Court of Appeal for Ontario
Judges: Feldman, Gillese and Pepall JJ.A.
Between
Callidus Capital Corporation Plaintiff (Respondent)
and
Jeffrey McFarlane Defendant (Appellant)
Counsel:
- Symon Zucker and Melvyn L. Solmon, for the appellant
- Lisa S. Corne and John D. Leslie, for the respondent
Heard: February 1, 2017
On appeal from: The judgment of Justice Frank J.C. Newbould of the Superior Court of Justice, dated May 24, 2016, with reasons reported at 2016 ONSC 3451.
A. Introduction
1A personal guarantee of corporate indebtedness should only be given after serious deliberation. Here the guarantor turned his mind to the language of the guarantee in the expectation that his exposure would be limited. That expectation was not met. The lender obtained summary judgment against the guarantor in an amount equal to US$3 million plus interest at the rate of 21% and costs. The guarantor now appeals from that judgment. For the reasons that follow, I would allow the appeal and reduce the summary judgment from an amount in Canadian currency sufficient to purchase the sum of US$3 million to US$250,000.
B. Facts
2Xchange Technology Group LLC (the "Company") carried on business as a supplier of information technology products and hardware rentals. The appellant, Jeffrey McFarlane, was the President and CEO of the Company.
3Royal Bank of Canada and PNC Bank provided financing to the Company.
4In support of the financing given by PNC Bank, McFarlane provided that bank with a limited guarantee of the Company's debt. The guarantee was limited to US$3 million plus interest and costs.
5The respondent, Callidus Capital Corporation, is a high risk distressed debt lender. On October 11, 2012, Callidus purchased the Company's debt from PNC Bank. It paid PNC Bank US$11.6 million. It also charged a facility fee to the Company of US$2.25 million. McFarlane stated that his interest cost went from 4 to 6% per annum before the purchase to 18 to 21% per annum after the purchase. The Loan Agreement between the Company and PNC Bank and McFarlane's personal guarantee were transferred to Callidus as part of the purchase transaction and were amended to so provide on October 11, 2012.
6The original guarantee as amended in favour of Callidus stated that:
The undersigned hereby jointly and severally (if more than one) guarantees payment to the Lender, upon demand therefore being made upon the undersigned, of all Obligations (as defined in the Loan Agreement) now or at any time and from time to time hereafter due to or owing to the Lender from or by the Borrowers or by any successor corporation of the Borrowers, limited to the amount of Three Million and 00/00 Dollars (US$3,000,000.00) in total; plus interest thereon, at the rate of interest applicable to such Obligations.
7The Company defaulted on its obligations to Callidus. McFarlane blamed Callidus for the Company's increased difficulty in servicing its debt. He stated in his affidavit filed in subsequent court proceedings that Callidus was engaging in a "loan to own" strategy by which it consumed the equity value of the Company's business through debt and fees with a view to ultimately owning the company.
8In June 2013, the Company negotiated a forbearance agreement with Callidus. This would avoid immediate enforcement of remedies under the Loan Agreement including repayment of the Company's debt. In conjunction with that agreement, McFarlane's guarantee was amended; he provided Callidus with mortgage security on property he owned; and he agreed to withdraw from management of the Company. McFarlane stated that he was alarmed by Callidus' lending tactics and practices and was particularly alarmed by its high fees and accumulating charges to the Company. He recognized that upon his withdrawal from management, he would no longer be able to mitigate past fees or influence future fees. He insisted that he would not be responsible for any portion of the Company debt that arose from Callidus' fees, past or future, and that his guarantee be amended to reflect that concern. As of the date of the amended guarantee, a US$2.25 million facility fee was one such charge.
