Court of Appeal for Ontario

Date: 20220126 Docket: C69247

Doherty, Tulloch and Thorburn JJ. A.

BETWEEN

Intercap Equity Inc. Plaintiff/Moving Party (Respondent)

and

Michael J. Bellman, Kenneth D.F. MacNeil and Capsule Media Inc. Defendants/Responding Parties (Appellants)

Counsel: J. Thomas Curry and Derek Knoke, for the appellants Jeffrey Larry and Daniel Rosenbluth, for the respondent

Heard: January 7, 2022 by video conference

On appeal from the order of Justice Frederick L. Myers of the Superior Court of Justice, dated March 1, 2021, with reasons reported at 2021 ONSC 1510.

Thorburn J.A.:

Background

[1] Michael J. Bellman (“Bellman”) and Kenneth D.F. Mac Neil (“Mac Neil”) appeal the motion judge’s order granting the respondent Intercap summary judgment against them (“the appellants”) pursuant to a guarantee.

[2] On the motion for summary judgment, Intercap sought to enforce a debt and a guarantee signed by Bellman and Mac Neil as principals of the corporate debtor, Capsule Media Inc. (“Capsule”). Capsule conceded liability for the debt. Bellman and Mac Neil did not.

[3] The central questions on the motion were (i) whether the guarantee was a continuing guarantee and (ii) whether the debt under the most recent loan agreement was connected with the debt under the earlier loan agreement, such that the appellants were responsible to repay the loan.

[4] The motion judge held that this was a continuing guarantee which applied to the most recent loan agreement. He concluded that the guarantee “expressly contemplates that the termination of the initial loan agreement will not release the guarantors …. under a subsequent [loan] agreement” where the subsequent loan agreement is “in connection with” and arises from a prior loan agreement.

[5] The motion judge formed his decision on the basis of the documentary record alone and held that the parties’ subjective views were inadmissible. He noted however that, had he considered evidence of the subjective views of the parties, he would have found it incredible that the debt obligation would no longer be subject to the guarantee by Bellman and Mac Neil.

[6] The central issue to be determined on this appeal is whether the motion judge erred in his analysis and conclusion that the guarantee applied to the most recent loan agreement between the parties, namely the Second Amended and Restated Loan Agreement (“This Loan”) such that the appellants are liable to repay the funds guaranteed.

[7] Before addressing the issues raised by the appellants, I will set out the history of the loan agreements and guarantees, and the terms in those agreements that are significant for the purposes of this appeal.

The Loan Agreements and Guarantees

[8] The parties are sophisticated businesspeople who negotiated the terms of their agreements and did not rely on standard form contracts.

[9] Intercap is a merchant bank that invests in private and public companies. Capsule is an Ontario corporation in the business of cloud-based media management, owned by Mac Neil’s holding company and Bellman’s spouse. Bellman is a former corporate lawyer with experience in private lending who has been involved in many loans.

The First Loan Agreement and Guarantee

[10] On April 5, 2018, Intercap and Capsule entered into a loan agreement (“the First Loan Agreement”), whereby Intercap agreed to lend Capsule $250,000. The purpose of the loan was to repay funds to a prior lender and to provide general working capital. The loan agreement included a right to convert the loan into common shares of Capsule based on a conversion price formula set out in the loan agreement. The maturity date of the agreement was October 5, 2018.

[11] On April 5, 2018, Bellman and Mac Neil provided Intercap with a joint and several personal guarantee of the initial $250,000 loan agreement (“the First Guarantee”). Paragraph 14 of the guarantee provides that Intercap may vary the terms and conditions of the loan without the guarantors’ consent provided the principal amount of the loan is not increased.

[12] While the First Guarantee granted security over all of Bellman and Mac Neil's personal property, Intercap agreed that it would not register notice of its security interests over the appellants’ personal assets under the Personal Property Security Act, R.S.O. 1990, c. P.10 (“PPSA”), unless Bellman and Mac Neil defaulted under the loan. Bellman acknowledged that he did not want a PPSA notice filed because registration could adversely affect his creditworthiness.

