Bank of America Canada v. Mutual Trust Company 2000 OCA mini 134

COURT OF APPEAL FOR ONTARIO

DATE: 20000310

DOCKET: C29714

CARTHY, GOUDGE AND FELDMAN JJ.A.

B E T W E E N :

BANK OF AMERICA CANADA

Respondent

(Plaintiff)

and

THE MUTUAL TRUST COMPANY, MUTUAL TRUSTCO, INC., MUTUAL LIFE OF CANADA, RAYMOND DORE, IAN SUTHERLAND, ROBERT A. STUEBING and S. SCOTT CAMERON

Appellant

(Defendant)

Earl A. Cherniak, Q.C. Kirk F. Stevens for the appellant

F.J.C. Newbould, Q.C. Aaron A. Blumenfeld for the respondent

Heard: November 1 and 2, 1999

On appeal from the judgment of Farley J. dated April 14, 1998.

Bank of America Canada v. Mutual Trust Co. (1998), 18 R.P.R. (3d) 213 (Ont. Gen. Div.)

GOUDGE J.A.:

INTRODUCTION

[1] In the real estate boom of the late 1980s, Reemark Sterling I Limited (“Reemark”) undertook the building of a 300-unit residential condominium project in Scarborough, Ontario. The respondent Bank of America Canada (“BAC”) agreed to provide Reemark with a construction loan of $33 million for the project.

[2] On November 12, 1987, the appellant Mutual Trust Company (“MT”) contracted with Reemark to provide long-term mortgage financing for the project in the aggregate amount of $36.5 million. This agreement was known as the Takeout Mortgage Commitment (the “TOC”). On December 16, 1988, BAC, Reemark and MT executed an Assignment of Takeout Financing (the “TOC Assignment”) by which BAC would receive repayment of the construction loan it had made from the funds advanced by MT under the TOC.

[3] On July 31, 1991, against the background of the collapsing real estate market of the early 1990s, MT declared that it was legally entitled to decline to advance funds under the TOC and would not do so unless additional conditions were met.

[4] Following further negotiations, MT, BAC and Reemark executed a further agreement on December 18, 1991, known as the Amended Takeout Mortgage Commitment (the “ATOC”), providing a renegotiated basis upon which MT was to advance the long-term mortgage financing.

[5] Shortly thereafter, on February 28, 1992, MT took the position that because it had not received satisfactory answers to requisitions it had submitted, it would not advance any funds pursuant to the ATOC and considered its commitment to be at an end.

[6] As a result, BAC commenced this litigation. At trial, Farley J. found that MT had breached the TOC, the TOC Assignment, and the ATOC. He awarded damages to BAC together with both pre- judgment and post-judgment interest calculated on a compound basis.

[7] On appeal MT contests the findings of liability and the award of compound interest.

[8] For the reasons that follow, I agree with the conclusions reached by Farley J. except for that relating to interest. In the circumstances of this case, I can find no basis for awarding compound interest. Rather, it should be simple interest calculated in the usual way as provided for in the Courts of Justice Act. I would therefore allow the appeal, but only to this limited extent.

FACTS

9The additional facts needed for my analysis are as follows.

[10] The TOC was executed by MT and Reemark on November 12, 1987. While it contained many terms, the principal one relied on by MT in these proceedings was “Other Condition 3”, which provided that there shall be no material change in any representation or information in regard to the project.

[11] MT was a wholly owned subsidiary of Mutual Trustco Inc. (“MTrustco”). On November 25, 1987, almost two weeks after MT and Reemark entered the TOC, MTrustco, Reemark, and several Reemark related companies, negotiated an agreement called the Support Agreement. It required that when legal title to the condominium units was transferred to individual investors, Reemark would establish a trust fund of some $5.6 million in favour of MTrustco. This was to protect MTrustco in the event that it was called upon to satisfy its guarantee of certain undertakings of cash flow given by Reemark to the investors in the project. MT was not a party to the Support Agreement.

[12] On December 16, 1988, MT, Reemark and BAC entered into the TOC Assignment. As part of this contract MT agreed that as of that date the TOC was valid and in good standing, that the takeout financing was fully available to all 300 units of the project, that Reemark was entitled to receive all of the proceeds of the takeout financing and that all such proceeds were to be advanced by it to BAC pursuant to the irrevocable direction from Reemark to do so.

[13] In the spring of 1991 MT learned that Reemark had granted a further mortgage on the project for $5 million, which had then been assigned to Royal Trust for $3 million.

