COURT FILE NO.: CV-20-00640432 DATE: 20210301 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
INTERCAP EQUITY INC. Plaintiff – and – MICHAEL J. BELLMAN, KENNETH D.F. MAC NEIL and CAPSULE MEDIA INC. Defendants
Counsel: Jeffrey Larry and Daniel Rosenbluth, for the Plaintiff Sean N. Zeitz and James S. Quigley, for the Defendants
HEARD: February 26, 2021
F.L. Myers J
REASONS FOR JUDGMENT
The Motion
[1] The Supreme Court of Canada directs that the guarantor “is a favoured creditor in the eyes of the law whose obligation should be strictly examined and strictly enforced”. Manulife Bank of Canada v Conlin, [1996] 3 SCR 415, at para. 10. Below, I do both.
[2] This is a motion for summary judgment to enforce a debt and also a guarantee against the principals of the corporate debtor. Judgment is to issue against the corporate debtor on consent.
[3] All the parties are or had sophisticated lawyers. They negotiated the very terms that are in issue. No one preyed upon an uninvolved spouse or a wealthy relative who was a stranger to the transactions to provide their guarantee. No powerful institution dictated standard form terms. No one alleges that the guarantee is unconscionable under Uber Technologies v Heller, 2020 SCC 16.
[4] This is a contacts case that calls for interpretation of the contract of guarantee in light of the objective factual matrix, including the underlying debt documents, and with a special and strict eye to the desirability of exercising great care in enforcing guarantees. The claim either falls within the clear words of guarantee strictly construed or not.
[5] For the reasons that follow, I find for the plaintiff and enforce the guarantee as claimed.
Summary Judgment
[6] In the most recent decision of the Court of Appeal concerning a motion for summary judgment in a claim on a guarantee, Roberts JA wrote:
24 This determination required the motion judge to follow the analytical approach set out in Hryniak, at para. 66, which is summarized as follows:
- First, the motion judge should have determined if there was a genuine issue requiring a trial based only on the evidence before her, without using the enhanced fact-finding powers under r. 20.04(2.1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
- Second, if there appeared to be a genuine issue requiring a trial, the motion judge should have determined if the need for a trial could be avoided by using the enhanced powers under r. 20.04(2.1) – which allowed her to weigh evidence, evaluate the credibility of a deponent, and draw any reasonable inference from the evidence – and under r. 20.04(2.2) to order that oral evidence be presented by one or more parties.
[7] In this case, I am able to reach a conclusion based on the record without using the expanded fact-finding powers. The process employed by the parties allows me to make the necessary findings of fact, to apply the law to the facts, and is a proportionate, expeditious, and less expensive means to achieve a just result.
[8] In my view, the principal argument advanced by the defendants is premised on inadmissible evidence of the guarantors’ subjective interpretation of the contract. As such, there is no credibility issue for me to resolve.
[9] However, were I left not satisfied that it was fair and appropriate for me to proceed on the record, I would find that this is a case in which it is fair and in the interests of justice to use of expanded powers under R. 20.04 (2.1).
[10] Using the expanded powers, I would find the evidence of Messrs. Bellman and Mac Neil that they insisted that the final iteration of the corporation’s debt obligation was not to be subject to their guarantee incredible. It is belied by the documentary record; it does not survive cross-examination of Mr. Bellman; and it belies common business sense.
[11] I agree with both counsel that there is nothing further to be gained by having a trial. Each side put its best foot forward. The evidence is clear and seeing it evolve slowly through a trial narrative including much the same cross-examinations repeated in court will not aid the assessment of credibility. [1]
The Facts
The Initial Loan
[12] By loan agreement dated April 5, 2018, Intercap loaned Capsule $250,000. Capsule agreed to repay the debt in six months – by October 5, 2018. The debt was convertible and could be repaid in shares of Capsule at the option of Intercap. The formula to determine the number of shares to which Intercap might become entitled was set out in the loan document.