The Second Loan Agreement and Guarantee

[13] In August of 2018, it became clear that Capsule would not be able to repay the loan by the maturity date of October 5, 2018 and that it required further funds. As such, on August 27, 2018, Intercap and Capsule entered into an Amended and Restated Loan Agreement (the “Second Loan Agreement”) to increase the loan amount from $250,000 to $450,000 and extend the maturity date from October 5, 2018 to November 6, 2018. The Second Loan Agreement also included a novation clause, but all other terms remained substantially the same.

[14] Because the original guarantee required consent to increase the amount of the loan, the parties also entered into an Amended and Restated Personal Guarantee (“the Second Guarantee”) on August 27, 2018.

[15] The Second Guarantee provides that:

Para. 1: Guarantee. The guarantee is “of all present and future debts, liabilities and obligations of the Borrower arising out of an Amended and Restated Loan Agreement as of August 27, 2018 … and any ultimate unpaid balance thereof ”.

Para. 2: Liability Absolute. The guarantee is “unconditional and absolute irrespective of … any amendment, waiver or other modification of any obligations of the Borrower or any rights of the Lender under any Agreements, including, without limitation, any increase in the principal amount thereof[.] … This shall be a continuing Guarantee and shall cover all liabilities of the Borrower to the Lender under the Amended and Restated Loan Agreement and all such liabilities incurred before or after the date hereof in connection with the Amended and Restated Loan Agreement and shall apply to and secure any ultimate balance due or remaining due to the Lender thereunder and shall be binding as a continuing security on the Guarantor.”

Para. 12: Continuing Nature. “ This agreement shall continue and apply to any ultimate unpaid balance of the Guaranteed Obligations and shall be reinstated if at any time payment of any of the Guaranteed Obligations is rescinded or must otherwise be returned by the Lender upon the insolvency, bankruptcy or reorganization of the Borrower or for any other reason whatsoever, all as though such payment had not been made.”

Para. 14: Dealings by the Lender. “The Lender, may from time to time (i) renew, terminate and otherwise vary any of the terms and conditions of any loans; … all as the Lender may see fit, without prejudice to or in any way limiting or lessening the liability of the Guarantors under this agreement and without obtaining the consent of or giving notice to the Guarantors.… The Lender covenants and agrees that it will not increase the principal amount of the Loan without the prior written consent of both Guarantors.”

Para. 19: Entire Agreement. “No alteration or waiver of this guarantee or of any of its terms, provisions or conditions shall be binding on the Lender unless made in writing by the President or Chief Financial Officer of the Lender.” [Emphasis added.]

The Amending Agreement

[16] The funds were not repaid by November 6, 2018.

[17] Instead, on November 6, 2018, the parties entered into yet another Agreement (“the Amending Agreement”), amending the terms of the Second Loan Agreement to extend the maturity date to March 16, 2019 and add $20,000 to the loan to reimburse Intercap for legal fees.

[18] The Amending Agreement also amended the terms of the Guarantee to remove the provision in the Second Loan Agreement that prohibited Intercap from registering a PPSA notice against Bellman and Mac Neil until there was a default or event of default.

[19] The Amendment provides that the Second Guarantee shall continue in full force and effect. Bellman and Mac Neil personally executed the Amendment as guarantors.

[20] On November 7, 2018, Intercap filed notices under the PPSA against Bellman and Mac Neil.

The Second Amended and Restated Loan Agreement (“This Loan”)

[21] Because Capsule again failed to pay back any of the $450,000 loan by March 16, 2019, Intercap and Capsule entered into a Second Amended and Restated Loan Agreement (“This Loan”) on July 15, 2019. The repayment option of conversion to shares provides a different conversion formula than the one used in the First Loan Agreement. This Loan also extended the maturity date to March 31, 2020.

[22] No further funds were advanced pursuant to This Loan.

[23] The recital to This Loan provides as follows: “And whereas the Lender and the Borrower wish to amend and restate the [Second] Loan Agreement by [This] Loan”.

[24] This Loan provides that:

1.01 Novation. “The First Amended and Restated Loan Agreement is hereby terminated … and replaced with the terms of this Agreement.”

3.01 Establishment of Loan. “[T]he Lender hereby establishes in favour of the Borrower a non-revolving term loan (“the Loan”) in the amount of $450,000.00, of which $250,000 was advanced on April 5, 2018 and $200,000 was advanced on August 27, 2018.” No new money was advanced.

