Court File and Parties

COURT FILE NO.: CV-18-00611454-0000 DATE: 20200113 ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N :

JANERIC ENGINEERING INC. Plaintiff (Moving Party) – and – 2496110 ONTARIO INC. Defendant (Responding Party)

COUNSEL: Brett D. Moldaver for the Plaintiff (Moving Party) Rahul Gandotra for the Defendant (Responding Party)

HEARD: July 10, 2019

FAVREAU J.

Overview

[1] The plaintiff, Janeric Engineering Inc. ("Janeric"), seeks summary judgment for $400,000 plus interest based on a promissory note given by the defendant, 2496110 Ontario Inc. ("Parliament"), in the context of an asset purchase agreement.

[2] Parliament's position is that Janeric has not met the conditions precedent for the payment of the note and that, in any event, it has a right of setoff against the amount owed under the note.

[3] For the reasons that follow, the motion for summary judgement is granted.

Background Facts

[4] Janeric and Parliament are both in the business of selling and supplying construction materials.

[5] On September 19, 2016, Janeric and Parliament entered into an asset purchase agreement (the "APA"), under which Parliament agreed to purchase Janeric's assets. The purchase price was to be $1,600,000. Parliament was to pay $1,200,000 on closing and $400,000 at a later date in accordance with a promissory note.

[6] The promissory note originally provided that there was to be no interest on the $400,000 "prior to maturity". The APA and promissory note also provided that the $400,000 was to be paid on December 31, 2016 or on "such date as the parties may agree upon following satisfactory review by [Parliament] of the closing date financial statements to be delivered to [Parliament] following closing of the sale of assets".

[7] Article 9.1.8 of the APA specified that the "value of Accounts Receivable plus Inventory less Accounts Payable is not less than $300,000". Article 12.1.1 provided that all representations and warranties in the APA were to survive for a period of two years after closing. The provision goes on to identify some representations and warranties that were to survive indefinitely. However, these do not include the representations and warranties set out in Article 9.1.8.

[8] On September 20, 2016, the parties signed an Addendum to the APA (the "Addendum"). The Addendum was prefaced with the statement “Notwithstanding all of the documentation delivered or to be delivered on the closing of this transaction, the parties agree as follows”. The Addendum contained the following provisions relevant to the payment of the promissory note:

(2) There will be no adjustment to the $400,000 note regarding whether Accounts Receivable plus Inventory less Accounts Payable on Closing Date is higher or lower than $300,000.

(3) If the $400,000 note is not paid in full by December 31, 2016 it will thereafter bear interest at 7% per annum calculated and payable monthly in arrears. If the note is not paid in full, with all interest, by December 31, 2017, the principal and interest unpaid will be deemed to be unpaid rent under the Sublease.

[9] The “Sublease” referred to in the promissory note relates to an agreement between Parliament and a company related to Janeric for the rental of the premises where Janeric operated its business.

[10] On September 20, 2016, Janeric signed documents titled "Subordination Agreement by the Creditor" and "Standstill Agreement" (the “Toronto Dominion Bank agreements”). In these documents, Janeric agreed to give the Toronto-Dominion Bank ten days notice before exercising any rights under the promissory note and not to take any enforcement action without the bank's prior written consent.

[11] In September 2017, Parliament obtained an audit from BDO Canada Ltd. that identified issues with the accounts receivable and inventory on the date of closing. BDO's audit found that $600,999 of the accounts receivable were not collectable and that the value of the inventory was off by $472,009 due to a "keying error".

[12] Following the audit, there were communications between the parties over outstanding amounts owed. Janeric claimed that Parliament owed the $400,000 under the promissory note and outstanding rent under the sublease. Parliament claimed that Janeric owed amounts due to the issues identified by the BDO audit.

[13] Evidently, the parties were not able to resolve these issues.

[14] On December 21, 2018, Janeric commenced this action against Parliament, claiming payment of the $400,000 owed under the promissory note plus interest starting on January 1, 2017 at a rate of 7%.

[15] Parliament served its statement of defence on February 7, 2019. In its defence, Parliament claims that the Addendum is not valid and that it has a right of set-off against the amounts owed under the promissory note based on the uncollectible accounts receivable and inventory errors.

[16] There is another proceeding in the Superior Court involving the sublease. It appears that Parliament was in arrears on its rent, and that Janeric's related company sought to enforce its rights under the sublease. Parliament brought an application to the Court for relief from forfeiture. In an endorsement dated February 12, 2019, Patillo J. granted relief from forfeiture subject to a number of conditions. In his decision, he rejected an argument by the applicant that moneys owed by Parliament under the sublease included the amount owed pursuant to the promissory note:

The respondent wants payment of $400,000 plus interest due on a promissory note which is in default and which the parties agreed would be considered as delayed rent in such circumstances. The respondent's principal (to whom the note is made) has commenced a separate action on the note. Due to circumstances [sic] I am not prepared to deal with the note as a term for relief from forfeiture. The note action must be determined or resolved.

