Court File and Parties

COURT FILE NO.: CV-17-586380 DATE: 2018/08/23

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Royal Bank of Canada Plaintiff – and – Everest Group Inc., Yousaf Jameel Kahn, also known as Yousaf Jamil, Zarmina S. Khan and Shadid Saleem Khawaja Defendants

COUNSEL: Rachel Moses for the Plaintiff Adrienne L. Boudreau and Daniel Hamson for the Defendants

HEARD: August 13, 2018

PERELL, J.

REASONS FOR DECISION

A. Introduction

[1] The Royal Bank of Canada (“RBC”) made a business loan to Everest Group Inc., which operated a restaurant as a franchisee of Paramount Fine Foods at Yorkdale Mall in Toronto, Ontario.

[2] Yousaf Kahn, Zarmina S. Khan, and Shadid Saleem Khawaja signed guarantees. Everest Group ceased operations and sought to rescind the franchise. RBC called the business loan but was not repaid.

[3] RBC now moves for a summary judgment against Everest Group and the guarantors.

[4] For the reasons that follow, RBC’s motion is granted.

B. Facts

[5] Mr. Khawaja is the president and a director of Everest Group. Mr. Khan is the executive vice-president, and Ms. Khan is vice-president.

[6] On December 18, 2015, Everest Group signed a franchise agreement with Paramount Fine Foods, a franchisor of a chain of restaurants, to operate a restaurant at Yorkdale Mall in Toronto. Mr. Khawaja, Mr. Khan, and Ms. Khan signed the franchise agreements as guarantors. The franchisee received a disclosure document under the Arthur Wishart (Franchise Disclosure), 2000. [1]

[7] To finance the opening of the restaurant and the operation of the franchise, in February, 2016, Everest Group signed loan and security agreements with RBC; namely: (a) a Canada Small Business Financing Loan (“CSBFL Loan”) for a variable rate term loan to a maximum of $350,000: (b) a revolving demand loan facility of $5,000 available by way of overdraft; (c) a variable rate term facility of $256,000; (d) a visa facility to a maximum of $10,000; and (e) a general security agreement (RBC’s Standard Form 924).

[8] The CSBFL Loan with RBC provides, among other things:

EVENTS OF DEFAULT

Each Event of Default shall entitle the Bank, in its sole discretion, to cancel any Credit Facility, demand immediate repayment in full of any amounts outstanding under any Credit Facility, together with outstanding accrued interest and any other indebtedness under or with respect to any Credit Facility, and to realize on all or any portion of any Security. The term Event of Default has the meaning set out in the standard terms provided herewith.

EVENTS OF DEFAULT [Standard Terms].

Without affecting or limiting the right of the Bank to terminate or demand payment of, or to cancel or restrict availability of any unutilized portion of, any Credit Facility, each of the following shall constitute an "Event of Default" which shall entitle the Bank, in its sole discretion, to cancel any Credit Facility, demand immediate repayment in full of any amounts outstanding under any Credit Facility, together with outstanding accrued interest and any other indebtedness under or with respect to any Credit Facility, and to realize on all or any portion of any Security:

(a) failure of the Borrower to pay any principal, interest, or other amount when due pursuant to this Agreement;

(b) failure of the Borrower or any Guarantor, if applicable, to observe any covenant, term or condition provision contained in this Agreement, the security or any other agreement delivered to the Bank or in any documentation relating hereto or thereto;

(c) the Borrower, or any Guarantor, if applicable, is unable to pay its debts as such debts become, or is, or is adjudged or declared to be, or admits to being bankrupt or insolvent;

(d) if any proceeding is taken to effect a compromise or arrangement with the creditors of the Borrower, or any Guarantor, applicable, or to have the borrower, or any Guarantor, if applicable, declared bankrupt or wound up, or to have a receiver appointed for any part or the assets or operations of the Borrower, or any Guarantor if applicable, or if any encumbrancer takes possession of any part thereof;

(e) if in the opinion of the Bank there is a material adverse change in the financial condition, ownership structure or composition or operation of the Borrower, or any Guarantor if applicable;

[9] The revolving demand facility and the Visa facility are repayable on demand.