3.04 Use of Proceeds. “The Borrower used the proceeds of the Loan to repay funds owing to Clearflow Commercial Finance and for general working capital purposes.” (meaning Capsule had spent the money);

3.05 Current Outstanding Loan Balance. “As of the date hereof, the total amount outstanding under the Loan is $518,966.93, being comprised of $450,000 in principal, $44,671.93 in accrued but unpaid interest, and $24,295 in legal and other fees (inclusive of HST).”

11.07 Entire Agreement. “This Agreement and the agreements referred to herein and delivered pursuant hereto constitute the entire agreement between the parties hereto and supersede any prior agreements, undertakings, declarations, representations and understandings, both written and verbal, in respect of the subject matter hereof.”

[25] Intercap claims there was no need to enter into a new guarantee when This Loan was executed, because the amount of the loan was not increased.

The Parties’ Positions on This Appeal

The Appellants’ Position

[26] The appellants claim that the motion judge made the following errors in arriving at the conclusion that the Second Guarantee is a continuing guarantee that bound the appellants:

a. The motion judge failed to address the hallmarks of continuing guarantees, he erred in finding that the debt under This Loan was connected to the debt under the Second Loan Agreement, and he failed to read the Second Guarantee in accordance with the proper principles of contract interpretation; and

b. The motion judge failed to appreciate that the terms of the Second Guarantee were ambiguous, he failed to appreciate the effect of ambiguity on the law of personal guarantees, and he misconstrued the extrinsic evidence.

[27] The appellants contend that, absent these errors, the motion judge would have concluded that there was no continuing guarantee that bound the appellants.

[28] The appellants submit that the novation clause and the entire agreement clause demonstrate that This Loan is a new agreement, and because the Second Guarantee was not a continuing guarantee, the requirement to guarantee the amounts paid to Capsule in the Second Loan Agreement was terminated.

[29] The appellants claim these are all issues of law subject to the correctness standard of review, save for the appellants’ allegation that the motion judge misconstrued or failed to consider extrinsic evidence to resolve ambiguity in the Second Guarantee. This, they claim, is a question of mixed fact and law subject to the deferential standard of palpable and overriding error.

The Respondent’s Position

[30] The respondent submits that the appeal involves the interpretation of a negotiated contract, for which the standard of review is deferential.

[31] The respondent further submits that, since the indebtedness evidenced in This Loan was incurred “in connection with” and “ar[ose] out of” the Second Loan Agreement, the Second Guarantee applies to that indebtedness as a continuing guarantee. The respondent submits that the novation and entire agreement clauses in This Loan are not relevant, as paragraph 14 of the Second Guarantee expressly permits Intercap to “renew, terminate and otherwise vary any of the terms and conditions of any loans … all as the Lender may see fit, without prejudice to or in any way limiting or lessening the liability of the Guarantors under this agreement and without consent of or giving notice to the Guarantors”, on condition that the principal amount of the loan does not increase. This Loan did not increase the principal amount of the loan.

[32] As such, the respondents say the Second Guarantee continues to apply and the appellants remain responsible for repayment of the loan.

[33] The respondent further submits that the motion judge did not err in applying the principles of contractual interpretation, in excluding evidence of the parties’ subjective interpretations of the agreements, and in finding that even if the extrinsic evidence was admissible, he would have rejected it.

[34] The respondent submits that even if the terms of the Second Guarantee were ambiguous, the extrinsic evidence does not assist the appellants as there is no reason why Intercap would have agreed to give up its right to indemnification from the appellants under the Second Guarantee, as none of the monies had been repaid at the time This Loan was executed.

Analysis of the Issues and Conclusion

The Appropriate Standard of Review

[35] The central issues to be determined on this appeal are whether the motion judge erred in holding that the Second Guarantee is a continuing guarantee and whether the debt under This Loan is connected with the debt under the Second Loan Agreement. Analysis of these issues involves the interpretation of the contractual terms in negotiated agreements, the Second Guarantee and This Loan.