9The June 6, 2013 amended guarantee provided:
2.1 Section 1 of the Guarantee is amended entirely to read:
"1. The undersigned ("Guarantor") hereby jointly and severally (if more than one) guarantees payment to the Lender, upon demand therefore being made upon the undersigned, of all Obligations (as defined in the Loan Agreement) now or at any time and from time to time hereafter due or owing to the Lender from or by the Borrowers or by any successor of the Borrowers excluding however the $2,250,000 Facility Fee as defined in the Loan Agreement or any forbearance fee charged by Lender in connection with any forbearance agreement with Borrowers, limited to the lesser of:
(x) the Limited Principal Amount or
(y) provided that Guarantor is in compliance with the terms of the letter agreement dated June 6, 2013, by which Guarantor suspended and relinquished powers and authorities over the Borrowers ("Letter Ceding Authority"), the Deficiency Amount,
in each case as defined below, plus interest thereon at the rate of interest applicable to such Obligations (or the applicable rates of interests if different rates of interest apply to different parts of such Obligations), from and including the date of demand until payment, and legal or other costs, charges and expenses." [Emphasis added.]
10Obligations was very broadly defined in the Loan Agreement:
[A]ll loans, advances, indebtedness, obligations and liabilities of Borrowers to Lender under this Agreement and the Notes, together with all other indebtedness, obligations and liabilities whatsoever of Borrowers to Lender, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, due or to become due, now existing or hereafter arising.
11Limited Principal Amount was defined in the amended guarantee as meaning US$3 million reduced by certain sums that are immaterial to this appeal.
12Deficiency Amount was defined in the amended guarantee as meaning:
[T]he amount of the Obligations, excluding however the $2,250,000 Facility Fee as defined in the Loan Agreement or any forbearance fee charged by the Lender in connection with any forbearance agreement with Borrowers, that remains outstanding at the end of the Collateral Liquidation Period.
13Collateral Liquidation Period was defined in the amended guarantee as meaning:
the 90 day period after:
(i) Lender commences (either by exercise of self-help remedies or judicial proceeding) collection in a commercially reasonable manner of collateral constituting payments receivable by the Borrowers located in the United States and/or Canada including without limitation accounts receivable and lease receivables; and
(ii) Lender commences (either by exercise of self-help remedies or judicial proceeding) sale in a commercially reasonable manner of collateral constituting inventory of the Borrowers located in the United States and/or Canada.
The amended guarantee was stated to be a continuing guarantee that would cover and secure any ultimate balance owing. It went on to state that except to the extent required by s. 1 of the amended guarantee, Callidus was not obliged to seek recourse against the Borrowers or other persons or the securities it held.
14On July 26, 2013, Callidus demanded payment of all indebtedness from the Company and gave notice to McFarlane in his capacity as guarantor.
15On August 3, 2013, Callidus, the Company, and McFarlane entered into another forbearance agreement. Callidus extended the date of debt enforcement to August 15, 2013, and charged the Company a forbearance fee of US$250,000. The Company and McFarlane provided Callidus with a broad release of claims against Callidus. McFarlane also signed a letter in which he confirmed that he had relinquished his powers as an officer and director of the Company.
16On October 29, 2013, after the expiry of the period stipulated in the forbearance agreement, Callidus commenced court proceedings for the appointment of a receiver and the approval of both a stalking horse asset purchase credit bid agreement and a sale process. The proposed order also declared Callidus' nominee company to be the successful bidder absent a better offer being generated from the sale process.
17In support of the request, Callidus filed a report of the proposed receiver. Among other things, the stated purpose of the report was to provide background information about the Company, summarize the proposed sale process and the reasons the proposed receiver believed the sale process maximized the value of the business and assets and was in the best interests of stakeholders. The proposed receiver also recommended the proposed order.
18The report stated that as at October 24, 2013, the Company was indebted to Callidus in the amount of $36.97 million. In its description of the purchase price, the proposed receiver wrote: "Will be paid by credit bid and calculated as follows: Callidus debt on closing (less $3 million) plus the Priority Payables." The Priority Payables represented approximately $790,000 in payables that potentially took priority over the debt to Callidus.