[13] Messrs. Bellman and Mac Neil are the principals of Capsule through various indirect holding structures. They each guaranteed the initial $250,000 loan by written guarantee.
[14] In the guarantee document, the guarantors grant Intercap security interests over their personal assets as continuing collateral security for the due payment of their guaranteed obligations.
[15] Mr. Bellman is a non-practising corporate lawyer who acted for Capsule, Mr. Mac Neil, and himself on these transactions. At Mr. Bellman’s request, Intercap agreed that it would not register notice of its security interests over their personal assets under the Personal Property Security Act until such time as there was an event of default under the loan or the guarantee.
[16] The guarantee has very broad terms entitling the lender to make changes to the underlying loan agreement with Capsule without the consent of the guarantors. However, para 14 of the guarantee required the lender to obtain the guarantors’ consent if Intercap wished to increase the principal amount of the loan to Capsule.
The Amended and Restated Loan
[17] In August, 2018, Capsule’s principals determined that Capsule was not going to be able to repay the loan by October 5, 2018. They asked for another month to pay. Capsule also needed more money. They asked for a further advance of $200,000.
[18] On August 27, 2021 Intercap and Capsule entered a further written agreement. The recitals reflect that the initial loan agreement is being amended and restated. Para. 1.1 of the agreement is a novation clause. It terminates the initial loan agreement and replaces it with the new one.
[19] This loan is for $450,000 and is due November 6, 2018.
[20] As the amount of the loan increased, the lender required the guarantors’ consent to keep them bound. They entered into a new, amended and restated guarantee dated August 27, 2018.
[21] This is the guarantee that Intercap seeks to enforce in this proceeding.
[22] The following are the key terms of the guarantee:
AND WHEREAS the Lender and the Borrower have agreed to amend and restate the Original Loan Agreement by entering into an Amended and Restated Loan Agreement dated August 27, 2018 (the "Amended and Restated Loan Agreement") to (i) increase the amount of the Loan (as defined in the Amended and Restated Loan Agreement) from $250,000.00 to $450,000, and (ii) to amend the Maturity Date (as defined in the Amended and Restated Loan Agreement) from the date that is 6 months from the date of the Original Loan Agreement to November 6, 2018.
Guarantee. The Guarantors hereby irrevocably and unconditionally, on a joint and several basis, guarantee the due and punctual payment and performance by CAPSULE MEDIA INC. (the "Borrower") of all present and future debts, liabilities and obligations of the Borrower arising out of an Amended and Restated Loan Agreement dated as of August 27, 2018 (the "Amended and Restated Loan Agreement") made by the Borrower in favour of the Lender (collectively the "Guaranteed Obligations") to the Lender and any ultimate unpaid balance thereof and agrees to pay all out-of-pocket costs and expenses (including, without limitation, reasonable legal fees on a solicitor-client basis) incurred by or on behalf of the Lender in enforcing or endeavouring to collect any Guaranteed Obligations or enforcing any of its rights hereunder, the liability of the undersigned being unlimited.
Liability Absolute. The liability of the Guarantors hereunder shall be unconditional and absolute irrespective of (i) the invalidity, illegality or unenforceability of any provisions of any agreements, instruments or documents (collectively the "Agreements") creating, evidencing or securing any Guaranteed Obligations; (ii) any amendment, waiver or other modification of any obligations of the Borrower or any rights of the Lender under any Agreements, including, without limitation, any increase in the principal amount thereof; (iii) any change or changes in the name of, or the amalgamation or reorganization of any kind of the Borrower shall not affect or in any way limit or lessen the liability of the Guarantors hereunder and this Guarantee shall extend to any person, firm or corporation acquiring or from time to time carrying on the business of the Borrower; (iv) any defence, counter-claim or right of set-off available to the Borrower; or (v) any other circumstances which might otherwise constitute, whether in whole or in part, a defence available to, or a discharge of, one or more of the Guarantors, the Borrower or any other persons in respect of the Guaranteed Obligations, or any Guarantor under this agreement. This shall be a continuing Guarantee and shall cover all liabilities of the Borrower to the Lender under the Amended and Restated Loan Agreement and all such liabilities incurred before or after the date hereof in connection with the Amended and Restated Loan Agreement and shall apply to and secure any ultimate balance due or remaining due to the Lender thereunder and shall be binding as a continuing security on the Guarantor.