[10] The loan agreement and its standard terms provides, among other things:

EVENTS OF DEFAULT

Without affecting or limiting the right of the Bank to terminate or demand payment of, or to cancel or restrict availability of any unutilized portion of, any demand or other discretionary facility, each Event of Default shall entitle the Bank, in its sole discretion, to cancel any Credit Facilities, demand immediate repayment in full of any amounts outstanding under any term facility, together with outstanding accrued interest and any other indebtedness under or with respect to any term facility, and to realize on all or any portion of any Security. The term Event of Default has the meaning set out in the Loan Agreement Standard Terms (Form 472) and includes, without limitation, each of: (i) failure of the Borrower to pay any principal, interest or other amount when due pursuant to this Agreement, (ii) failure of the Borrower to observe any covenant, condition or provision contained in this Agreement or in any documentation relating hereto or to the Security, and (iii) if in the opinion of the Bank there is a material adverse change in the financial condition, ownership structure or composition or operation of the Borrower, or any Guarantor if applicable.

EVENTS OF DEFAULT [RBC Loan Agreement Standard Terms (472)]

Without affecting or limiting the right of the Bank to terminate or demand payment of, or to cancel or restrict availability of any unutilized portion of, any demand or other discretionary facility, each of the following shall constitute an "Event of Default" which shall entitle the Bank, in its sole discretion, to cancel any Credit Facilities, demand immediate repayment in full of any amounts outstanding under any term facility, together with outstanding accrued interest and any other indebtedness under or with respect to any term facility, and to realize on all or any portion of any Security:

(a) failure of the Borrower to pay any principal, interest or other amount when due pursuant to this Agreement;

(b) failure of the Borrower, or any Guarantor if applicable, to observe any covenant. term or condition or provision contained in this Agreement, the Security or any other agreement delivered to the Bank or in any documentation relating hereto or thereto:

(c) the Borrower, or any Guarantor if applicable, is unable lo pay its debts as such debts become due, or is, or is adjudged or declared to be, or admits to being, bankrupt or insolvent;

(d) if any proceeding is taken to effect a compromise or arrangement with the creditors of the Borrower, or any Guarantor if applicable, or to have the Borrower, or any Guarantor, if applicable, declared bankrupt or wound up, or to have a receiver appointed for any part of the assets or operations of the Borrower or any Guarantor, if applicable, or if any encumbrancer takes possession of any part thereof;

(e) if in the opinion of the Bank there is a material adverse change in the financial condition, ownership structure or composition or operation of the Borrower, or any Guarantor if applicable;

[11] Section 10 of the General Security Agreement specifies “Events of Default” as follows:

The happening of any of the following events or conditions shall constitute default hereunder which is herein referred to as "default":

(a) the nonpayment when due, whether by acceleration or otherwise, of any principal or interest forming part of indebtedness or the failure of Debtor to observe or perform any obligation, covenant. term, provision or condition contained in this Security Agreement or any other agreement between Debtor and RBC;

(c) the bankruptcy or insolvency of Debtor; the filing against Debtor of a petition in bankruptcy; the making of an assignment for the benefit of creditors by Debtor; the appointment of a receiver or trustee for Debtor or for any assets of Debtor or the institution by or against Debtor of any other type of insolvency proceeding under the Bankruptcy and Insolvency Act or otherwise;

(d) the institution by or against Debtor of any formal or informal proceeding for the dissolution or liquidation of, settlement of claims against or winding up of affairs of Debtor;

(e) if any Encumbrance affecting Collateral becomes enforceable against Collateral;

(f) if Debtor ceases or threatens to cease to carry on business or makes or agrees to make a bulk sale of assets without complying with applicable law or commits or threatens to commit an act of bankruptcy;

[12] Mr. Khan, Ms. Khan, and Mr. Khawaja signed two guarantees and postponements of claim (RBC’s Standard Form 812) limited to $271,000.00 and $87,500.00 (for the CSBFL Loan), respectively, in respect of the indebtedness owed by Everest Group to RBC.

