect Mortgage Investment Corporation, had an outstanding balance of over $7.7 million at the time of filing, increasing to over $8.7 million by the hearing date due to compounded monthly interest at 12.75%. The second, from Cannect International Mortgage Corporation, had an initial balance of over $30 million, with interest at 20% compounded monthly, increasing to over $36.3 million. Because Condoman’s pleadings had been struck, these amounts were deemed admitted by law.

Protective disbursements

In addition to loan principal and interest, Cannect sought recovery of protective disbursements—expenses incurred in managing and protecting the secured properties. Disbursements incurred prior to August 16, 2024, were deemed admitted. Cannect provided detailed evidence to support additional disbursements up to October 15, 2024, totaling over $10.2 million, which the court accepted. However, a further $6.1 million in claimed disbursements lacked sufficient detail, being listed only as “protective advances” with no itemization or explanation. The court found this insufficient and disallowed that portion of the claim.

Defence and credibility considerations

Although procedurally barred, Condoman attempted to argue that the loans were actually intended to be equity investments, and that the agreements had been signed under duress stemming from an earlier 43% interest loan. The court found these arguments unpersuasive. Condoman had legal representation when executing the two loans in question, and had previously agreed to consolidate the earlier high-interest loan into these two agreements. The court noted that if the original document had been fraudulent, that issue should have been raised much earlier. The surrounding circumstances undermined the credibility of the fraud and duress claims.

Judgment and conditional stay

Justice Koehnen granted judgment in favour of Cannect, reduced by the $6.1 million in unsupported disbursements. However, recognizing that Condoman had motions for leave to appeal pending before the Divisional Court, the court stayed enforcement of the judgment until those motions were resolved. The stay was deemed minimally prejudicial due to the short timeline before the appellate decision. The judgment would become immediately enforceable if the motions were dismissed, and further stays could be sought if leave was granted. The court left open the option for further judicial conference if needed.