Court Information

COURT OF APPEAL FOR ONTARIO

DATE: 20230406 DOCKET: C70917

Judges: Gillese, Benotto and Coroza JJ.A.

BETWEEN

Castle Building Centres Group Ltd. Plaintiff/Defendant by Counterclaim (Respondent)

and

The Rehill Company Limited, Steven D. Parkes and Jeff A. Parkes Defendants/Plaintiffs by Counterclaim (Appellants)

Counsel: Chris Besant, for the appellants Steven D. Parkes and Jeff A. Parkes Robert Kennedy and Mark Freake, for the respondent Castle Building Centres Group Ltd.

Heard: February 22, 2023

On appeal from the judgment of Justice Mary Vallee of the Superior Court of Justice, dated July 6, 2022, with reasons reported at 2022 ONSC 3428.

REASONS FOR DECISION

INTRODUCTION

[1] The Parkes family owned and operated The Rehill Company Limited (“Rehill”), a building supply retailer. The appellants, Jeff A. Parkes and Steven D. Parkes, are father and son. Jeff operated the business for many years before retiring and passing down the business to Steven. [1] After Steven took over, Rehill ran into financial difficulties and became unable to pay its creditor and main wholesale supplier, the respondent, Castle Building Centres Group Ltd. (“Castle” or the “respondent”).

[2] At different times during Rehill’s relationship with Castle, Jeff and Steven provided separate personal guarantees for Rehill’s debt in favour of it.

[3] Castle attempted to enforce the appellants’ personal guarantees for Rehill’s debt totaling over $2 million. On April 24, 2020, Castle commenced an action by way of Statement of Claim against Rehill. The appellants defended and counterclaimed alleging that Castle wrongfully issued demands against their guarantees, which harmed Rehill, caused it to be put into a receivership, and thereby caused the appellants to lose the value of their equity in and shareholder loans advanced to Rehill.

[4] Castle then brought a motion for summary judgment. By the time the motion was heard, Rehill had been forced into receivership and adjudged bankrupt. The motion judge found there were no genuine issues for trial regarding Rehill’s indebtedness to Castle and the validity of the appellants’ personal guarantees. By judgment dated July 6, 2022 (the “Judgment”), among other things, the motion judge granted the summary judgment motion, enforced the guarantees totalling $2,229,710.06, and dismissed the appellants’ counterclaim.

[5] The appellants appeal the summary judgment enforcing the guarantees and dismissing their counterclaim. They seek leave to introduce fresh evidence in support of their appeal. For the reasons that follow, the motion for leave to introduce fresh evidence and the appeal are dismissed.

BACKGROUND FACTS

(1) Rehill’s Membership with Castle and Jeff’s Personal Guarantee

[6] Castle operates a not-for-profit, membership-based buying group. When members purchase through the buying group, they can negotiate for wholesale prices, subject to volume discounts, which will be credited back to the member’s account with Castle (the “rebates”).

[7] Rehill’s membership agreement with Castle’s buying group is dated May 23, 1984.

[8] In addition to operating the buying group, Castle had another membership-based subsidiary, Commercial Builders Supplies (“CBS”), through which high volume purchasers could buy products. No copy of Rehill’s alleged membership with CBS was provided by either party to the court below.

[9] On November 23, 1994, Jeff executed a personal guarantee. The guarantee contains 15 terms. The two relevant terms are reproduced below.

Term 2: This Guarantee is an original direct, absolute, unconditional, unlimited, continuing and irrevocable obligation of Guarantor to Castle. This Guarantee shall remain in full force and effect without respect to future changes and conditions, including changes of law or any invalidity or irregularity with respect to Liabilities of the Member to Castle or with respect to the execution, delivery and performance of any present or future agreement between the Member and Castle. This Guarantee shall not be revoked or terminated and Guarantor shall not be released from Liability to Castle under this Guarantee until all Liabilities are paid in full.