Dealings by the Lender. The Lender, may from time to time (i) renew, terminate and otherwise vary any of the terms and conditions of any loans, advances, credit or financial accommodation made to the Borrower; (ii) grant extensions of time and other indulgences, take and give up securities, accept compositions, proposals and arrangements, grant releases and discharges, full, partial, conditional or otherwise, perfect or fail to perfect any securities, release any property charged by any securities and otherwise deal or fail to deal with the Borrower and others (including, without limitation, any other guarantors) and securities; and (iii) apply all moneys received from the Borrower or other persons or from any securities, upon such part of the Guaranteed Obligations; all as the Lender may see fit, without prejudice to or in any way limiting or lessening the liability of the Guarantors under this agreement and without obtaining the consent of or giving notice to the Guarantors. No delay on the Lender's part in the exercise of any right or remedy shall operate as a waiver thereof. The Lender covenants and agrees that it will not increase the principal amount of the Loan without the prior written consent of both Guarantors.
[23] In addition, the new guarantee also included the provision whereby Intercap agreed not to register notice of its security interests over the guarantors’ personal assets under the PPSA prior to default.
[24] In para. 1 of the guarantee, the guarantors agree to be liable for all amounts “arising out of” the amended and restated loan agreement dated August 27, 2018.
[25] Para. 2 expresses the unconditional nature of the guarantors’ liability.
[26] The last sentence of para. 2 of the guarantee is the focus of the defence mounted by the guarantors. It expresses that the guarantee is a “continuing guarantee” – one that covers a series of debts. But, in the initial loan agreement, the guarantors specifically negotiated to include the limitation that the continuing nature of the guarantee is limited to the debt under the loan agreement and all liabilities incurred thereafter “in connection with” that loan agreement. The same term is repeated in the new guarantee in relation to the amended and restated loan agreement.
[27] Mr. Bellman’s evidence is that he added the words to the continuing guarantee sentence limiting the guarantors’ liability to the loan agreement. He accepted Intercap’s refinement that future liability was limited to liabilities “in connection with” that loan. He then testifies:
These revisions were included in the executed April 2018 guarantee (the "April 2018 Guarantee"), a true copy of which is attached hereto as EXHIBIT "G". At no time during the negotiations did any of [Intercap] say or do anything that would have led me to believe that they did not accept or agree to the fact that the April 2018 Guarantee was specific to the April 2018 loan agreement (hereafter the "April 2018 Loan Agreement").
Under the April 2018 Guarantee, Mac Neil and I agreed, on a joint and several basis, to guarantee the due and punctual payment and performance by Capsule of all present and future debts, liabilities and obligations of the Capsule arising out of the April 2018 Loan Agreement. As is evident, Mac Neil and I strenuously bargained for our personal guarantee to be limited to indebtedness arising out of the April 2018 Loan Agreement and for the right to have our prior written consent obtained to any increase in our risk under such loan agreement.
[28] In these paragraphs, Mr. Bellman gives his understanding of the effect of the wording added to the continuing liability sentence in para 2 of the guarantee. As will later be discussed, the guarantors argue that the guarantee is not a continuing guarantee. Rather it is limited to the one debt instrument, now the amended and restated loan agreement dated August 27, 2018. They argue that the sentence is therefore ambiguous and must be read most favourably to them.
[29] At this point it is sufficient to foreshadow, that Mr. Bellman’s evidence about what the term means or meant to him is inadmissible. Moreover, he is simply ignoring the words “in connection with” to which the parties agreed.
The November, 2018 amendment
[30] On November 6, 2018, the parties amended the amended and restated loan agreement dated August 27, 2018.