[13] The Guarantees provide: (a) the Guarantors are liable to make payment on receiving demand for repayment; (b) a demand for payment is made by sending the Guarantor a demand addressed to their place of address last known to RBC; (c) once demand is made the Guarantor is liable for all legal costs on a full indemnity basis for any action instituted on the Guarantees; (d) the Guarantees are continuing guarantees and cover all liabilities and shall secure any ultimate balance due or remaining unpaid; and (e) RBC is not bound to exhaust recourse against the debtor before being entitled to payment.

[14] Everest Group operated the restaurant from September 2016 until October 10, 2017. The franchise was unprofitable. Everest Group, Mr. Khan, Ms. Khan, and Mr. Khawaja expended approximately $2.4 million to acquire and build the franchise but were unable to make any meaningful operating profits.

[15] In September 2017, RBC transferred Everest Group’s accounts to its Special Loans Group because of poor financial performance. At a meeting in September 2017, RBC was advised that Everest Group had HST arrears of approximately $60,000.

[16] On September 27, 2017, Jason Lukez, RBC’s Special Loans Manager, sent an email to requesting Everest Group, Mr. Khan, Ms. Khan, and Mr. Khawaja to provide specified financial information by October 11, 2017.

[17] Before any information was provided, on October 10, 2017, Everest Group exercised its right of rescission under the Arthur Wishart (Franchise Disclosure), 2000. Under the Act, there is a right rescind a franchise agreement within two years, if the franchisor failed to deliver a proper Disclosure Document.

[18] Everest Group delivered a Notice of Rescission in accordance with section 6 (2) of the Act. The Notice of Rescission demanded the franchisor to deliver a certified cheque or bank draft to Everest Group of $2,718,650.94 (by December 11, 2017), which sum represented Everest Group’s then current losses in connection with purchasing and operating the Franchise.

[19] At the time of the delivery of the Notice of Rescission, Everest Group did not have sufficient funds in its accounts to make its monthly loan payments to RBC.

[20] On October 15, 2017, within days of the delivery of the Notice of Rescission, the franchisor took back the franchise and Everest Group ceased to operate the restaurant.

[21] On October 20, 2017, Everest Group advised RBC that it had exercised its right to rescind the franchise agreement and that it was claiming $5.6 million from Paramount Fine Foods. Everest Group advised that it had terminated its employees’ contracts, which had been taken over by Paramount Fine Foods.

[22] On October 23, 2017, RBC sent a letter to the Everest Group. The bank’s letter stated:

On Friday, October 20, 2017, Mr. Shahid Khawaja advised RBC that the Borrower had exercised its rescission rights relating to the Paramount Fine Foods franchise located in Yorkdale Mall and surrendered the business operations to the franchisor.

Such actions constitute a default under the lending and security arrangements between RBC and the Borrower. As a result of the foregoing, we wish to confirm, on behalf of RBC, that RBC has frozen, effective immediately, account number 00523 1006410 maintained by RBC in the name of the Borrower.

We wish to further advise that RBC reserves all of its rights and remedies against the Borrower and all guarantors of the indebtedness owing to it by the Borrower.

[23] On October 23, 2017, Sotos LLP, the Everest Group’s legal counsel, provided RBC with a copy of the Notice of Rescission of Franchise Agreement and advised that Everest Group returned the businesses to the franchisor, who took over operations effective Monday, October 16.

[24] On October 25, 2017, RBC made written demand on the Everest Group for payment of the indebtedness and gave notice of its intention to enforce its security pursuant to section 244(1) of the Bankruptcy and Insolvency Act. [2]

[25] On October 26, 2017, RBC’s lawyers wrote Sotos LLP as follows:

As you are aware, RBC recently made formal demand for repayment of all indebtedness owing to it by each of Everest and Versatile. In connection therewith, RBC has been advised that it is the intention of the guarantors to repay the indebtedness owing to RBC by each of Everest and Versatile.