Term 11: No alteration or waiver of this Guarantee or any of its provisions shall be binding on Castle unless made in writing and signed by Castle.

[10] Jeff retired from Rehill in 2010 and Steven, who had been involved in the family business for many years, took over. Steven’s evidence before the motion judge was that all of Rehill’s common shares were transferred to his holding company and Jeff was issued $3,500,000 of preferred shares. Of those shares, $500,000 was converted to a shareholder loan. Jeff received a small dividend and a repayment of $120,000 before the Castle debt at issue arose. When Steven took over, Castle did not request a personal guarantee from him, nor did he did offer to provide one for Rehill’s account.

(2) Rehill’s Financial Difficulties and The Subordination Agreement

[11] In 2015, Rehill began having financial difficulties. Its outstanding account with Castle had grown considerably and it was in default with its primary lender, TD Bank. After TD Bank put Rehill into a “special loans” category, Rehill sought further financing through a lender called Waygar Capital Inc (“Waygar”).

[12] In order to lend money to Rehill, Waygar required a priority position over Castle. Castle was asked to sign a “Postponement, Subordination and Standstill Agreement” in favour of Waygar (the “Subordination Agreement”).

[13] On November 8, 2017, Castle signed the Subordination Agreement in order to facilitate the financing based on Steven’s promise to pay Rehill’s outstanding account from the Waygar financing. Steven and Jeff were not signatories to the Subordination Agreement. Rehill ultimately obtained financing from Waygar, but did not use any of it to settle its account with Castle.

(3) Rehill’s Payment Plans, Subsequent Defaults, and Steven’s Personal Guarantee

[14] Negotiations of a payment plan with Castle resumed, and two payment plan agreements were ultimately executed in late 2017 and 2018. Castle added some terms into both payment agreements including: “Updated security will be required, including, and not limited to a General Security Agreement and a Guarantee, Assignment and Postponement of Claim from Steve Parks” (the “GSA clause”).

[15] On November 17, 2017, Steven signed the first payment agreement, which included the GSA clause.

[16] On March 28, 2018, Steven signed the General Security Agreement in favour of Castle. Subsequently, Rehill defaulted on the first payment agreement.

[17] In April 2018, Steven made a revised payment proposal to Castle. By letter dated April 20, 2018, Castle responded stating that it agreed with most of the terms but added some “stipulations”. The stipulations included the same GSA clause. The letter stated, “If you agree with these conditions, please sign below and we will begin the payment plan on April 23, 2018. All terms of this agreement will not take effect until such time that all required security has been received and registered.”

[18] As he did before, Steven signed at the bottom of the page under the statement, “I agree with the terms and conditions”.

(4) Castle’s Enforcement Proceedings and Rehill’s Bankruptcy

[19] On May 4, 2021, Castle brought the motion for summary judgment to enforce the appellants’ personal guarantees. Castle sought no remedy from Rehill, which was in receivership and bankruptcy proceedings.

[20] On May 14, 2021, Waygar obtained an order from the Ontario Superior Court of Justice (Commercial List) appointing a receiver over Rehill and staying all claims against Rehill, including Castle’s claim against Rehill in its April 2020 Statement of Claim (the “Receivership Order”). The receiver subsequently liquidated Rehill’s assets and Rehill was adjudged bankrupt in November 2021.

APPELLANTS’ MOTION TO INTRODUCE FRESH EVIDENCE

[21] On the eve of the appeal, the appellants brought a motion to file fresh evidence on the appeal. The motion record was served on the respondent on Friday, February 17, 2023, and filed with this court on Tuesday, February 21, 2023, one day before the hearing. The fresh evidence consists of an affidavit by Steven, sworn on February 17, 2023, containing several documents that he asserts were discovered only recently from his own “personal records”. Steven claims that since Rehill was put into receivership in May 2021 and bankruptcy in November 2021, he was not the custodian of Rehill’s records. He asserts that he has since been conducting an ongoing search of his own personal records, but it has been “very difficult” because his records were not systematically organized.