[31] The amendments extended the maturity date of the loan to March 6, 2019. Intercap also required Capsule to agree, to pay its legal fees in the amount of $20,000 plus HST in addition to the principal debt and interest.
[32] Finally, in the November 6, 2018 agreement, Intercap and the guarantors amended their guarantee to remove the prohibition against Intercap filing notice of its security interests over the guarantors’ personal assets before default. The guarantors signed on to this amendment personally as well as for the corporation.
[33] Intercap filed PPSA registrations against the guarantors personally on November 7, 2018.
The Second Amended and Restated Loan Agreement dated July 15, 2019
[34] This is the final loan agreement. It is this agreement that Intercap relies upon to enforce the guarantee.
[35] In this agreement, the parties agreed to extend the maturity date of the loan to March 31, 2020. The conversion right in favour or Intercap is amended from the prior formula to a straight conversion to one-third of the shares of Capsule. [2]
[36] In compliance with securities laws, the following notice is set out at the top of the second amended and restated loan agreement:
Unless permitted under securities legislation, the holder of this security must not trade the security before the date that is 4 months and a day after the later of (i) August 27, 2018 and (ii) the date the issuer became a reporting issuer in any province or territory.
[37] I simply note here that the date of the trading hold runs from the August 27, 2018 first amended and restated agreement and not from this agreement.
[38] The following is the salient recital to the second amended and restated agreement:
AND WHEREAS the Lender and the Borrower wish to amend and restate the First Amended and Restated Loan Agreement by this Second Amended and Restated Loan Agreement (the "Agreement") to (i) amend the conversion feature to provide that the Covenantors shall deliver the Conversion Shares (as defined below) in accordance with the terms set forth in Article 6 below, and (ii) to amend the Maturity Date (as defined below) from November 6, 2018 to March 31, 2020.
[39] Para. 1.01 of this agreement is a novation clause. It terminates the first amended and restated loan agreement and replaces it with this new agreement.
[40] Para. 3.01 of the agreement provides:
3.01 Establishment of Loan. Subject to the terms and conditions hereof, the Lender hereby establishes in favour of the Borrower a non-revolving term loan (the "Loan") in the amount of $450,000.00, of which $250,000 was advanced on April 5, 2018 and $200,000 was advanced on August 27, 2018.
[41] There is no fresh advance of finds with this agreement. The agreement expressly recognizes the prior advances. Mr. Bellman speaks of a “notional advance”. But there was not even an exchange of cheques marking a notional repayment and re-advance. Doing so would have been inconsistent with the express wording of para. 3.01 recognizing the prior advances.
[42] Para. 3.05 of the agreement provides:
3.05 Current Outstanding Loan Balance. As of the date hereof, the total amount outstanding under the Loan is $518,966.93, being comprised of $450,000 in principal, $44,671.93 in accrued but unpaid interest, and $24,295 in legal and other fees (inclusive of HST).
[43] The parties agreed that the loan as at July 15, 2019 had already accrued interest of 44,671.93. A new loan does not have interest accrued on the day of the loan.
Evidence of the Guarantors
[44] The guarantors have adduced evidence about the negotiation leading to the second amended and restated loan agreement.
[45] They start from the proposition that the novation clause terminated the first amended and restated loan agreement. Therefore, they believe that their guarantee was no longer valid because it was limited to liability under that agreement only. Mr. Mac Neil’s evidence on this point relies upon Mr. Bellman.
[46] Mr. Bellman testifies that the demand by Intercap for a conversion right into one-third of the shares of Capsule would make raising funds from third parties very difficult because it constrained the value of the corporation. He swears to a conversation with Mr. Merkur of Intercap:
53…I mentioned my concerns about raising capital from other sources while having a convertible security on the company's financial statements with such a low valuation: that with Intercap not participating in a new funding round it would look to potential investors as if Intercap was betting on the company's failure. I also told Merkur that under no circumstances would Mac Neil and I provide personal guarantees for a loan that so increased the likelihood of Capsule's default. I told him that it was one or the other, personal guarantees or one third of the company. Merkur suggested that I come back with some ideas for different structures.