19The report did not include any description of the purpose of the $3 million. It did include as an appendix a June 6, 2013 letter from McFarlane that stated that he had guaranteed the Obligations as defined in the Loan Agreement pursuant to an October 11, 2012 guarantee subject to the limitations set forth therein. The letter confirmed that he had relinquished the exercise of his powers as an officer and director of the Company and had provided Callidus with a release.
20McFarlane did not object to approval of the proposed order. On October 29, 2013, Morawetz J. granted the order requested. The order contemplated that if a superior bid to that of the stalking horse bid was not received, no further court approval was required and a nominee company owned by Callidus would become the new purchaser of the Company. The receiver would be obliged to apply later for a vesting order.
21In his endorsement granting the October 29, 2013 receivership order, Morawetz J. noted that the purchase price was the amount owing to Callidus plus priority payables less $3 million. The price would be satisfied by the credit bid and by payment or assumption of the priority payables. Morawetz J. also wrote in his endorsement that nothing in the order was to affect any defences McFarlane had with respect to his personal guarantee.
22On November 19, 2013, the receiver advised Callidus that it was the successful bidder. It also filed a receiver's report dated November 19, 2013, on the progress of the receivership with the court.
23The purchase price was described in the approved asset purchase agreement dated October 25, 2013:
The purchase price payable to the Vendor for the Purchased Assets (such amount being hereinafter referred to as the "Purchase Price") will be the aggregate of: (a) the amount of the obligations of the Debtors to Callidus as at the Closing Date less CDN$3,000,000 and (b) the [Priority Payables Amount].
24The Closing Date was the Business Day two days following the date on which the U.S. Order was granted, or such earlier or later date as may be agreed to in writing by the Parties. The U.S. Order was in the nature of a recognition order and the receiver was to file and serve an application with the U.S. court for entry of the order as soon as practicable following the granting of the Canadian approval and vesting order.
25A vesting order was subsequently granted on November 22, 2013. The recognition order was granted by the U.S. court on November 25, 2013. The receivers' certificate was delivered on January 2, 2015. The Company's September 30, 2015 financial statements recorded its assets held for sale as having a value of US$66.902 million. It was acknowledged that the assets held for sale refers to the assets of the Company acquired by Callidus.
26Callidus then sued McFarlane on his guarantee and subsequently brought a motion for summary judgment. It was McFarlane's position that the amount of the facility and forbearance fees of US$2.75 million was included in the Company's total debt of $37 million. While the Company may have been obliged to Callidus for US$37 million, his exposure (subject to the cap on the guarantee) was to a debt that was US$2.75 million lower, or in this scenario, US$34.25 million. As the credit bid satisfied US$34 million, his guaranteed debt was limited to US$250,000.
27More than two years after the vesting order, Callidus' nominee brought a rectification motion as a result of which the asset sale agreement reference to CDN$3 million was rectified by court order on January 14, 2016 to reflect US$3 million.
C. Reasons of Summary Judgment Motion Judge
28In his reasons granting summary judgment to Callidus, the motion judge observed that the guarantee provision restricting the liability of McFarlane to exclude liability for the $2.75 million facility and forbearance fees was inserted at McFarlane's insistence. The motion judge wrote:
The amended Guarantee provides that Mr. McFarlane will be liable for all of the Obligations [approximately $37 million]"excluding however" the facility and forbearance fees [$2.75 million], limited to the lesser of the Limited Principal Amount [$3 million] or the Deficiency Amount [$37 million less $2.75 million, or $34.25 million]. In dollar terms, Mr. McFarlane guaranteed $34.25 million with his liability limited to $3 million.
29He noted that the purchase price in the asset purchase agreement was the amount of the Company's obligations to Callidus at the closing date less $3 million, that is, $37 million less $3 million, or $34 million.