[36] Contractual interpretation is a question of mixed fact and law and subject to a deferential standard of review, absent extricable questions of law such as “the application of an incorrect principle, the failure to consider a required element of a legal test, or the failure to consider a relevant factor”: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 53, citing King v. Operating Engineers Training Institute of Manitoba Inc., 2011 MBCA 80, 280 Man. R. (2d) 63, at para. 21. As noted by the Supreme Court in Sattva, at para. 55, “[T]he goal of contractual interpretation, to ascertain the objective intentions of the parties, is inherently fact specific. The close relationship between the selection and application of principles of contractual interpretation and the construction ultimately given to the instrument means that the circumstances in which a question of law can be extricated from the interpretation process will be rare.”

[37] In this case, there are no extricable questions of law. The questions on this appeal involve the interpretation of provisions of negotiated agreements. As such, the standard of review is the deferential standard of palpable and overriding error: Sattva, at paras. 52-55; Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306, at paras. 21-24.

The First Issue: The Hallmarks of Continuing Guarantees, Connection of Liabilities Under This Loan, and Principles of Contract Interpretation

A. The Importance of Hallmarks

[38] The appellants claim the motion judge failed to consider that continuing guarantees have the following hallmarks:

a. Future advances are covered by continuing guarantees even after existing obligations have been satisfied and the consent of guarantors to enable a lender to provide future advances is not generally required: Kevin McGuinness, The Law of Guarantee, 3rd ed. (Markham, Ontario: LexisNexis Canada Inc., 2013), at para. 15.44; see also Royal Bank of Canada v. Samson Management & Solutions Ltd., 2013 ONCA 313, 115 O.R. (3d) 380, at paras. 24-32, leave to appeal refused, [2013] S.C.C.A. No. 301; Royal Bank v. Poisson (1977), 26 O.R. (2d) 717 (H.C.), at pp. 718-719; and Granata Family Trust (Trustee of) v. Royal Bank, [2000] O.J. No. 4239 (Ont. S.C.), at paras. 12-16;

b. The time for a continuing guarantee is usually indefinite, in which case the guarantor has a right to provide notice of cancellation for future liability which freezes the liability at the amount outstanding at the end of the notice period: McGuinness, at paras. 15.57, 15.62; and

c. Continuing guarantees do not contain a reference to a specific loan agreement and cover future debts without qualification: see Samson, at para. 24; Poisson, at pp. 718-719; Granata, at paras. 12-16.

[39] The appellants submit that the Second Guarantee lacks these hallmarks as:

a. Intercap agreed “not to increase the principal amount of the Loan without the prior written consent of both Guarantors” (para. 14);

b. The Second Guarantee does not have a mechanism to terminate liability for future advances; and

c. The Second Guarantee refers to the Second Loan Agreement.

[40] Therefore, the appellants submit that the Second Guarantee is not a continuing guarantee. I disagree.

[41] There are no hard and fast rules to determine whether a guarantee is a continuing guarantee: McGuinness, at para. 15.55.

[42] Moreover, to support their submission that a hallmark of a continuing guarantee is that it does not reference a specific loan agreement, the appellants rely on authorities that feature “continuing all accounts” guarantees. An “all accounts” guarantee extends to all debts owing or that may become owing to the creditor, whereas a continuing guarantee covers a series of transactions: McGuinness, at paras. 7.5, 15.43-15.44. While most continuing guarantees are also all accounts guarantees, this is not necessarily always the case: McGuinness, at para. 15.40.

[43] In this case, the Second Guarantee specifically provides that it is “a continuing guarantee” that applies to the specific liabilities under the Second Loan Agreement and all liabilities incurred “in connection with” the Second Loan Agreement. However, the fact that it applies to specific liabilities does not mean that it is not a continuing guarantee.

[44] In any event, while hallmarks may be of some assistance, what is most important is to look at the language of the agreements, giving the words their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of contract formation: Sattva, at para. 47.

[45] This is precisely what the motion judge did.

B. Interpreting The Provisions in The Agreements

(i) The Motion Judge’s Interpretation of the Provisions

[46] The motion judge carefully reviewed the terms of the Second Guarantee and This Loan.