[47] Mr. Mac Neil swears that he “was not willing to sign a guarantee in relation to any agreement that gave Intercap an option to acquire a one third ownership interest in Capsule”. He does not say that he told this to anyone or that he took any step to withdraw his existing guarantee.
[48] Mr. Bellman continues:
- From these discussions, it would not be possible for Merkur to fail to understand that Intercap would have to choose between personal guarantees or being able to convert the loan into one-third of the company, and that I regarded Intercap's proposal as a very substantial change, one that would have significant negative impact on Capsule's ability to raise funds to repay Intercap and one which would significantly increase the likelihood of default and this the risk to Mac Neil and me under our personal guarantees.
[49] Mr. Bellman is swearing to what Intercap must have understood. Neither of the guarantors swears that Intercap agreed to let them guarantors off their guarantee while extending the loan further.
[50] To the contrary, Mr. Bellman’s next communication with Intercap was a proposal suggesting that it take five-year warrants and maintain the guarantee.
[51] From that point forward, Mr. Bellman says that Intercap never again mentioned the guarantee.
[52] Mr. Bellman testifies further that while he was satisfied that the guarantee would no longer apply once he saw the draft of the second amended and restated agreement with the novation clause, he wanted to test the idea and force Intercap’s hand to take a position on the guarantee. Therefore, on July 10, 2019, they proposed an amendment to the draft second amended and restated loan agreement as follows:
7.02 Discharge of PPSA Registrations. Within 10 Banking Days of the execution of this Agreement, the Lender shall discharge all registrations under the Personal Property Security Act (Ontario) against each of Kenneth D.F. Mac Neil and Michael J. Bellman in connection with their personal guarantees of the Loan. Upon the occurrence of an Event of Default, the Lender may refile such registrations.
[53] In this proposed term, the guarantors recognized that their guarantee continued to apply to the loan as restated but asked Intercap to agree, once again, to lift its PPSA registrations against the guarantors’ personal assets until an event of default occurred.
[54] On July 15, 2019, Intercap responded:
- Section 7.02 - Intercap requires that this section be removed as the PPSA registrations against Bellman and Mac Neil personally shall continue in place until paid out (to minimize risk of there being an intervening registration).
[55] That is, Intercap rejected the request that it release its registration of the security interests against the personal assets of the guarantors under the guarantee.
[56] At para. 70 of his affidavit, Mr. Bellman attests:
- I know [Intercap’s lawyer] to be an experienced, careful lawyer who would not confuse a registration with a security agreement. I also know the principals at Intercap to be sophisticated businessmen with decades of experience in financial dealings, including equity and debt transactions in public and private companies across many industries. I took this statement at face value. The only reasonable conclusion was that they had turned their minds to the issue, decided to accept the Extended Conversion Right in lieu of personal guarantees, but for their own reasons wished to maintain PPSA registrations that, at a minimum, Meretsky knew were of no practical purpose from a legal perspective and were no longer backed by a security agreement.
[57] So, according to Mr. Bellman, the novation clause released the guarantee and therefore released Intercap’s security interest over his assets. Yet, Intercap insisted on maintaining a PPSA registration against his personal assets despite the fact that it no longer had a security interest over them. Moreover, this was the only reasonable conclusion that he could draw about what Intercap must have intended.
[58] Under cross-examination, Mr. Bellman agreed that that the ultimatum to which he testified “security or conversion but not both” is nowhere in writing. When asked if Intercap understood the either/or proposition, Mr. Bellman answered:
Merkur never responded to my counterproposal other than to say that was not how they sought to proceed. [Emphasis added]
[59] On Mr. Bellman’s own evidence therefore, Intercap rejected the either/or ultimatum that is the basis for his various beliefs in what Intercap must have known as set out above.