30The motion judge determined that there was no ambiguity in the amended guarantee. The obligations of the Company included $2.75 million in facility and forbearance fees. Moreover, the Company's obligations were not extinguished by the credit bid as $3 million continued to be owing by the Company to Callidus. In his view, the $3 million carve out in the asset purchase agreement was intended to maintain McFarlane's guarantee obligation by Callidus and that sum was still outstanding. He noted that a surety who has given a continuing guarantee for a stated amount is not entitled to a discharge if, after payment of the stated amount, the principal remains indebted to the creditor. There was no general legal principle that required all payments received from a debtor to be applied to the guaranteed portion of a debt.
31The motion judge held that Callidus acquired title to the Company's assets under the November 22, 2013 vesting order. Although the interim financial statements of Callidus as at September 30, 2015, records assets held for sale in the amount of $66.902 million, it was unclear what gave rise to that figure, but as at December 2014, there was no amount recorded in Callidus' financial statements for assets held for sale. In any event, an increase in value of the assets after the asset purchase agreement would not accrue to McFarlane's benefit.
32The motion judge accordingly granted judgment to Callidus on the guarantee in an amount in Canadian currency sufficient to purchase the sum of US$3 million plus interest at 21%.
D. Issues
33Before us, McFarlane did not advance any argument based on ambiguity. Rather, he focused on the motion judge's failure to consider all of the terms of the guarantee and to calculate the amount due in the correct order based on what McFarlane and the Company each owed to Callidus. Although he advanced additional arguments in his factum, given my conclusion, it is unnecessary to address them.
34In disputing McFarlane's appeal, among other things, Callidus relies on Sattva Capital v. Creston Moly, 2014 SCC 53, [2014] 2 S.C.R. 663. It submits that the motion judge and his decision should be reviewed on a deferential basis. He made no palpable and overriding error. It also argues that under section 4, the guarantee was continuing in nature and that under the Loan Agreement, payments made in respect of the loan could be applied to such part of the debt as Callidus saw fit. The carve out of $3 million was to preserve Callidus' ability to enforce the guarantee. Lastly, it also submits that the fact that as at September 30, 2015, Callidus valued the assets it acquired from the receiver at $66.902 million is irrelevant to McFarlane's liability under his guarantee.
35I do not accept Callidus' position. For the reasons that follow, I would allow the appeal and reduce the amount in the summary judgment from US$3 million to US$250,000.
E. Analysis
36Contractual interpretation involves issues of mixed fact and law: Sattva, at para. 50. The interpretation of a non-standard form guarantee, which is a contract, is therefore a question of mixed fact and law: Toronto-Dominion Bank v. Konga, 2016 ONCA 976. In the absence of an extricable error of law or a palpable and overriding error of fact, deference is owed to a motion judge's decision. The failure to consider a relevant factor may amount to an extricable error of law: Sattva at para. 53.
37In my view, the motion judge erred in law by failing to consider that s. 2.1 of the amended guarantee served to reduce the Company's obligations that were guaranteed. He then made a further palpable and overriding factual and mathematical error in calculating the amount owing under the guarantee.
38The amended guarantee was to accomplish three things: (1) McFarlane would personally commit to paying the Obligations of the Company to Callidus; (2) his exposure would be limited to the lesser of US$3 million plus interest and Callidus' deficiency less facility and forbearance fees; and (3) to the extent the Obligations included facility or forbearance fees, his guarantee would not extend to cover those amounts. On this last point, the motion judge stated that McFarlane had insisted that he not be responsible for any portion of the Company's debt that arose from fees and the guarantee was amended to reflect that concern.
39The Company's total Obligations amounted to approximately $37 million (not including priority payables of $750,000). These Obligations included the $2.75 million in facility and forbearance fees. The purchase price that was the subject matter of the credit bid was calculated under the asset purchase agreement as the debt on closing ($37 million which included the $2.75 million) less $3 million plus priority payables of approximately $790,000. Accordingly, $34.25 million of debt was extinguished through the credit bid, leaving $3 million of debt outstanding.