[14] On June 18, 1991, MT asserted to both Reemark and BAC that there had been a material change in the representations and information provided in relation to the project in contravention of Other Condition 3 of the TOC. MT provided no particulars of the alleged material change either then or at trial. Then on July 23, 1991, MT made clear that it would only advance funds under the TOC if Reemark agreed to a holdback of $5.6 million from the advance in order to cover the cash flow assurances that had been guaranteed by its parent MTrustco. MT asserted that if the funding did not proceed on this basis by July 31, 1991, it would cancel its commitment and consider the matter closed.

[15] After MT took this position, BAC and Reemark, rather than immediately litigating, attempted to reach a negotiated business solution with MT. These negotiations concluded on December 18, 1991, with the execution by all three parties of the ATOC. That agreement amended the TOC.

[16] Included in its provisions was confirmation that the full amount of the takeout financing provided by MT was to be $36,555,835 commencing with the first advance to be $18.25 million less a holdback of $2.5 million. The parties were to use all reasonable and diligent efforts to ensure that this first advance was made by January 31, 1992 and if not made by February 29, 1992, MT was to be released of its obligation to fund if the delay was not its fault. MT expressly confirmed that all of the conditions precedent to funding which were set out on page two of the TOC had been satisfied and that there had been no material changes in the representations or information in regard to the project which would prevent it from proceeding with the advances. It was further agreed that contemporaneously with the first advance, BAC would release MT from all claims in relation to the TOC and the TOC Assignment.

[17] A few days before the target date of January 31, 1992, MT changed solicitors. On February 6, 1992, the new solicitor forwarded to Reemark a list of 52 purported requisitions on title. Without admitting his right to make these requisitions, Reemark responded to each of them. Nonetheless, on February 28, 1992, MT took the position that these responses were unsatisfactory, that it would not advance any funds and that its commitment was at an end.

18This litigation followed.

[19] At trial, Farley J. held that MT was in breach of the TOC and the TOC Assignment as of July 31, 1991, when it failed to advance funds and cancelled its commitment. He found that while Reemark may have breached the Security Agreement by giving the mortgage that was assigned to Royal Trust (something which he said might have provided MT with a defence to a claim from Reemark), BAC’s claim was undiminished by this, since it was an assignee from Reemark for value without notice of the Support Agreement.

[20] Second, Farley J. held that MT was in breach of the ATOC when it refused to advance as of February 29, 1992. He found that the requisitions submitted by MT were invalid and need not have been answered, but were reasonably answered in any event. Moreover, MT acted in bad faith in making them since it did so simply to further its intention of escaping its obligations.

[21] The trial judge then went on to calculate the damages suffered by BAC as a result of these breaches taking into account the mitigation efforts which it had undertaken following February 29, 1992. Damages are not an issue in this appeal.

[22] Finally, Farley J. determined that in the circumstances of the case pre-judgment interest should be calculated on a compounded basis. He thus awarded BAC pre-judgment and postjudgment interest at its prime rate plus 1% compounded monthly.

ANALYSIS

[23] In argument before this court, the appellant raised three issues. I will deal with each of them in turn.

[24] The first issue is whether MT breached the TOC and the TOC Assignment when in July 1991 it declared that it would only advance funds if Reemark agreed to a holdback of $5.6 million and otherwise would cancel its commitment.

[25] I agree with Farley J. that this constituted a breach of contract by MT. First, the holdback insisted on by MT was a unilateral demand not provided for by the TOC. Second, MT’s claim that there had been material change in the representations provided in relation to the project was never substantiated in any way. MT neither alleged nor proved a specific material change.

[26] Finally, in my view, the mortgage given by Reemark and assigned to Royal Trust could not serve to excuse MT from its funding obligation either to BAC or to Reemark. That mortgage could not be said to have reduced Reemark’s equity in the project below any agreed upon level since the TOC contained no such requirement.

[27] Nor could it be said to have been a breach of Reemark’s obligation under the Support Agreement to establish a $5.6 million trust fund in favour of MTrustco. That obligation was only to arise at the point when legal title to the condominium units was transferred to the investors. Hence, in July 1991 when MT declared that it would no longer comply with the TOC there could not have been a breach of that obligation since there was as yet no requirement that legal title be transferred to the individual investors.

[28] Finally, Reemark’s obligations under the Support Agreement were owed to MTrustco not to MT and if breached could not be relied on by MT to excuse its own performance under the TOC.

[29] For these reasons, I do not agree that MT may have had the right to refuse to perform at the instance of Reemark. I therefore need not deal with whether BAC was subject to the equities between Reemark and MT, or could be treated as an assignee for value without notice of the Support Agreement.

