Recovering Surplus Funds After a Power of Sale in Thunder Bay

The situation

Yan and Liang bought their home in Thunder Bay together seven years ago, back when Yan's factory job and Liang's administrative assistant income comfortably covered the mortgage. The trouble started when Yan's shifts were cut during a slowdown at the plant. For a while the couple made up the gap with savings, then with a private second mortgage arranged through a lender named Tesfay, who advanced them roughly $50,000 secured against the equity in their home. It bought them time, but it did not fix the underlying problem — Yan's hours never went back to what they had been, and within eighteen months the couple were behind on both the first mortgage and the payments to Tesfay.

By the time they missed several consecutive first-mortgage payments, their bank had begun the process of power of sale, the standard remedy written into almost every Ontario mortgage that lets a lender sell a property to recover what it is owed after a borrower defaults, without first going to court for permission the way a judicial foreclosure would require. Yan and Liang could not put together enough to reinstate the loan in time, and the bank listed the property. It sold a few months later for roughly $520,000.

Most people in that position assume the story ends there — that the bank takes the house and whatever it is owed, and the former owners walk away with nothing. Yan and Liang assumed the same thing, and had already signed a lease on a rental unit by the time they called Treadstone Law, not to stop the sale, which had already closed, but to ask a narrower question: was there anything left over, and if so, was it theirs?

What the review found

The answer to their first question was yes. When a lender sells a property under power of sale, it is entitled to recover only what it is actually owed — the outstanding mortgage balance, accrued interest, and the reasonable costs of the sale, such as real estate commissions, legal fees, and any property taxes paid on the owners' behalf. Anything left after that is not the lender's to keep. It belongs to whoever holds the next claim in priority, and eventually, if nothing else is owed, to the former owners themselves.

Working through the bank's statement of proceeds, our team calculated a surplus of roughly $85,000 after the first mortgage payout and the costs of sale were deducted from the $520,000 sale price. That was real money owed to someone. The complication was that Yan and Liang were not the only claimants. Tesfay, holder of the private second mortgage, had also filed a claim against the proceeds — for roughly $60,000, well above the $50,000 he had originally advanced.

Reviewing the accounting behind that figure turned up problems. Tesfay's claim included interest calculated at a rate higher than what the couple's loan documents actually specified, compounded in a way the paperwork did not support, along with several thousand dollars in fees for administrative work that appeared nowhere in the original agreement. Under Ontario's system for distributing power of sale proceeds, a second mortgagee is entitled to be paid ahead of the former owner, but only for what is genuinely owed under the terms of that mortgage — not whatever figure the lender submits. Because Tesfay and the couple could not agree on the number, the funds could not simply be handed over informally; a proper accounting, and if necessary a court determination, was needed before anyone saw a dollar.

What we did

1. Obtained the full accounting of sale proceeds from the bank's lawyer. We requested an itemized statement showing exactly how the $520,000 sale price had been applied — the first mortgage payout, the real estate commission, legal costs, and any outstanding property tax arrears — to confirm the surplus figure independently rather than relying on a summary.
2. Reviewed Tesfay's second mortgage documents against his claimed payout. We compared the interest rate, compounding terms, and permitted fees set out in the original private mortgage agreement to the figure Tesfay had submitted, and identified the specific items — an inflated interest rate and unsupported administrative charges — that were not authorized by the contract.
3. Sent a formal written demand disputing the inflated claim. Rather than let the excess amount pass through unchallenged, we set out in writing exactly which portions of Tesfay's claim were supported by the mortgage terms and which were not, and requested a corrected accounting before any funds were released.
4. Prepared to bring an application to determine entitlement to the surplus. Where claimants to power of sale proceeds cannot agree, Ontario law allows the funds to be paid into court and the competing claims resolved by a judge. We prepared the groundwork for that application as leverage, making clear the couple would not simply accept an unsupported figure to avoid the process.
5. Negotiated a resolution with Tesfay before the matter reached a hearing. Facing a documented dispute over the legitimacy of a large part of his claim, Tesfay agreed to a reduced payout that reflected the actual principal and interest owed under the loan terms, avoiding the cost and delay of a contested court application for both sides.

The outcome

Tesfay's claim settled at roughly $42,000, reflecting the principal he had advanced plus interest properly calculated under the original loan terms, well below the $60,000 he had first submitted. Of the roughly $85,000 surplus, that left approximately $43,000 owed to Yan and Liang once the accounting was finalized, money that would very likely have been paid to Tesfay in full — and largely lost to the couple — had no one checked the figures behind his claim.

It was not the outcome Yan and Liang had hoped for when they first bought the home together. They still lost the house, still carried the record of the default, and still had to rebuild from a rental unit rather than the equity they had spent years building. That part of the story could not be undone, and our team was straightforward with them about it from the first conversation. What could still be salvaged was the surplus that was rightfully theirs, and recovering it meant treating the power of sale process as something that did not simply end when the property changed hands, but continued through an accounting that had to be checked rather than assumed correct.

The couple used the recovered funds to cover moving costs, a rental deposit, and several months of breathing room while Yan looked for steadier work. It was a fraction of what they had put into the home over seven years, but it was money they had been ready to write off entirely, and reclaiming it took the dispute over Tesfay's claim seriously rather than treating it as a formality.

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