[60] In addition, Mr. Bellman then agreed that his evidence about what Intercap must have known was pure supposition.
[61] The defendants rely on the cross-examination of Mr. Merkur for Intercap in which he said that he understood that it was the defendants’ aspirational goal to be released from their guarantee but Intercap did not agree. He said he had no recollection of the ultimatum attested to by Mr. Bellman.
[62] I do not see how this assists the defendants.
[63] Mr. Merkur also said that the guarantee was important to Intercap. But it refused to produce its underwriting file and in answers to questions about its goals in the transaction, Mr. Merkur did not mention the guarantee. From this, Mr. Zeitz submits that a trial may be required to determine if Intercap knew that the guarantee was released in the second amended and restated loan agreement.
Analysis
Interpreting the Words of the Guarantee and the Loan Agreements
[64] I repeat for convenience the key words in the last sentence of para. 2 of the guarantee agreed upon by the parties:
This shall be a continuing Guarantee and shall cover all liabilities of the Borrower to the Lender under the Amended and Restated Loan Agreement and all such liabilities incurred before or after the date hereof in connection with the Amended and Restated Loan Agreement....
[65] It is neither ambiguous nor uncertain. It says that the guarantee is a continuing guarantee covering both liabilities under the first amended and restated loan agreement dated August 27, 2018 and liabilities incurred after that date “in connection with” the first agreement.
[66] There is nothing ambiguous about a continuing guarantee that is limited to future liabilities that are incurred “in connection with” a specific agreement. It means strictly what it says. If Intercap and Capsule do other business or if, for any reason, Capsule owes money to Intercap in future that is not incurred in connection with the first amended and restated loan agreement, then the guarantee is not engaged and the guarantors have no liability to pay. But if future liabilities are incurred by Capsule in connection with the first amended and restated loan agreement, then the guarantors are liable and must pay.
[67] I then turn to the second amended and restated loan agreement. It is perfectly clear that the agreement is extending, amending, and restating the same debt as referred to in the first amended and restated loan agreement dated August 27, 2018. There is no fresh advance. The advances are specified as the prior advances. Moreover, the accrued interest is recognized as accrued and continuing. The securities hold ran from the first agreement and not this agreement.
[68] I find that the debt under the second amended and restated loan agreement is connected with the debt under the amended and restated loan agreement dated August 27, 2018. It is the very same advances. One does not need to go beyond the agreements to determine that question.
[69] The only argument that the guarantors have on the terms of the agreement is the claim that as a matter of law the novation clause terminated the prior loan agreement. It is on this basis that the guarantors say that their guarantee must have been discharged.
[70] Not only are they ignoring the continuing nature of the guarantee as discussed above, they are also wishing away para. 14 of the guarantee that says, in part:
The Lender, may from time to time (i) renew, terminate and otherwise vary any of the terms and conditions of any loans, advances, credit or financial accommodation made to the Borrower…without prejudice to or in any way limiting or lessening the liability of the Guarantors under this agreement and without obtaining the consent of or giving notice to the Guarantors. [Emphasis added]
[71] The guarantors’ argument is negated by the express words of the guarantee. They agreed to the opposite. As long as the new debt is connected to the old, the fact that the first agreement has terminated is not an answer to the guarantors’ liability under the guarantee.
The Guarantors’ Subjective Views are Inadmissible and Inconsistent with the Contemporaneous Record
[72] I agree with the defendants that I should and do assess the terms of the various loan documents to help assist understanding the terms of the guarantee. However, I disagree that their subjective views are admissible as part of the surrounding circumstances.
[73] Mr. Bellman’s personal view that:
a. he determined that the novation clause ended the guarantee; b. that Intercap must have known that it could have only one of the guarantee or the amended conversion right; and c. that the only reasonable conclusion is that Intercap decided to keep PPSA registrations that it knew to be of no effect,
are neither helpful nor admissible. Similarly, Mr. Mac Neil’s view that Intercap demanded continuing registration of its security interest, “just to complicate my personal financial dealings” is equally inadmissible. These personal beliefs do not form part of the objective factual matrix that is available for the interpretation of the meaning of the guarantee or the loan agreements.