[30] MT therefore had no lawful basis for its assertion that as of July 31, 1991, it would not comply with its funding obligation under the TOC. This was an anticipatory breach of the TOC. Similarly, it was a breach of the TOC Assignment under which BAC had the right to receive the proceeds from the funding that MT was obliged to make under the TOC. This ground of appeal must fail.

[31] The second issue is whether MT breached the ATOC as of February 29, 1992, when it refused to advance any funds and declared its commitment to be at an end.

[32] Here, again I agree with Farley J. MT had no lawful basis upon which to take this position.

[33] On appeal, MT offered as its justification the answers given to three of the requisitions made on February 6, 1992. It argued that these were unsatisfactory and excused all further performance under the ATOC. The thrust of these requisitions was to require, as a precondition to making the first advance of $18.25 million, that Reemark demonstrate that the individual investors had reconfirmed their deals by producing the security documents said to be required of these investors.

[34] In my view there was nothing in the ATOC that entitled MT to submit these requisitions. That contract expressly provided that all of the conditions precedent set forth on page two of the TOC had been satisfied. The ATOC contained no provision for MT to do further due diligence. Indeed, the trial judge found that MT’s new solicitor had acknowledged that his client had no right to refuse to close if the requested information was not given.

[35] Moreover, I agree with the trial judge that the ATOC clearly contemplated that individual investors would assume their security obligations only after MT made the first advance of $18.25 million. MT’s funding obligation was not conditioned on individual investors having provided the security documents which would ultimately be required of them.

[36] I therefore conclude that MT had no right to advance these requisitions. Moreover, the ATOC did not accord to MT the rights suggested by these requisitions. As a result, MT had no lawful basis to terminate its contractual obligations under the ATOC as of February 29, 1992.

[37] Given this conclusion, it is not necessary to address the finding by the trial judge that these requisitions were advanced in bad faith and that this provides another reason for concluding that MT cannot rely on the requisitions and the answers to them as a basis for refusing to meet its obligations under the ATOC.

[38] Because of its breach of the ATOC, MT never made the first advance called for by the ATOC. Since making this advance was a precondition to the release of MT from its breach of the TOC and the TOC Assignment, that release never became effective. As a result, as the trial judge found, BAC was entitled to damages for MT’s breach of the earlier agreements as well as its breach of the ATOC.

[39] Those damages run from the date upon which MT breached the TOC and the TOC assignment. I agree with Farley J. that July 31, 1991 is that date, since it was as of that date that MT unlawfully cancelled its commitment under the TOC and the TOC Assignment and indicated that it considered the matter to be closed.

[40] These 1991 breaches entitled BAC to the full measure of damages resulting from MT’s repudiation of its contractual obligations and its complete refusal to provide any takeout financing whatsoever. Hence, it is unnecessary to consider whether the damages flowing from the breach of the ATOC should be limited to compensation for failure to make the first advance only. BAC is entitled to the full measure of damages in any event. The second ground of appeal must also fail.

[41] The third issue addresses the basis upon which interest should be calculated. The entitlement to interest runs from the date of the breach, namely, July 31, 1991. Farley J. ordered that interest throughout be on a compounded basis. The debate is whether he was correct to do so.

[42] He did so on two grounds: first, in the exercise of his discretion under s. 130 of the Courts of Justice Act, R.S.O. 1990, c.C.43 and, second, as a component of the damages sustained by BAC.

[43] With respect, I disagree with his conclusion that BAC proved an entitlement to compound interest as a matter of damages. It is not enough for BAC to simply describe the nature of its lending business. It must also demonstrate that the failure of MT to provide it with the financing contracted for deprived it of lending opportunities that would have yielded compound interest and that its lost profits on these missed opportunities were equal to that quantum of interest without discounting for such things as the possible impact of non-performing loans. There was simply no such evidence here and these gaps cannot be filled by making assumptions based on the nature of BAC’s business. Indeed the respondent did not strenuously defend this basis for the awarding of compound interest.

[44] Moreover, in finding that he had jurisdiction under s.130 of the Courts of Justice Act, to award compound interest, I conclude that Farley J. erred in law.

45The relevant sections of that Act are as follows:

128.—(1) A person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest thereon at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order.

…

(4) Interest shall not be awarded under subsection (1),

…

(b) on interest accruing under this section;

…

(g) where interest is payable by a right other than under this section.

129.—(1) Money owing under an order, including costs to be assessed or costs fixed by the court, bears interest at the postjudgment interest rate, calculated from the date of the order.

…

(5) Interest shall not be awarded under this section where interest is payable by a right other than under this section.

130.—(1) The Court may, where it considers it just to do so, in respect of the whole or any part of the amount on which interest is payable under section 128 or 129.

