COURT OF APPEAL FOR ONTARIO

CITATION: The Equitable Trust Company v. The Rose Corporation, 2012 ONCA 44

DATE: 20120124

DOCKET: C54172

Rosenberg and Hoy JJ.A. and Swinton J. (Ad Hoc)

BETWEEN

The Equitable Trust Company

Applicant (Respondent)

and

The Rose Corporation

Respondent (Appellant)

James M. Wortzman and Karey Anne Dhirani, for the appellant

Daniel S. Murdoch and Kathryn Esaw, for the respondent

Heard: January 17, 2012

On appeal from the order of Justice David M. Brown of the Superior Court of Justice, dated July 12, 2011.

ENDORSEMENT

[1] The Rose Corporation appeals the order of the application judge dated July 11, 2012, ordering and declaring that the “Covenant and Postponement of Claim” (the “Covenant”) sought to be enforced by the respondent, The Equitable Trust Company, is valid and enforceable against the appellant.

[2] Pursuant to the Covenant, the appellant merchant bank agreed – as “principal debtor, and not as a surety”, as guarantor, and as indemnitor – to be liable for $1.5 million of loans advanced by the respondent to three corporations (collectively, the “Borrower”), and secured by first mortgages on three hotels owned by a subsidiary of the appellant. The hotels were sold twice with the appellant’s consent. Two of the Borrowers remained on the loan covenant. The mortgages fell into arrears. A “Binding Term Sheet Regarding Forbearance Agreement” was signed by, among others, the appellant. The respondent ultimately appointed a receiver and manager. Thereafter, the appellant took the position that the Covenant was unenforceable.

[3] The appellant argues that the application judge erred in finding that the Covenant is valid and enforceable against the appellant and, in the alternative, erred in finding that there were no material facts in dispute which require a trial.

[4] With one exception, the appellant advances arguments made before, and fully and ably addressed by, the application judge in his reasons. On this appeal, the appellant relies on Montreal Trust Co. of Canada v. Birmingham Lodge Ltd. (1995), 1995 CanLII 438 (ON CA), 24 O.R. (3d) 97 (C.A.), which appears not to have been argued before the application judge.

[5] We therefore focus our analysis on the argument arising out of Montreal Trust.

[6] In Montreal Trust, the mortgaged property was sold with the defendant guarantors’ consent, but the mortgage was subsequently renewed, at an increased interest rate, without their consent. It is long established that a surety will be discharged if the principal contract which he guaranteed is materially varied without his consent.

[7] Laskin J.A. held that the guarantors were released from liability by the renewal agreement; the “no prejudice” clause in the debenture containing the guarantee covenant provided that the guarantors were not released from liability if the terms of the mortgage were varied by “the Corporation or any successor”. The variation was effected by an assignee, not a successor. He also rejected the argument that the effect of the phrase “the guarantors shall be primarily liable” was to convert the guarantee into a contract of indemnity and make the defendants liable as primary debtors, even if released from liability as guarantors.

[8] He noted, at para. 21:

All these cases turn on the specific language of the document being considered. The mere inclusion of a phrase such as “the guarantors shall be considered as primarily liable” is not determinative. The court should examine the entire document to ascertain the parties’ intention. If the court is uncertain about the correct interpretation, it may resort to extrinsic evidence to assist it.”

[9] In Montreal Trust, the defendants were referred to as guarantors throughout the debenture and signed as guarantors; Laskin J.A. therefore construed the covenant at issue as a contract of guarantee. His conclusion was buttressed by the parties’ subsequent conduct. In each of the mortgage renewal offers, and in the statement of claim, the defendants were referred to as “guarantors.”

[10] Based on Montreal Trust, the appellant argues that the application judge erred in concluding that the appellant was a principal debtor under the Covenant. While the appellant is referred to throughout as a “Covenantor”, and not as a “guarantor”, and did not sign as guarantor, subsequent documents describe the appellant as “guarantor”. All of the common law defences to the enforcement of a guarantee are therefore open to the appellant, it argues, unless waived in the Covenant. The appellant notes that in paragraph (h) of the Covenant it waives “all notices of default, non-performance, non-payment and non-observance on the part of the Borrower of the terms, covenants and provisos contained in the Security” (emphasis added). Again relying on Montreal Trust, the appellant argues that it did not waive such notices in respect of the Borrower’s assignees, and the general “no prejudice” clauses in the Covenant do not amount to a waiver of its right to rely on its failure to receive the demand notice issued by the respondent to the ultimate purchaser of the mortgaged property in a timely manner.

[11] While the application judge concluded that the appellant was a principal debtor, that was not determinative of liability. He also correctly concluded that the liability of the appellant turned on the language of the Covenant.

[12] Paragraph (f) of the Covenant provides that “nothing but payment and satisfaction in full of the Indebtedness and the due performance and observation of all covenants, agreements and provisos in the Security and other security to be given to the Lender shall release the Covenantor of this covenant”. As the application judge noted, paragraph (j) provides that “the liability of each Covenantor under this covenant shall not be impaired or discharged … by any other act or thing whereby, as guarantor, the Covenantor would or might be released in whole or in part.” The Covenant contemplated the sale of the hotels.

[13] The application judge carefully considered the specific language of the Covenant. The language used in the Covenant is different from that used in Montreal Trust. We agree with his conclusion that the appellant contracted out of its ability to rely on its failure to receive a demand notice.

[14] We also agree with the application judge’s finding that the appellant by, among other things, signing the “Binding Term Sheet Regarding Forbearance Agreement”, in which it agreed to sign an acknowledgement that its guarantee remained in effect and subsequently dispensing with the need for that formality, ratified the events that, but for the “no prejudice language”, might have entitled the appellant to release under the Covenant.

[15] The material facts which the appellant pointed to in his oral submissions on this appeal as in dispute, and requiring a trial, arise out of an email exchange between counsel relating to the ratification issue. The application judge rejected the appellant’s suggestion as to the proper interpretation of the emails as contrary to their plain import. It was open to the application judge to rely on the plain meaning of the emails and thus determine the matter as an application.

[16] In the result, the appeal is dismissed.

[17] The respondent is entitled to its costs of the appeal on a partial indemnity scale, which are fixed at $13,000, inclusive of disbursements and applicable taxes.

“M. Rosenberg J.A.”

“Alexandra Hoy J.A.”

“K. Swinton J. (ad hoc)”