Please advise if your clients are prepared to repay such indebtedness, failing which RBC will have no alternative but to immediately enforce its rights and remedies.

[26] On October 27, 2017, RBC made written demand on the guarantees.

[27] While it was pursuing its rights against Paramount Fine Foods, in its negotiations with RBC, Everest Group offered to continue making payments to RBC, but these offers were rejected by the bank. The Everest Group wished to repay the indebtedness with the funds payable by Paramount Fine Foods, but on October 30, 2017, RBC advised Sotos LLP that it would not hold repayment in abeyance.

[28] Between October 31, 2017 and November 13, 2017, there were discussions between RBC and Everest Group, but the discussions failed to resolve the matter, and on November 14, 2017, RBC had a Statement of Claim issued.

[29] On November 22, 2017, the Bank delivered an Amended Statement of Claim.

[30] On January 5, 2017, Everest Group, Mr. Khan, Ms. Khan, and Mr. Khawaja delivered their Statement of Defence. They pleaded that Everest Group’s rescission of the franchise agreements and resulting cessation of operations did not constitute an event of default under RBC’s loan and security agreements. They pleaded that Everest Group’s rescission was not an adverse change in the condition of the franchisee, but rather resulted in a significant material improvement in its financial and operational condition. Everest Group, Mr. Khan, Ms. Khan, and Mr. Khawaja pleaded that RBC was not entitled to demand full repayment of the indebtedness nor entitled to terminate the loan and security agreements.

[31] On March 7, 2018, following the franchisor’s failure to comply with the Notice of Rescission, Everest Group, Mr. Khan, Ms. Khan, and Mr. Khawaja issued a Third Party Claim against Paramount Fine Foods seeking, among other things, contribution and indemnity for any amounts that the Defendants are found to owe RBC.

[32] After the completion of pleadings, RBC brought a motion for a summary judgment, and on March 20, 2018, the parties attended Civil Practice Court and a timetable was set for the hearing of the summary judgment motion.

[33] As at August 9, 2018, the following amounts are owing by Everest Group to RBC: (a) small business loan, $299,683.54; (b) variable rate term facility, $212,554.93; (c) overdraft facility, $10,513.43; and (d) Visa facility, $11,353.04.

C. Discussion

1. Position of the Parties

[34] RBC’s position is straightforward. The Everest Group is in default of the lending agreements and RBC is entitled to judgment for the indebtedness from both the debtor and from the guarantors to the limits of the guarantees.

[35] The Defendants’ position is that given that RBC’s action and the Defendants’ third party proceeding arise from the same factual matrix, the just, most expeditious and least expensive determination of the action requires that this motion be adjourned until such time as it can be heard alongside a hearing of the merits of the third party proceeding.

[36] Further, the Defendants submit that, in any event, RBC has failed to lead evidence that would allow the court to make the necessary of findings of fact for a summary judgment.

[37] The Defendants’ principal argument is that having regard to the principles of contract interpretation and the doctrine of good faith in contract performance, the loan agreements and the guarantees should be interpreted in light of RBC’s knowledge that it was financing a start up franchise, which has a two-year right of rescission under the Arthur Wishart (Franchise Disclosure), 2000 Act.

[38] The Defendants submit that Everest Group did not cease to carry on business; rather, the evidence is that instead of a restaurant operation, Everest Group’s undertaking is recovering the substantial investment it made in the franchise operation pursuant to the Arthur Wishart Act.

[39] Everest Group submits that having regard to the surrounding circumstances of the contracts at the time of their formation, the “cease to carry on business” clauses should not be interpreted to have the effect of penalizing a franchisee and preventing it from exercising its statutory rights in the event that it did not receive a proper disclosure document, and consequently decides to avail itself of its statutory right of rescission under the Wishart Act. The Everest Group submits that any ambiguity in interpreting the term “cease to carry on business” must be resolved against RBC.