[74] Even if they had been admissible, it would make no difference. The evidence of what actually happened is to the contrary. The guarantors asked for a release of the guarantee. Intercap said, “no”. The guarantors asked for registrations to be withdrawn until default. Intercap said “no”. The cross-examinations for Messrs. Bellman and Merkur are agreed on this. All that is left after Mr. Bellman’s examination is a supposition that is inconsistent with the documentary record and Mr. Merkur’s examination.
[75] Were it necessary for me to make a credibility finding, I am very comfortable making the finding of fact that the guarantors’ evidence lacks credibility. While Mr. Bellman postulates that the only reasonable conclusion from Intercap’s demand to maintain PPSA registrations is that it had a desire to keep them despite knowing that they had no effect, I can think of another, far more reasonable conclusion: As Capsule’s financial situation was weakening, Intercap refused to release the guarantee that it might need if the company failed. Instead, it kept the guarantee and ensured that its security interests against the guarantors’ personal assets remained perfected by registration.
[76] Maintaining perfection of valid security interests is much more consistent with the conduct of an experienced, careful corporate lawyer than demanding that registrations remain in place knowing that there were no underlying security interests to register. Registering notices with no actual underlying claim is tortious and is likely an offence under the PPSA.
[77] Moreover, it makes no sense that Messrs. Bellman and Mac Neil, who had expressed concerns about the effect of registrations on their personal credit, would agree to keep up fake PPSA registrations to their personal prejudice and for absolutely no discernable or articulated business reason. They did not even ask Intercap why it wanted to keep the registrations if they thought that they were not valid.
[78] Ignoring the admissions and documented communications that already undermined the guarantors’ story, it is not consistent with any business common sense. To the extent that any of the negotiations and oral evidence is admissible, the guarantors’ evidence lacks credibility. It is just an effort to revise history to try to create a basis to deny their personal liability under the guarantee.
[79] In all, the evidence is inadmissible. If it is admissible, it is undermined by Mr. Bellman’s cross-examination and it is inconsistent with the contemporaneous record and the words of the guarantee and the second amended and restated loan agreement. Finally, it makes no business sense on its face and is incredible.
Dhawan v Shails
[80] Finally, the defendants put great emphasis on a decision by Gomery J., sitting as a single judge of the Divisional Court, in Dhawan v Shails et al., 2018 ONSC 7116. Although superficially similar to the facts in this case, the differences are crucial and make all the difference.
[81] Mr. Dhawan advanced a loan of $50,000 to the Shails’ company so that it could bid on a government project. If the bid was rejected, the company agreed that it would return the $50,000 without interest. If the bid was accepted, Mr. Dhawan agreed that he would advance a further $250,000 to fund the project. Once the project was completed, the company would repay Mr. Dhawan’s money plus 25% of the profits.
[82] The loan agreement provided that the initial loan of $50,000 would be secured by a promissory note and guarantee from the Shails. If the bid succeeded so that the further loan of $250,000 was required, the agreement expressly required a further promissory note and guarantee for that advance.
[83] Mr. Dhawan advanced the first tranche of $50,000 under a promissory note and guarantee. The company won the bid. Mr. Dhawan advanced the next $250,000 but did not obtain a new promissory note or a further guarantee.
[84] Mr. Dhawan advanced a further $450,000 to the Shails’ company for the same and other projects. The company failed leaving Mr. Dhawan owed $110,000 for outstanding loans and another $133,000 for unpaid profit share.
[85] A Master held the Shails liable for these amounts under their initial guarantee. She held that it was a continuing guarantee despite wording limiting indebtedness to debts arising under or in connection with the initial $50,000 promissory note.