[47] The motion judge rejected the appellants’ argument that the Second Guarantee was not a continuing guarantee. At paragraph 66 of his reasons the motion judge held that:

There is nothing ambiguous about a continuing guarantee that is limited to future liabilities that are incurred “in connection with” a specific agreement. It means strictly what it says. If Intercap and Capsule do other business or if, for any reason, Capsule owes money to Intercap in future that is not incurred in connection with the first amended and restated loan agreement, then the guarantee is not engaged and the guarantors have no liability to pay. But if future liabilities are incurred by Capsule in connection with the first amended and restated loan agreement, then the guarantors are liable and must pay. [Emphasis added.]

[48] He also rejected the appellants’ contention that any obligation to pay the debt in the Second Loan Agreement was extinguished upon execution of This Loan or that the liabilities set out in This Loan are not “connected with” the Second Loan Agreement.

[49] He noted that the recital in This Loan provides that This Loan is “amend[ing] and restat[ing] the [Second Loan Agreement] by [This Loan]” and that, by the time This Loan was executed, the entire loan amount had been advanced and interest had accrued. He therefore concluded that:

It is perfectly clear that [This Loan] is extending, amending, and restating the same debt as referred to in the [Second Loan Agreement]. There is no fresh advance. The advances are specified as the prior advances. Moreover, the accrued interest is recognized as accrued and continuing. The securities hold ran from the first agreement and not this agreement.

I find that the debt under [This Loan] is connected with the debt under the [Second Loan Agreement]. It is the very same advances. One does not need to go beyond the agreements to determine that question. [Emphasis added.]

[50] The “accrued but unpaid interest” as of the day This Loan was executed was $44,671.93. A new loan does not have interest accrued on the day the loan is advanced and, in any event, there was no notional advance such that the monies would be considered new monies under This Loan.

[51] He held that the debt under This Loan was connected with the debt under the Second Loan Agreement. To find that the guarantee was discharged, would be to ignore the continuing nature of the Second Guarantee, and the fact that while the Second Loan Agreement was terminated and replaced with This Loan, paragraph 14 of the Second Guarantee permits Intercap to “terminate” and “otherwise vary” the terms of any loans “without prejudice to or in any way limiting or lessening the liability of the Guarantors under this agreement and without obtaining the consent of or giving notice to the Guarantors.”

(ii) Analysis and Conclusion on the Interpretation of the Provisions in the Second Guarantee and This Loan

[52] I agree with the motion judge’s finding that the Second Guarantee is a continuing guarantee covering liabilities arising in connection with the Second Loan Agreement. I also agree with his finding that the liabilities under This Loan arose in connection with the liabilities under the Second Loan Agreement.

[53] The Second Guarantee and the loan agreements contain entire agreement clauses such that all terms are contained in the written agreements. The Second Loan Agreement was terminated and replaced with This Loan. However, the terms of the Second Guarantee permitted Intercap to “terminate” the Second Loan Agreement, without releasing the guarantors, provided the liabilities under This Loan “aris[e] out of” and are “in connection with” the Second Loan Agreement.

[54] Similarly, although the entire agreement clause in the Second Loan Agreement provides that no other loan agreements are binding on Capsule, a “renew[al]” of loan agreements is provided for at paragraph 14 of the Second Guarantee.

[55] First, This Loan simply (i) restates the debt advanced in the Second Loan Agreement, (ii) it contains no fresh advance of funds, (iii) it provides that the interest accrued under the funds advanced pursuant to the Second Loan Agreement are payable under This Loan, and (iv) there was no notional advance such that the monies should be considered a new loan. This Loan reiterates the loan monies already advanced and interest accrued on the loan advanced in the Second Loan Agreement.

[56] Second, the Second Guarantee extends beyond the Second Loan Agreement to all liabilities “ arising out of the [Second Loan Agreement]” as “ a continuing Guarantee ” covering “all such liabilities incurred before or after the date hereof in connection with the [Second] Loan Agreement” (emphasis added): Second Guarantee, at paras. 1 and 2.

[57] Third, the Second Guarantee provides that, “This agreement shall continue and apply to any unpaid balance of the Guaranteed Obligations ” (emphasis added): Second Guarantee, at para. 12.