Positions of the Parties

[17] Janeric argues that the claim can be decided by way of summary judgment because the only issue is the enforcement of the promissory note. Janeric seeks judgment for $400,000 plus 7% interest starting on January 1, 2017 in accordance with the terms of the promissory note and Addendum. Janeric argues that Parliament has lost any right of setoff due to the terms of the Addendum and that, in any event, any right Parliament may have had to rely on the representations and warranties has expired. Janeric also argues that the banking documents are irrelevant because there is no evidence of a loan by the Toronto Dominion Bank to Parliament.

[18] Parliament argues that a trial is required to decide the issues between the parties. In particular, it argues that the issues surrounding the negotiations of the APA and the Addendum are complex and that its setoff claim cannot be decided without a trial. Parliament also argues that, even if the Court finds that the promissory note is enforceable, judgment should be stayed until the setoff claim is decided.

Test on a Motion for Summary Judgment

[19] Under subrule 20.04(2) of the Rules of Civil Procedure, summary judgment is to be granted if the Court is satisfied that there is no genuine issue requiring a trial.

[20] As set out in Hryniak v. Mauldin, 2014 SCC 7, at para. 49, there will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits using the summary judgment process. This is the case when the process: "(1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result."

[21] On a motion for summary judgment, the judge should first determine if there is a genuine issue requiring a trial based on the evidence before him or her without using the fact-finding powers in subrule 20.04(2.1). If there appears to be a genuine issue requiring a trial, Rule 20.04(2.1) permits the motion judge, at his or her discretion, to: (1) weigh the evidence, (2) evaluate the credibility of a deponent, or (3) draw any reasonable inference from the evidence unless it is in the "interest of justice" for these powers to be exercised only at trial: Hryniak, at para. 66. The motion judge is also permitted to use the expanded powers under Rule 20.04(2.2) to direct a procedure such as a mini-trial, rather than a full trial.

[22] The responding party cannot rely on the prospect that additional evidence may be tendered at trial; the respondent must put its best foot forward in response to a motion for summary judgment: Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONSC 1200 (Ont. S.C.J.), at para. 26, aff'd 2014 ONCA 878 (Ont. C.A.), leave to appeal to SCC refused, [2015] S.C.C.A. No. 97 (S.C.C.).

[23] In Mason v. Peras Mongenais, 2018 ONCA 978 (C.A.), at para. 44, the Court of Appeal for Ontario emphasized that "summary judgment is only appropriate where it leads to a fair process and just adjudication'", and that adjudication by trial, rather than summary judgment, is not to be viewed as exceptional.

Analysis

[24] The issue to be decided on this motion is whether this is an appropriate case for summary judgment, or whether a trial is required. In order to make this determination, it is necessary to decide whether a trial is required to determine the following issues raised by the parties:

a. Whether the promissory note is enforceable; b. Whether the plaintiff was required to notify the bank as a precondition to enforcing the promissory note; and c. Whether the defendant has a right of set-off.

[25] For the reasons that follow, I find that a trial is not required to decide these issues and that Janeric is entitled to summary judgment.

Enforceability of the Promissory Note

[26] Janeric argues that, in combination, the promissory note and the Addendum make clear that it is entitled to the payment of $400,000 plus interest starting on January 1, 2017.

[27] Originally, in its pleading and factum, Parliament took the position that the Addendum was not valid because Parliament had no record that it had been signed and because Parliament gave no consideration in exchange for the terms of the Addendum. At the hearing of the motion, Parliament conceded that the Addendum was valid and enforceable. However, Parliament argued that the Addendum altered the terms of the agreement between the parties such that its obligation to pay the outstanding $400,000 was no longer subject to a promissory note. Instead, Parliament takes the position that any outstanding amounts can only be enforced as unpaid rent under the sublease.

[28] I see no merit to Parliament’s original position or its argument on the motion.

[29] With respect to the original position, the Addendum was signed by both parties and there is no evidence of fraud. Parliament’s position that it received no consideration for the Addendum is unsupported by the evidence and by the terms of the Addendum itself. Janeric's affiant on the motion, Vipin Jain, stated that the Addendum was made at Parliament's request because it anticipated having difficulty paying the $400,000 owed under the promissory note by December 31, 2016, as required by the original APA. The Addendum was agreed to for the purpose of giving Parliament more time to pay the $400,000 owed under the note. Parliament's affiant, Noah Murad, does not offer any evidence to contradict Mr. Jain's evidence on this issue. In any event, and more significantly, on the face of the Addendum, it is evident that Parliament was receiving a benefit in the form of an extension of the time within which it would be obligated to pay the amount owed on the promissory note.