[86] On appeal, Gomery J. made two important findings. First, on the words of the guarantee, there was an inconsistency between the language calling it a continuing guarantee and the language limiting it to the specific promissory note. Finding the guarantee ambiguous because of its internal inconsistency, Gomery J. then found that the Master had erred by failing to consider the terms of the underlying agreements between the parties to help interpret the intended scope of the guarantee.
[87] Gomery J. looked at the loan agreements. She made note of the clause that contemplated a fresh guarantee would be provided for further advances. She found that this did not positively preclude the parties from entering into a continuing guarantee, but she relied on the rule of contra proferentem to interpret the agreement and guarantee against the drafter to eliminate that piece of ambiguity.
[88] I note first that I have already considered the factual matrix and the agreements as a whole as Gomery found necessary. Unlike the agreement before her, nothing in the agreements before me required a new guarantee be signed. Moreover, I have found that the second amended and restated loan agreement establishes the connection between the liability of Capsule and the first amended and restated loan agreement.
[89] Of greater significance however, is the wording of the guarantee in Dhawan. The last sentence of para. 2 of the Shails’ guarantee said:
For greater certainty, this shall be a continuing guarantee and shall cover all of the obligations now or hereafter existing and shall apply to and secure any ultimate balance due or remaining due to the Lender.
[90] This continuing guarantee sentence was unlimited. It seemed to make the Shails liable for all future indebtedness ever arising between their company and Mr. Dhawan. Gomery J. found ambiguity in trying to interpret whether the guarantee was limited to the promissory note as it said earlier or whether it was an unlimited continuing guarantee of all future indebtedness between the company and Mr. Dhawan. She saw there were two diametrically opposed interpretations of the same document possible on its words.
[91] That is not the situation before me. As explained above, the guarantors agreed to pay liabilities incurred after August 27, 2018 in connection with the first amended and restated loan agreement. Unlike Dhawan, the continuing guarantee is limited to match the scope of the guarantee stated earlier in the document. There is no internal inconsistency in the guarantee.
[92] Thanks to the parties negotiating and expressing their intent for this sentence expressly, I have an unambiguous sentence before me. My finding that the liability under the second amended and restated loan agreement is plainly in connection with the first amended and restated loan agreement determines the issue before me.
[93] The finding that the guarantee expressly contemplates that the termination of the initial loan agreement will not release the guarantors similarly answers the argument that the novation of the first agreement ended the guarantee. The termination will not release liability of the guarantors under a subsequent agreement provided that the liability under the later agreement is “in connection with” the liability guaranteed under prior agreement. I find that it is.
Outcome
[94] Judgment to issue against all of the defendants jointly and severally for $624,726.31.
[95] I heard no argument about post-judgment interest. I assume that it should accrue at the same interest rate as prejudgment interest under the loan agreement. If that is not admitted, I will deal with the point summarily at a case conference.
[96] The plaintiff may deliver cost submissions no later than March 8, 2021. The respondent may deliver cost submissions no later than March 15, 2021. Both sides shall deliver Costs Outlines. In addition, the parties may deliver copies of any offers to settle on which they rely. Submissions shall be no longer than three pages (not counting the Cost Outlines and offers to settle).
[97] All costs material is to be filed through the Civil Submissions Online portal and shall also be sent to me in searchable PDF format as an attachment to an email to my Judicial Assistant. No case law or statutory material is to be submitted. References to case law and statutory material, if any, shall be embedded in the parties’ submissions as hyperlinks to.
F.L. Myers J
Released: March 1, 2021
COURT FILE NO.: CV-20-00640432 DATE: 20210301 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: INTERCAP EQUITY INC. Plaintiff – and – MICHAEL J. BELLMAN, KENNETH D.F. MAC NEIL and CAPSULE MEDIA INC. Defendants REASONS FOR JUDGMENT FL Myers J Released: March 1, 2021
[1] I acknowledge that during the hearing, Mr. Zeitz changed the defendants’ position and submitted that a trial is required if I was not accepting his clients’ credibility. I disagree for the reasons set out above and below.
[2] It is actually the shares of Capsule’s parent company but nothing turns on this.