[58] This Court has repeatedly held that the phrase “in connection with” has a very broad meaning: Mantini v. Smith Lyons LLP (2003), 64 O.R. (3d) 505 (C.A.), at para. 19, leave to appeal refused, [2003] S.C.C.A. No. 344; Lawrence v. Toronto Humane Society (2006), 271 D.L.R. (4th) 329 (Ont. C.A.), at para. 84. The term “connection” means “there is some relationship between two things or activities – that they have something to do with each other”: Lawrence, at para. 85, citing Kitchener-Waterloo Real Estate Board Inc. v. Ontario Regional Assessment Commissioner, Region No. 21 (1986), 56 O.R. (2d) 94 (H.C.).

[59] Because:

a. The $450,000 loan advanced pursuant to the Second Loan Agreement remained unpaid when This Loan was executed;

b. No new funds were advanced under This Loan;

c. Interest on the principal under This Loan had already begun accruing before the day that This Loan was executed; and

d. There was no notional advance such that the monies were considered a new loan;

the condition in the Second Guarantee that the debt obligation “aris[es] out of” and is “in connection with” the Second Loan Agreement is met, and the guarantors’ obligations are not extinguished.

[60] The appellants point to the fact that a new guarantee was entered into when the Loan amount was increased from $250,000 to $450,000. This, they say, supports their argument that a new guarantee must be executed and that any obligations under the prior loan agreement are extinguished.

[61] I do not agree. The Second Guarantee was executed because the principal amount of the loan was increased from $250,000 to $450,000. The First Guarantee specifically required that consent must be obtained from the borrowers before increasing the principal amount of the loan and as such, a Second Guarantee had to be executed.

[62] When This Loan was executed, by contrast, the principal amount of the loan was not increased and there was therefore no need to enter into a new guarantee.

[63] Moreover, as noted by the motion judge, this case is distinguishable from Dhawan v. Shails et al., 2018 ONSC 7116 (Div. Ct.), cited by the appellants. In Dhawan, the language of the guarantee was ambiguous because of internal inconsistency. The same clause limited the scope to obligations “arising under or in connection with” a specific promissory note and also provided that “this shall be a continuing guarantee and shall cover all of the obligations now or hereafter existing and shall apply to and secure any ultimate balance due or remaining due to the Lender.”

[64] In this case, by contrast, the Second Guarantee clearly contemplates that liability will continue even if the Second Loan Agreement is terminated provided liability is “in connection with” the Second Loan Agreement and the principal amount of the loan is not increased, which for the reasons set out above, I find it was. The terms of the Second Guarantee are unambiguous.

[65] In sum, a review of This Loan and the Second Guarantee as a whole, giving the words their ordinary and grammatical reading, consistent with the objectives of the parties, leads to the conclusion that this is a continuing guarantee and that the liabilities under This Loan are connected to the liabilities under the Second Loan Agreement. The motion judge did not err in his application of the principles of contractual interpretation.

[66] Thus, although the Second Loan Agreement was terminated and replaced with This Loan, the Second Guarantee enables Intercap to recover “all such liabilities incurred before or after” execution of the Second Guarantee “in connection with” the Second Loan Agreement, to secure any ultimate balance remaining.

The Second Issue: Ambiguity and the Motion Judge’s Use of Extrinsic Evidence

[67] In the alternative, the appellants claim the provisions in the Second Guarantee are ambiguous and that, (i) where contractual provisions are ambiguous, the courts may consider extrinsic evidence to determine the scope and subject matter of the guarantee and, in any event, (ii) any ambiguity should be construed against the party who drafted the agreement, that is, the lender.

[68] As noted above, I find the wording in the Second Guarantee is clear and unambiguous. Moreover, This Loan and the Second Guarantee contain entire agreement clauses such that all terms are set out in the written agreements.

[69] However, even if the wording were ambiguous and extrinsic evidence were to be considered, the extrinsic evidence does not support the appellants’ assertion that it, “went to the objective basis for how the appellants believed (and how Intercap could have believed) the Second Guarantee was limited to the Second Loan Agreement.”