[22] The appellants argue that since these documents could not have been adduced earlier through due diligence, bear on the issues raised in the appeal, are credible, and if believed, could have affected the result in the proceeding below, this panel should admit them.

[23] After hearing brief oral submissions from the respondent, who did not have a chance to provide a written response to this late motion, we advised the parties that the fresh evidence motion was dismissed because we were not satisfied that the appellants met the test set out in Palmer v. The Queen, [1980] 1 S.C.R. 759, at p. 775.

[24] The first branch of the Palmer test requires that the evidence could not have been discoverable at the summary judgment motion through due diligence. We agree with the respondent’s submission that the appellant has not shown why most of these documents could not, by due diligence, have been made available before the motion judge.

[25] The underlying action was started in April 2020 and the appellants were served in August 2020. Rehill was then put into receivership in May 2021, and the summary judgment motion was heard in May 2022. The appellants had plenty of notice to organize and search for relevant documents before losing custody of the company’s records. During this period, the appellants were aware of the allegations against them. The lack of organization of Steven’s personal records does not excuse the late filing of these documents. The first branch of the Palmer test is not met. Nearly all of these documents, save for one email from the trustee’s counsel dated August 9, 2022, well predated the motion hearing.

[26] In any event, the appellants have also failed to satisfy the fourth branch of the Palmer test. This branch requires the court to consider whether the fresh evidence, if believed, could reasonably be expected to affect the result of the motion. As we will explain below, we see no basis to interfere with the motion judge’s conclusion that there were no genuine issues requiring a trial and that summary judgment should be granted to the respondent and counterclaim dismissed. The 2022 email noted above was sent by counsel for the receiver/trustee to counsel to the appellants and counsel to the respondent. The email asks “each of [their] clients whether they wish to submit a bid to acquire [Rehill’s] counterclaim” against Castle and sets out the deadline and method for submitting a bid. It is evident from the content of the email that it was written in response to “inquiries made by counsel for the appellant regarding the counterclaim”. We accept the respondent’s argument that the inquiry was made as part of the appellants’ appeal strategy and the email document bears no relevance to the motion. In sum, the admission of the fresh evidence would not have affected the result.

[27] For these reasons, we dismissed the motion to introduce fresh evidence.

GROUNDS OF APPEAL

[28] The appellants advanced the following six grounds of appeal in their factum. Essentially, they reiterate the arguments they made on the motion, which the motion judge rejected.

i. The motion judge erred in law in applying the test and procedure for summary judgment, particularly given that the motion was brought prior to discovery and there were conflicting facts; ii. The motion judge erred in finding that Rehill’s debt was owed to the respondent and not its subsidiary, CBS; iii. The motion judge erred in finding that Rehill’s claim for rebates owing to it by the respondent was not a genuine issue for trial; to the contrary, the rebates would have an impact on the amount of debt the respondent sought to recover from the appellants; iv. The motion judge erred in finding that the respondent’s breach of the Subordination Agreement caused no damage to the appellants; v. The motion judge erred in concluding that Jeff’s guarantee was not waived by the respondent; and vi. Because the Rehill receivership order stayed the action against Rehill, the respondent should have lifted the stay to proceed against the appellants.

[29] At the oral hearing of the appeal, counsel for the appellants addressed only the first five arguments. Since they have not formally abandoned the final ground of appeal, we have nevertheless considered it.

[30] At the oral hearing of the appeal, the court called on the respondent to respond only to the fifth issue raised by the appellants.

ANALYSIS

Issue 1: The Motion Judge Did Not Err in Law in Granting Summary Judgment

[31] The appellants submit that the motion judge’s decision to hear the summary judgment motion was premature because it had been brought prior to discovery. The appellants argue that where discovery has not occurred, the standard for showing a genuine issue needs to be considered in light of the state of disclosure made by the party seeking judgment. In the present case, the appellants argue that the respondent had not filed an Affidavit of Documents, and failed to properly answer its undertakings. Therefore, they contend, the motion judge’s decision to grant summary judgment led to unfairness and error because an avenue for the appellants to obtain evidence was truncated, creating an incentive for non-disclosure.