2. Is the Case Appropriate for a Summary Judgment?

[40] Rule 20.04(2)(a) of the Rules of Civil Procedure provides that the court shall grant summary judgment if: “the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence.” With amendments to Rule 20 introduced in 2010, the powers of the court to grant summary judgment have been enhanced. Rule 20.04 (2.1) states:

20.04 (2.1) In determining under clause (2)(a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:

1. Weighing the evidence.

2. Evaluating the credibility of a deponent.

3. Drawing any reasonable inference from the evidence.

[41] In Hryniak v. Mauldin [3] and Bruno Appliance and Furniture, Inc. v. Hryniak [4], the Supreme Court of Canada held that on a motion for summary judgment under Rule 20, the court should first determine if there is a genuine issue requiring trial based only on the evidence in the motion record, without using the fact-finding powers introduced when Rule 20 was amended in 2010. The analysis of whether there is a genuine issue requiring a trial should be done by reviewing the factual record and granting a summary judgment if there is sufficient evidence to fairly and justly adjudicate the dispute and a summary judgment would be a timely, affordable and proportionate procedure.

[42] If, however, there appears to be a genuine issue requiring a trial, then the court should determine if the need for a trial can be avoided by using the powers under rules 20.04 (2.1) and (2.2). As a matter of discretion, the motions judge may use those powers, provided that their use is not against the interest of justice. Their use will not be against the interest of justice if their use will lead to a fair and just result and will serve the goals of timeliness, affordability, and proportionality in light of the litigation as a whole. To grant summary judgment, on a review of the record, the motions judge must be of the view that sufficient evidence has been presented on all relevant points to allow him or her to draw the inferences necessary to make dispositive findings and to fairly and justly adjudicate the issues in the case. [5]

[43] Hryniak v. Mauldin does not alter the principle that the court will assume that the parties have placed before it, in some form, all of the evidence that will be available for trial. The court is entitled to assume that the parties have advanced their best case and that the record contains all the evidence that the parties will present at trial. [6] Thus, if the moving party meets the evidentiary burden of producing evidence on which the court could conclude that there is no genuine issue of material fact requiring a trial, the responding party must either refute or counter the moving party’s evidence or risk a summary judgment. [7]

[44] In my opinion, in the immediate case there are no genuine issues requiring a trial and the case at bar is an appropriate case for a summary judgment. It is further my opinion that if there were genuine issues requiring a trial, then there is a more than adequate evidentiary record to decide the genuine issues and it would be in the interests of justice to do so. There are no issues of credibility and the central issues for the summary judgment motion are essentially a matter of contract interpretation where the court has an adequate evidentiary record of the circumstances of the creation of the contracts and an adequate evidentiary record of the circumstances of the alleged breach of contract.

3. Is RBC Entitled to a Summary Judgment?

[45] The evidence on the summary judgment motion establishes that in the fall of 2017, there were several events of default under the various loan agreements and under the guarantees.

[46] Everest Group has never had a successful operation and in the fall of 2017, its accounts with RBC were being supervised by the Special Loans Group because of poor financial performance.

[47] Everest Group’s accounts with RBC did not have sufficient funds to pay the ongoing payments to RBC, and the bank was aware that Everest Group had a significant indebtedness to Revenue Canada for HST. In the fall of 2017, the Special Loans Group asked for information about the financial status of the business, but that information was never provided because Everest Group ceased operating as a restaurant and surrendered the operation of its restaurant to the franchisor.

[48] I find as fact that in the fall of 2017 that: (a) Everest Group had ceased to carry on business; (b) the cessation of business operations was a material adverse change in operations; (c) Everest Group had insufficient funds to make the October loan payments to the bank; (d) Everest Group did not provide financial information to RBC as it was required to do; and (e) although there was discussion about Everest Group’s continuing to make loan payments, that did not occur and Everest Group ceased making payments to the Bank after September 2017. Approximately, $535,000 is outstanding on the bank’s loans.