40Callidus' position is that the $34.25 million of debt that was extinguished included the facility and forbearance fees, leaving $3 million of debt, all of which was covered by McFarlane's guarantee. However, there is no basis for that position. The debt was treated as a whole; there was no issue of allocation. The whole debt was $37 million, $34.25 of which was extinguished.
41The amended guarantee was based on a formula. McFarlane guaranteed the Company's debt limited to the lesser of $3 million or the Deficiency Amount, a defined term. The date for calculation of the Deficiency Amount as described in the amended guarantee was the end of the Collateral Liquidation Period. Based on the motion judge's finding, Callidus acquired title to the assets on November 22, 2013. No real issue was taken with $37 million representing the quantum of the obligations to be reduced by the sales price. The Deficiency Amount was comprised of two elements. First, the amount of the Obligations outstanding at the end of the Collateral Liquidation Period and second, the exclusion of the $2,250,000 facility fee and any forbearance fees. The Obligations amounted to $3 million. The forbearance fees amounted to $500,000. Forbearance and facility fees to be excluded therefore totaled $2,750,000. $3 million less $2,750,000 left an amount of $250,000 owing from McFarlane on his amended guarantee.
42Counsel for McFarlane submits that Callidus is the author of its own misfortune. He argues that in essence Callidus could have structured its loan to own strategy in a manner that reflected a purchase price of $30 million which would have left room to recover $7 million, which necessarily includes $3 million more than the amount of the facility and forbearance fees. That would have left McFarlane liable for the full $3 million on the guarantee. He argues that, being a public company, Callidus refrained from doing so so that it would not have to show a loss to its investors. Moreover, the facility and forbearance fees would appear as profit. Indeed, counsel argues that Callidus made a windfall on the acquisition of the Company as evident from the $66.902 million value set forth in the Company's September 30, 2015 financial statements.
43While it is the case that Callidus might have structured the transaction by negotiating or stipulating a purchase price less than $34.25 million, the fact is that it neglected to do so. There is no need to draw any conclusion on its motivation. Nor is such a determination necessary for the purposes of identifying McFarlane's obligations under the guarantee.
44In addition, the continuing nature of the guarantee as described in section 4 of the amended guarantee is immaterial to the calculation. That provision in the amended guarantee was in part made subject to s. 1 of the amended guarantee which expressly excluded the facility and forbearance fees from the debt guaranteed. More importantly, however, while under the Loan Agreement, payments made in respect of the loans could be applied to such part of the debt as Callidus saw fit, under the guarantee, those obligations were to exclude the facility and forbearance fees. McFarlane did not guarantee $3 million. He guaranteed the Company's debt excluding facility and forbearance fees. Although Callidus obviously tried to preserve its claim under the guarantee, whatever its maturation, its unilateral action was inadequate and failed to accomplish its objective. Moreover, this purpose was not addressed in the preliminary report or reports of the receiver, the court orders approving the sale, the vesting order, or in Morawetz J.'s endorsement in support of the sale approval order. The after the fact subsequent amendment of the order to reflect US dollars and the ancillary endorsements cannot serve to assist Callidus' position.
Disposition
45Accordingly, I would allow the appeal and vary the summary judgment to substitute US$250,000 for US$3 million in paragraph 1 of the May 24, 2016 judgment. As McFarlane has been successful on this appeal, I would order Callidus to pay his costs of the appeal as agreed, fixed in the amount of $27,500 inclusive of disbursements and applicable taxes and would vacate the order below of $86,817.30 in favour of Callidus. I would also order McFarlane to deliver his written costs submissions, not exceeding five pages in length, on the appropriate disposition for the costs below to the Registrar of this court within 15 days from the date of the release of these reasons and that Callidus deliver its responding costs submissions, not exceeding five pages in length, on the appropriate disposition for the costs below to the Registrar within 15 days thereafter.
Released: July 28, 2017
"S.E. Pepall J.A."
"I agree K. Feldman J.A."
"I agree E.E. Gillese J.A."