[32] We reject this submission. The motion judge correctly noted and applied the governing legal principle on a summary judgment motion: whether, based on the record before the court, there is a genuine issue that requires a trial: Hyrniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 43; r. 20.04(2)(a) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. We see no error in her decision to proceed with the summary judgment motion.

[33] As for the complaint regarding non-disclosure, the appellants acknowledged in oral argument that they did not bring a motion for directions for documentary discovery. In our view, it lies ill in the mouths of the appellants to suggest now that the summary judgment motion was premature when they failed to bring such motion.

[34] Indeed, the appellants have cited no proposition that would limit the availability of summary judgment when sought prior to discovery. Contrary to the appellants’ submission, r. 20.01 expressly allows a plaintiff to bring a motion for summary judgment as soon as the defendant delivers its pleadings. If the appellants’ complaint was that respondent had not complied with disclosure, then the appellants should have taken steps to compel production: see Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONCA 878, at para. 4. Parties are required to put their best foot forward on a summary judgment motion. This they failed to do.

Issues 2 to 6: The Motion Judge Did Not Commit Palpable and Overriding Errors

[35] Whether there is a genuine issue requiring a trial is a question of mixed fact and law. Absent an extricable error in principle, the standard of review is palpable and overriding error: Hyrniak, at para. 82; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 36. Apart from standard form contracts, contractual interpretation is also an issue of mixed fact and law subject to the same standard of review: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at para. 50.

[36] The remaining grounds of appeal can be dealt with briefly. The appellants’ overarching submission is that the motion judge committed several palpable and overriding errors in granting summary judgment to the respondent. In our view, the appellants have not shown any error in the careful reasons of the motion judge.

[37] First, the motion judge did not err when she rejected the appellants’ argument that the debt was owed to CBS, not Castle. There was no evidence that dispositively showed Rehill had any membership agreement with CBS. While she noted that there was evidence of discussions about transitioning Rehill to CBS in documents the appellants put (last minute and improperly) before the motion court, none showed that the transition actually happened. The motion judge accepted that the respondent permitted Rehill to purchase some CBS products because it was trying to assist Rehill. However, all of the invoices were rendered by Castle, not CBS. While the motion judge had before her the Castle membership agreement, no CBS membership agreement was produced. Based on the record before her, she concluded Rehill was never a member of CBS. We see no basis to interfere with that finding.

[38] Second, the motion judge’s rejection of the appellants’ argument that Rehill was entitled to rebates from the respondent, which could be set off against the debt claimed, was firmly grounded in the record. To support its allegation before the motion judge and this panel, the appellants provided a spreadsheet from 2015 prepared by Rehill showing discrepancies between “rebates expected” and “rebates received”. The motion judge considered this evidence, but noted that any claim for rebates belonged to Rehill and therefore, the receiver/trustee. The evidence before the motion judge was that, as of January 28, 2022, the receiver/trustee confirmed it was not proceeding with a claim for the rebates.

[39] During oral argument, there was some discussion of whether the appellants, as guarantors, are entitled to challenge the amount of indebtedness by way of the rebates claim that the principal, now the receiver/trustee, does not otherwise seek to pursue. We need not resolve this issue. In any event, the motion judge made a factual finding that Steven did not raise the rebates issue with the respondent during the payment plan negotiations in 2017 and 2018. The rebates issue would have been an important one to raise then because it was at that point the respondent claimed Rehill owed it over $2,000,000, the amount it now seeks to enforce against the appellants. It was open to the motion judge to find that Rehill acknowledged the amount of indebtedness to Castle through its silence on the rebates issue while explicitly undertaking to make payments under the two payment agreements.

