Indira is a 72 year old professional dentist. In late 2016 Indira bought a home in Toronto with funds provided by herself and her 45 year old cousin. They borrowed $390,000 from Bank One in order to pay the purchase price. As security for the loan, Indira and her cousin agreed to Bank One registering a first mortgage for $390,000 against title to that Toronto home for an initial term of five years, which home they purchased in co-ownership with Indira owning 60 per cent, and her cousin 40% =  in the personal names of Indira and her cousin. The Bank One mortgage carries a variable rate of interest, and contains a pre-payment privilege that Indira has negotiated to obtain with Bank One.  Due to an unexpected increase in housing prices in 2017, Indira and her cousin were later able to obtain from Bank Two a second mortgage for $80,000, since they needed that money to complete renovations to the home. That second mortgage was also registered against title to her same Toronto home (after the registration of Bank One’s mortgage). Indira and her cousin are required to make the monthly mortgage payments on the first day of each month to Bank One and to Bank Two.

Indira practices her profession as Indira Dental Inc. (“IDI”) in a downtown Toronto office building.  She is the sole shareholder of IDI. IDI leases a sophisticated $42,000 computer system for its dental practice from Dell Computer Leasing Ltd. (“Dell”) for a term of two years, on which IDI has an option to purchase the computer system. Dell properly registered its interest under the Ontario Personal Property Security Act (“P.P.S.A.”).

IDI requires certain small quantities of porcelain for its dental practice, for the purpose of molding caps for teeth. IDI purchases an unusually large quantity of porcelain for $50,000 from Porcelain Seller Ltd., in the expectation that this material will soon rise in value and enable IDI to re-sell it for a profit. IDI takes delivery of the porcelain on July 14, 2020 but will not actually use any of the porcelain material until late September 2020. IDI pays Porcelain Seller Ltd. the $50,000 purchase price with: (a) the sum of $30,000 obtained by IDI from a loan from Dental Services Inc. (see below); and (b) a promissory note to pay Porcelain Seller Ltd. the sum of $20,000 within 60 days.

In order to obtain that $30,000 loan to purchase the porcelain, IDI grants a lender called Dental Services Inc. a security interest in all of IDI’s expensive dental teeth drilling equipment (already owned by IDI), which are used by IDI to treat patients. Unknown to Dental Services Inc., however, Finance Corp. Ltd. already held a validly registered Ontario P.P.S.A. security interest from IDI in this same dental teeth drilling equipment of IDI before Dental Services Inc. had even agreed to make its loan to IDI. Soon after the purchase of porcelain, however, the market for porcelain falls dramatically, and IDI’s $50,000 investment in porcelain is now worth only half that amount. Bank One learns of this situation, and immediately commences power of sale proceedings on July 27, 2020 against the Toronto home owned by Indira and her cousin. Due to a drop in the real estate market in 2020 due to the pandemic, their home is now worth only $420,000. As Indira is short of money, she causes IDI to issue a bonus cheque to her of $28,000 in July 2020, in her capacity as the sole Officer and Director of IDI.

A friend suggests to Indira that notwithstanding that IDI might be petitioned into bankruptcy by one of its creditors, she should file for personal bankruptcy protection under the Companies Creditor Arrangements Act (“C.C.A.A.”), to protect her own personal name. She refuses to do so, however, in the hope that the Province of Ontario will pass a new law prohibiting any creditors from petitioning Ontario dentists into bankruptcy, unless the consent of the Province has first been obtained.

As at August 4, 2020, IDI has the following creditors:

–  Dental Services Inc., and Finance Corp. Ltd., – as described above;

–  Porcelain Seller Ltd. is owed $20,000; and 

–  Joe Creditor is owed more than $40,000 by IDI, but holds no security for this debt. Joe is particularly interested in seizing the $42,000 computer system that IDI is leasing from Dell (it still remains in IDI’s dental office in Toronto). His daughter (who is currently taking a course in Advanced Business Law)

advises him to sue IDI for the money right now, so as to improve his position in the upcoming bankruptcy of IDI, but Joe will await your advice before doing so.

You must assume for the purposes of your answer that IDI (only) has now been petitioned into bankruptcy by creditors on August 4, 2020, but that Indira and her cousin will not be personally bankrupt at all.  

Why would Indira and her cousin have negotiated with Bank One for a pre-payment privilege when they first obtained their $390,000 mortgage loan from Bank One:

  1. A mortgage with a variable rate of interest such as Bank One’s mortgage with Indira and her cousin, will often cost the borrowers less in interest than a fixed rate mortgage.
  2. A pre-payment privilege would enable Indira (age 72) and her cousin to pay out the Bank One  mortgage so that they could then qualify for a “revere mortgage” from another lender.
  3. A pre-payment privilege could save on interest for Indira and her cousin in the long term if/when they ever had the money to pay down (reduce) a lump sum of the principal amount of the Bank One mortgage loan during the term of that mortgage.
  4. A pre-payment privilege would make a second mortgage lender such as Bank Two more likely to  make a second mortgage loan to Indira and her cousin, secured against their same house.  
  5. Identify which of the above three answers are false or not as accurate, and briefly explain why each is false or not accurate.  

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