[30] With respect to Parliament's position that, if the Addendum is valid, it changed the agreement between the parties and essentially extinguished Janeric's ability to sue on the note. In making this argument, Parliament relies on the following language quoted above from clause 3 of the Addendum:

If the note is not paid in full, with all interest, by December 31, 2017, the principal and interest unpaid will be deemed to be unpaid rent under the Sublease.

[31] Parliament seems to be arguing that, with this provision, Janeric is only allowed to seek payment of the note through enforcement mechanisms under the sublease and cannot sue Parliament for payment of the note. Janeric argues that this language simply refers to an additional enforcement mechanism available as of January 1, 2018, but that it does not change the status of the promissory note. I agree with Janeric. Clauses 2 and 3 of the Addendum clearly refer to the "note". The Addendum has the effect of changing the note's terms, but not its status. With the Addendum, the changes to the terms of the note are as follows:

a. Parliament can no longer reduce the amount payable in the event the representations about the $300,000 value of the combined accounts receivable, inventory and accounts payable were inaccurate. b. Payments on the note can be made after December 31, 2016, but they will be subject to interest of 7% after that date. c. As of January 1, 2018, Janeric can rely on enforcement mechanisms in the sublease to enforce payment of the note.

[32] Ironically, on the application for relief from forfeiture, Parliament opposed Janeric's ability to rely on the sublease enforcement mechanisms to enforce payment of the note, and the application judge deferred the determination of amounts owing under the note to this proceeding. If I were to accept Parliament's position, Janeric would be left without any recourse to enforce payment of the note.

[33] Accordingly, I find that the promissory note as amended by the Addendum is valid.

Effect of Banking Documents

[34] Parliament argues that Janeric has not met its obligations under the Toronto Dominion Bank agreements before seeking enforcement of the promissory note. Parliament claims that Janeric was required to give the Toronto Dominion Bank notice which it did not do. In response, Janeric argues that there is no evidence of an existing outstanding loan with the Toronto Dominion Bank.

[35] I agree with Janeric that the evidence on the motion does not establish that these documents prevent Janeric from enforcing the promissory note against Parliament.

[36] Janeric’s evidence on the motion is that it signed the two documents at Parliament’s request, but that it never received versions signed by the bank. Parliament's evidence does not include any evidence of an existing loan with the Toronto Dominion Bank. It has not produced versions of the agreements signed by the bank nor has it produced any evidence of an existing debt to the bank to which these agreements would apply. This issue was the subject of an undertaking given by Parliament’s affiant during his cross-examination, but Parliament did not produce any documents in response to the undertaking. Therefore, other than the versions of the agreements signed by Janeric in September 2016, there is no evidence that these agreements were ever effective or that they are still effective. If there was a live issue regarding the priority between the bank and Janeric, I would have expected Parliament to notify the bank and that the bank would have sought to be added as a party to these proceedings. In any event, any dispute over this issue would be between the bank and Janeric, and not between Janeric and Parliament.

[37] Accordingly, a trial is not required to determine whether Janeric failed to meet a condition precedent for enforcement of the promissory note. Parliament had an obligation to put its best foot forward on the motion and it has failed to do so.

Whether the Defendant has a Right of Set-off

[38] Parliament argues that, even if the promissory note is enforceable, it has a right of setoff, and that its claim for setoff requires a trial. Janeric argues that there is no right of setoff against a promissory note and that, in any event, any right of setoff in this case was extinguished by the Addendum. Janeric also argues that Parliament is out of time to enforce the representations and warranties in the APA and that, therefore, Parliament’s claim for setoff could not succeed.

[39] There are two types of setoff: legal setoff and equitable setoff. Legal setoff arises where parties have mutual debts that are either liquidated sums or money demands that can determined with certainty: Marketing Products Inc. v. 1254719 Ontario Ltd., [2000] O.J. No. 5092 (C.A.), at para. 18. Equitable setoff may be available to set off an unliquidated claim for damages against a claim for liquidated damages if the competing claims arise from the same relationship and meet the other criteria for equitable setoff: Jhawer v. Singh, 2016 ONSC 2735 (Sup. Ct.), at para. 57.

[40] Here, the relevance of the distinction between legal setoff and equitable setoff is that, while there may be a right of legal setoff on a promissory note, there is no right of equitable setoff: Marketing Products Inc., at paras. 20-21; and Kwan v. Niederdorfer, [2009] O.J. No. 2983 (Sup. Ct.), at para. 24.

[41] Therefore, in determining whether Parliament has a right of setoff against the promissory note, two issues arise. First, does Parliament’s promise to pay have the legal status of a promissory note? Second, if so, does Parliament seek legal or equitable setoff?