[40] Third, we see no error in the motion judge’s rejection of the appellants’ argument that the respondent breached the Subordination Agreement with Waygar because it had agreed to take no steps whatsoever to collect its debt, but it proceeded to do so when it made a demand on the guarantees in 2019. The motion judge observed that the Subordination Agreement was a contract between the respondent and Waygar governing Waygar’s security in Rehill’s assets. Since Jeff and Steven were not privy to the Agreement and the respondent was not taking steps against Rehill but, rather, against Jeff and Steven to enforce their personal guarantees of Rehill’s debt, there was no breach of the Subordination Agreement.

[41] Fourth, we agree with the motion judge’s determination that Jeff’s guarantee was continuing and enforceable. The motion judge found that Castle did not waive Jeff’s personal guarantee when Steven took over the business. That finding stands on firm ground. Jeff admitted to signing his personal guarantee and according to its express terms, the guarantee is a “direct, absolute, unconditional, unlimited, continuing and irrevocable obligation” and cannot be altered or waived “unless made in writing and signed by Castle”. There was no evidence that Castle agreed in writing (or otherwise) to assign or waive Jeff’s guarantee. Consequently, Jeff’s guarantee continued beyond his retirement from day-to-day operations at Rehill (while remaining a shareholder and creditor of the company) and remained enforceable.

[42] The motion judge also grappled with the appellants’ claim that the respondent had a policy or practice of releasing former owners’ guarantees upon the sale of a business. When Rehill bought another member of the buying group, referred to as the “Cobourg company”, the respondent waived the previous owners’ guarantees. The motion judge found that the appellants mischaracterized the respondent’s alleged policy. The sale of the Cobourg company was an arm’s length, third party sale. The respondent only waived the third party seller’s guarantees after it received guarantees from the new owners. She distinguished the Cobourg instance from Steven’s takeover of Rehill on the ground that it was not a third party sale, the respondent did not receive a formal notice of sale, and at the time of the sale, the respondent did not receive new guarantees from Steven. We see no error in the motion judge’s analysis.

[43] The motion judge also rejected the appellants’ argument that Steven had negotiated a waiver of Jeff’s guarantee in writing when he signed the payment plan agreements in 2017 and 2018 containing the words “Updated Security”. The appellants argued before the motion judge that “Updated Security” should mean “replacement security”, that is, Jeff’s guarantee effectively replaced Steven’s guarantee. The motion judge disagreed. She noted in her reasons that the dictionary meaning of the word “update” is to “make it more modern, usually by adding new parts to it”.

[44] The appellants now allege on appeal that she erred in relying on the dictionary meaning and failing to consider the factual matrix. We disagree. The motion judge’s reasons must be read as a whole. Immediately prior to her analysis of the appropriate interpretation of “updated security”, she explicitly discussed the context surrounding the payment plan agreements. She noted that negotiations took place when Rehill was in default and facing serious financial difficulties. She stated, “From a creditor’s perspective, having two guarantees for Rehill’s significant increasing debt makes more sense than having only one.” We are not satisfied that the motion judge made any error in principle or any palpable and overriding error. She appropriately considered the plain meaning of “update” in light of the factual matrix and arrived at a meaning that makes commercial sense.

[45] Finally, we see no merit to the appellants’ argument that the respondent ought to have sought a lift of the stay order before proceeding with the motion. As the motion judge correctly noted, the receivership order only applied to Rehill and the summary judgment motion was to enforce the appellants’ personal guarantees. The receivership order did not apply to the appellants in their individual capacities as guarantors of Rehill’s debt.

DISPOSITION

[46] For these reasons, the appeal is dismissed. The respondent is entitled to its costs of the appeal fixed at $20,000, inclusive of disbursements and applicable taxes.

“E.E. Gillese J.A.”

“M.L. Benotto J.A.”

“S. Coroza J.A.”

Footnotes

[1] For clarity and simplicity, we refer to the appellants by their first names.