[70] The appellant Bellman provided an affidavit in which he states that, for the First Guarantee, he negotiated the inclusion of specific reference to the First Loan Agreement. He claims that the language that the guarantee refer to a specific loan was maintained in the Second Guarantee. This, he says, was to ensure that the guarantees would be specific to the loan agreements. I note however that, contrary to this assertion, the signed copy of the Second Guarantee provides that, “This shall be a continuing Guarantee and shall cover … all such liabilities incurred before or after the date hereof in connection with the [Second Loan] Agreement … and any ultimate balance due or remaining due to the Lender thereunder.”

[71] Second, Bellman said that in April 2019, when Intercap proposed extending the maturity date for the loan in exchange for acquiring a one-third interest in Capsule, Bellman told Intercap that he and Mac Neil would either provide personal guarantees or one-third of the company, but not both. However, Bellman admitted in cross-examination that there was no evidence in writing of this ultimatum and that Intercap never responded to it “other than to say that was not how they sought to proceed.”

[72] Bellman asserted that subsequently, in the weeks leading up to the execution of This Loan, Intercap never mentioned guarantees but spoke only about acquiring a one-third interest in Capsule. However, he said that,

I decided to include language in Section 7.02 that following execution Intercap would discharge all PPSA registrations against Mac Neil and me, but that it could refile upon a default. My rationale was that if Intercap was waiting to demand personal guarantees, this comment would force its hand. Alternatively, if Intercap had accepted the Extended Conversion Right in lieu of personal guarantees, that this would elicit a response accordingly.

[73] Intercap replied to Bellman’s proposal, indicating that it required that the proposed language in s. 7.02 be removed, “as the PPSA registrations against Bellman and Mac Neil personally shall continue in place until paid out (to minimize the risk of there being an intervening registration).” Bellman consented to Intercap’s requested changes, incorporating them into This Loan. Bellman asserted:

An hour or so prior to execution, Meretsky circulated an email … that, among other things, advised Intercap of the expiry dates of its PPSA registrations against Capsule, Mac Neil, and me. I did not give it much (if any) consideration because I considered the PPSA registration to be without any purpose from a legal perspective.

[74] There was no reason for Bellman to include this proposed language permitting Intercap to refile the PPSA notices against Bellman and Mac Neil if the Second Guarantee was no longer in effect. If the Second Guarantee was no longer in effect, the PPSA notices would have been discharged as of right (and could not have been refiled on default) because Intercap’s security interest arose from the Second Guarantee. Moreover, it is difficult to understand why a sophisticated businessperson like Bellman would consider “the PPSA registration to be without any purpose from a legal perspective.”

[75] In any event, Intercap rejected Bellman’s proposed language and instead chose to maintain its PPSA registrations against Bellman and Mac Neil, pursuant to the Amending Agreement, which amended the Second Guarantee. This is evidence that the Second Guarantee remained in effect.

[76] In short, Capsule had received two prior rounds of funding and had not paid any of the funds on three different maturity dates. Moreover, as noted above, although Bellman stated that prior to executing This Loan, he proposed that Intercap receive either a larger interest in Capsule or personal guarantees, but not both, there is no written confirmation of this ultimatum and Bellman himself acknowledged that Intercap did not respond to it “other than to say that was not how they sought to proceed.” He also asked for the PPSA registrations to be withdrawn unless there was another default. On July 15, 2019, this was refused by Intercap. In his affidavit, at para. 70, Bellman claims Intercap insisted on keeping its PPSA registrations although they knew they were of no effect.

[77] It is not plausible that, as Capsule’s financial situation weakened, Intercap would release the guarantee without further negotiation. If the company failed (and it had failed to repay money on three earlier maturity dates), it was important to ensure that its security interests against the guarantors’ personal assets remained perfected by registration. Whether or not Intercap obtained one-third of Capsule upon default, there is no reason why it would give up the right to collect on the personal guarantees.

[78] As such, even if the extrinsic evidence of Bellman were admissible, it does not support the conclusion that this was not a continuing guarantee.

[79] For these reasons, notwithstanding the able submissions by appellants’ counsel, the appeal is dismissed.

[80] Costs of this appeal to the respondent in the amount of $20,000 all-inclusive, as agreed.

Released: January 26, 2022 “D.D.” “J.A. Thorburn J.A.” “I agree. Doherty J.A.” “I agree. M. Tulloch J.A.”