[42] On the first issue, I find that the note has the legal status of a promissory note. In accordance with section 176(1) of the Bills of Exchange Act, R.S.C. 1985, c. B-4, a promissory note is an “unconditional promise” to pay a certain amount on demand or by a specified date. Parliament argues that the payment was conditional on satisfaction of the representations and warranties regarding the $300,000 value of the accounts receivable plus inventory minus accounts payable. As referred to above, the APA initially provided that the promissory note was payable on December 31, 2016 or on "such date as the parties may agree upon following satisfactory review by [Parliament] of the closing date financial statements to be delivered to [Parliament] following closing of the sale of assets". This suggests that the parties initially contemplated that Parliament could reduce its payment of the $400,000 owing if it was not satisfied that the financial statement confirmed the $300,000. However, any condition on the payment was clearly extinguished by the Addendum, which provides at clause 2 that "[t]here will be no adjustment to the $400,000 note regarding whether Accounts Receivable plus Inventory less Accounts Payable on Closing Date is higher or lower than $300,000". Accordingly, I find that, with the Addendum, the promissory note is an unconditional promise to pay.

[43] On the second issue, I find that Parliament seeks equitable setoff, and not legal setoff, and therefore there is no right of setoff against the $400,000 promissory note. Parliament’s defence of setoff is based on alleged misrepresentations or errors in the values of the inventory and accounts receivable. Parliament argues that a trial is required to ascertain the amounts it claims are owed by Janeric. By Parliament’s admission, this is therefore not a liquidated debt but would have to be ascertained through evidence.

[44] On the motion, Janeric argued that, even if there was a right of setoff, the representations and warranties given by Janeric had expired by the time Parliament asserted its setoff defence. As reviewed above, the APA provides that all representations and warranties given by Janeric expire two years following the making of the agreement. Given my finding that there is no right of setoff, I do not have to decide this issue. However, I note that the Court of Appeal’s decision in Canada Trustco Mortgage Co. v. Pierce Estate, [2005] O.J. No. 1886 (C.A.), at para. 43, suggests that a limitation period does not apply when setoff is raised as a defence. Therefore, while Parliament may be out of time to bring a claim or counterclaim against Janeric, if setoff had been available as a defence to the claim for payment under the promissory note, it is not clear that the defence would have been barred by the two year limitation period.

[45] Accordingly, I find that Parliament's setoff defence does not raise a triable issue. Whether Janeric misrepresented the value of its inventory and/or accounts receivable is irrelevant because Parliament has no right to setoff these amounts against the amount it owes Janeric under the promissory note.

Parliament's Request for a Stay

[46] In the event that I granted Janeric's motion for summary judgment, Parliament requests that I grant a stay in order to allow it to pursue its setoff claim.

[47] Rule 20.08 of the Rules of Civil Procedure provides that "[w]here it appears that the enforcement of a summary judgment ought to be stayed pending the determination of any other issue in the action or a counterclaim, crossclaim or third party claim, the court may so order on such terms as are just".

[48] Case law does support staying a judgment where a party asserts a claim for setoff via a counterclaim. In such circumstances, a stay is to be granted unless the counterclaim is without merit: Hinke v. Thermal Energy Internation Inc., 2012 ONCA 635 (C.A.); Comtract Air Compressors Inc. v. A.W. Service Industries Inc., [2000] O.J. No. 1887 (Sup. Ct.); and Perdue v. Myers, [2005] O.J. No. 3637 (Sup. Ct.).

[49] The difficulty with Parliament's request for a stay here is that it has not brought a counterclaim against Janeric. Rather, its setoff claim is asserted as a defence. Given my findings above that Parliament's setoff defence does not raise an issue for trial and given that Parliament has not asserted a separate claim against Janeric, there is no basis for staying the action.

[50] The audit performed by BDO suggests that Parliament may have had a valid claim against Janeric. However, Parliament chose not to pursue that claim separately or in a timely fashion. Under the circumstances, there would be no utility in staying the execution of judgment.

Conclusion

[51] For the reasons above, the motion for summary judgment is granted. Janeric is entitled to payment on its promissory note in the amount of $400,000 plus interest at a rate of 7% starting on January 1, 2017 up to the date of payment.

[52] At the hearing of the motion, counsel for the parties provided costs outlines. The plaintiff seeks $23,612.80 on a partial indemnity basis for the action and the motion. The plaintiff was entirely successful and is therefore entitled to costs. I find that the amount Janeric seeks is reasonable, given the issues raised by the defendant in response to the motion and given that cross-examinations were required. Accordingly, Parliament is to pay to Janeric costs in the all-inclusive amount of $23,612.80.

FAVREAU J. RELEASED: January 13, 2020