(a) disallow interest under either section;

(b) allow interest at a rate higher or lower than that provided in either section;

(c) allow interest for a period other than that provided in either section.

(2) For the purpose of subsection (1), the court shall take into account,

(a) changes in market interest rates;

(b) the circumstances of the case;

(c) the fact that an advance payment was made;

(d) the circumstances of medical disclosure by the plaintiff;

(e) the amount claimed and the amount recovered in the proceeding;

(f) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding; and

(g) any other relevant consideration.

[46] Clause 128(4)(b) is a clear statutory prohibition against awarding compound interest under s.128(1). This prohibition was in the predecessor legislation, the Judicature Act, R.S.O. 1980, c. 223, s.36(5)(b) and has been in the Courts of Justice Act since its inception in 1984.

[47] Section 129 has a similar history and in combination with s.127, it defines the rate of post-judgment interest for the purposes of the legislation. That definition does not encompass compounding. Similar to s.128(4)(g) for pre-judgment interest, s.129(5) provides an exception where the right to post-judgment interest is found outside the legislation.

[48] Section 130 of the Courts of Justice Act permits certain types of modification to the interest payable under ss. 128 and 129, but compounding is not among them. This provision too was in the Judicature Act (s.36(6)) and has been in the Courts of Justice since 1984. While it gives the court discretion to disallow statutory interest or to allow it at a higher or lower rate or for a different period of time, it simply cannot be read to empower the court to override the clear legislative intent found in ss.128 and 129 that both pre-judgment and post-judgment interest be awarded on a simple not a compounded basis: See Koukounakis v. Stainrod (1996), 3 C.P.C. (4th) 56 (Ont. Gen. Div.), aff’d., (1998), 22 C.P.C. (4th) 104 (Ont. C.A.).

[49] The relevant jurisprudence makes clear that the court’s jurisdiction to award compound interest is not found in s.130 of the Courts of Justice Act, but rather in the court’s general equitable jurisdiction. Where principles of equity warrant an award of compound interest, it is, in the language of s.128(4)(g) and s.129(5) “payable by a right other than under this section.” Where this jurisdiction rather than the legislation underpins the award of interest, the express legislative intent that interest awarded under ss. 128 and 129 be on a simple basis has no application.

[50] In the leading case of Brock v. Cole et al. (1983), 40 O.R. (2d) 97 (C.A.), this court considered s.36 of the Judicature Act, the predecessor of ss.128 and 130 of the Courts of Justice Act. In particular, it scrutinized s.36(5)(f) the predecessor to s.128(4)(g). Thorson J.A. writing for the court said this at p. 102:

I, of course, accept that s. 36(5)(f) constitutes a statutory recognition that there continue to be rights to interest on judgment claims that are found outside the general provisions of s. 36. Moreover, in my opinion, there is nothing in s. 36 from which it is to be concluded that the Legislature, in enacting s. 36 in its present form, intended to do away with the authority of a court, applying well-recognized principles of equity, to award interest including compound interest in those cases in which it is just and proper to do so. I also accept that once it is established that the conditions which must be met in order to warrant the exercise of the court’s equitable jurisdiction to order compound interest have been met, it can properly be said that the plaintiff has a right to such interest of the kind described in s.36(5)(f) of the Judicature Act, that is to say a right other than under the general provisions of s.36 respecting pre-judgment interest.

[51] In locating the authority to award compound interest outside the relevant legislation, in the court’s general equitable jurisdiction, Thorson J.A. saw no need to discuss s.36(6) of the Judicature Act, the predecessor to s.130 of the Courts of Justice Act. This confirms what I take to be the plain meaning of s.130, namely, that it does not confer the jurisdiction to award interest on a compounded basis either pre- or post-judgment.

[52] Since Brock v. Cole, subsequent jurisprudence has looked to the court’s general equitable jurisdiction rather than to the Courts of Justice Act in considering pre-judgment interest on a compounded basis. See, for example, Claiborne Industries Ltd. v. National Bank of Canada (1989), 1989 183 (ON CA), 69 O.R. (2d) 65 (C.A.); Confederation Life Insurance Co. v. Shepherd MacKenzie Plaxton Little and Jenkins (1996), 1996 3206 (ON CA), 88 O.A.C. 398 (C.A.); Oceanic Exploration Company v. Denison Mines Ltd., a judgment of the Ontario Court (General Division, Commercial List), released May 8, 1998 (per Feldman J.).