[49] I conclude that the Everest Group’s loans and guarantees are in default and RBC is entitled to enforce its loan instruments.

[50] While I admire the audacity and originality of Everest Group’s argument about how a business loan agreement between a sophisticated lender who would be aware of the Arthur Wishart (Franchise Disclosure), 2000 Act should be interpreted, having regard to the actual wording used in the various loan agreements and interpreting them in the context of the surrounding circumstances known to the parties at the time of contracting and in accordance with the canons of contract interpretation, [8] there is no basis for reading into the standard terms a provision that would require RBC to forebear exercising its rights.

[51] In the case at bar, there is no basis to infuse RBC’s loan agreements with a restriction on the bank’s rights in order to give the loan transaction business efficacy, and, indeed, it would not make common sense for a lender to agree to such a limitation on what counts for an event of default.

[52] Further, it is contrary to common sense for a borrower like Everest Group to have any expectation that its lender should forebear enforcing its security in anticipation that the borrower would be successful in exercising its rights under the Arthur Wishart Act, which, in the case at bar, is a matter that remains to be determined.

[53] In the case at bar, there is no basis on the factual record to find that RBC was subjectively or objectively unreasonable in exercising its discretion to enforce its rights under the loan agreements and the guarantees, and, rather, the evidence establishes that it was both expected and reasonable for the bank to enforce its security and its loan agreements.

[54] The evidence establishes that RBC was in the process of exercising due diligence to decide whether it should enforce its loan when Everest Group decided to discontinue its operation as a restaurant. In these circumstances, there was nothing unreasonable and there was no failure to act in good faith in RBC deciding to enforce the loan.

[55] There is nothing subjectively or objectively unreasonable in the bank declining to await the far from certain outcome of proceedings between the franchisor and franchisee before enforcing the rights that it contracted for when lending Everest Group over $600,000.

D. Conclusion

[56] For the above reasons, I grant RBC judgment against Everest Group for the indebtedness owed under the loan agreements and against the guarantees to the limits of their guarantees plus costs on a full indemnity basis of $33,411.78.

[57] The loan indebtedness as of August 23, 2018 is: (a) $300,411.68 for the CSBFL loan; (b) $213,070.27 for the variable rate term facility; (c) $10,546.33 for the overdraft facility; and (d) $11,589.32 for the Visa facility.

Perell, J. Released: August 23, 2018

COURT FILE NO.: CV-17-586380 DATE: 2018/08/23 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: Royal Bank of Canada Plaintiff – and – Everest Group Inc., Yousaf Jameel Kahn, also known as Yousaf Jamil, Zarmina S. Khan and Shadid Saleem Khawaja Defendant REASONS FOR DECISION PERELL J. Released: August 23, 2018

[1] S.O. 2000, c. 3 . [2] R.S.C. 1985, c B-3 . [3] 2014 SCC 7 . [4] 2014 SCC 8 . [5] Campana v. The City of Mississauga , 2016 ONSC 3421 ; Ghaeinizadeh (Litigation guardian of) v. Garfinkle Biderman LLP , 2014 ONSC 4994 , leave to appeal to Div. Ct. refused, 2015 ONSC 1953 (Div. Ct.); Lavergne v. Dominion Citrus Ltd. , 2014 ONSC 1836 at para. 38 ; George Weston Ltd. v. Domtar Inc. , 2012 ONSC 5001 . [6] Dawson v. Rexcraft Storage & Warehouse Inc . , [1998] O.J. No. 3240 (C.A.); Bluestone v. Enroute Restaurants Inc . (1994) , 18 O.R. (3d) 481 (C.A.); Canada (Attorney General) v. Lameman , 2008 SCC 14 , [2008] 1 S.C.R. 372 at para. 11 . [7] Toronto-Dominion Bank v. 466888 Ontario Ltd., 2010 ONSC 3798 . [8] Sattva Capital v. Creston Moly Corp. , 2014 SCC 53 .