[53] In my view, neither of the two cases put forward by the respondent undermine this conclusion. In the first of these, Niagara Airbus Inc. v. Camerman (1991), 1991 7314 (ON CA), 3 O.R. (3d) 108 (C.A.), Carthy J.A. for the court utilized the predecessor of s.130 of the Courts of Justice Act as a discretionary basis for awarding compound interest. The court was not invited to consider the legislative prohibition in the predecessor to s.128 of the Act nor the general equitable jurisdiction, outside the legislation, to award compound interest. In my respectful view, this case must be seen as per incuriam of the issue.

[54] The second case is Air Canada v. Ontario (Liquor Control Board), 1997 361 (SCC), [1997] 2 S.C.R. 581. As I read that case, the court’s obiter reference to compound interest is anchored in the judgment in Brock v. Cole, supra, hence in the court’s general equitable jurisdiction. In noting that such an award is a matter of discretion, Iacobucci J. simply recites s.130 of the Courts of Justice Act without elaboration. I cannot take this brief reference to indicate any sea change in the well-established jurisprudence that finds the jurisdiction to award interest on a compounded basis not in the Courts of Justice Act, but in the general equitable jurisdiction of the court.

[55] Hence, I conclude that Farley J. erred in law in grounding his order for compound interest in s.130 of the Courts of Justice Act.

[56] It remains only to determine whether his interest award can be defended as a proper exercise of the court’s equitable jurisdiction to make such an order. In Brock v. Cole the court utilized this jurisdiction to award compound pre-judgment interest against a lawyer who misused and failed to return funds in breach of his fiduciary duty. Significant reliance was placed on the English case of Wallersteiner v. Moir (No. 2), [1975] 1 All E.R. 849, which was also a case of a fiduciary misusing trust monies for his own benefit. It is in this context that I would read the well-known words from Lord Denning in that judgment that were quoted in Brock v. Cole at p. 103.

… in equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business. It is plain that the company should be compensated for the loss thereby occasioned to it. Mere replacement of the money – years later – is by no means adequate compensation, especially in days of inflation. The company should be compensated by the award of interest. …But the question arises: should it be simple interest or compound interest? On general principles I think it should be presumed that the company (had it not been deprived of the money) would have made the most beneficial use open to it … Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. But, whichever it is, in order to give adequate compensation, the money should be replaced at interest with yearly rests, i.e. compound interest.

[57] Since Brock v. Cole the jurisprudence in Ontario has focused on whether the wrongdoer against whom compound interest is sought is a fiduciary who has stolen funds or profited from the wrongful retention of trust monies. See Claiborne Industries, Confederation Life and Oceanic Exploration, supra. In England, it has been much the same. For example, in Westdeutsche Bank v. Islington L.B.C., [1996] 2 All E.R. 961 (H.L.) it was held that in the absence of fraud, equity had never awarded compound interest except against a trustee or other person in a fiduciary position in respect of profits improperly made.

[58] In Air Canada, supra, Iacobucci J., in obiter, found that compound interest might have been appropriate, but declined to interfere with the award of simple interest made at trial. The court was moved by the knowingly improper collection and retention of monies from the plaintiff by provincial authorities. Hence I think the general equitable jurisdiction of the court to award compound interest extends to a successful claim and restitution for the return of monies from a party who has retained them knowing that to be wrongful.

[59] These cases define the core of the court’s equitable jurisdiction to award interest on a compounded basis. Without fixing the precise reach of this jurisdiction, I agree with the trial judge in Oceanic Exploration, supra, now my colleague Feldman J.A., who concluded that this jurisdiction does not take in the case that is no more than a debt wrongfully withheld. As she said, where monies were to be advanced, but were not paid in breach of contract, without a right in equity to compound interest, the prohibition against it in s.128(4)(b) must prevail. Apart from cases of fraud, breach of fiduciary duty, knowingly wrongful retention of another’s monies and the like, where equity can assist, the clear legislative policy is that interest not be compounded unless, of course, it can be proven as a matter of damages.

[60] Turning to this case, I do not think that the general equitable jurisdiction of the court can be looked to to justify the compounding of interest. This is not a case of fraud. Nor can MT be said to owe a fiduciary duty to BAC. Nor is BAC seeking restitution of its monies wrongfully retained by MT. Rather, this case involves a breach of contract by a lending institution. In such a case equity cannot help. The order of Farley J. awarding compound interest must therefore be set aside. In its place there will be an order for simple interest as provided for in ss.128 and 129 of the Courts of Justice Act. Neither party asked the court to vary the rate of interest or to allow interest for a period other than that provided in the statute, and I see no basis for doing so in the circumstances of this case.

[61] In summary I would allow the appeal, but only to the extent of substituting the order for interest that I have described for the counterpart order made at trial. As the respondent has succeeded in large measure, I would award it three quarters (3/4) of its costs of the appeal.