DATE: 20030211

DOCKET: C38332

COURT OF APPEAL FOR ONTARIO

O’CONNOR A.C.J.O., WEILER and ROSENBERG JJ.A.

IN THE ESTATE OF John Keith McLennan, deceased

B E T W E E N:

KEVIN LEE McLENNAN

Bryan Finlay, Paul Perell and Marie-Andrée Vermette for the appellant Nelson Duncan Applicant (Respondent in Appeal) McLennan as Executor and Trustee and Testament under the Last Will of John F. McLennan

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HILARY McLENNAN, personally and as Executrix and Trustee of the Estate of John Keith McLennan, deceased, KEITH JOHN McLENNAN, JONATHAN McLENNAN a minor, GALEN McLENNAN a minor, and COLIN McLENNAN a minor

L. David Roebuck, John McCamus and Susan Heakes for the respondent The Trust Company of Bank of Montreal, Trustee

Respondents

(Respondents in Appeal)

Heard: December 13, 2002

IN THE MATTER OF AN APPEAL BY Nelson Duncan McLennan as Executor and Trustee under the Last Will and Testament of John F. McLennan, deceased from the Order of the Honourable Justice Dambrot of the Superior Court of Ontario dated October 17, 2001.

On appeal from the judgment of the Divisional Court (Farley, McCombs and Sedgwick JJ.) dated February 15, 2002.

ROSENBERG J.A.:

[1] This is an appeal from the decision of the Divisional Court upholding the decision of Dambrot J. that a collateral mortgage in favour of Royal Trust Corporation of Canada be discharged and requiring that the estate of John F. McLennan repay $5,743,643.71 to the estate of one of his sons, John K. McLennan. In these reasons, I will refer to John F. McLennan and John K. McLennan as McLennan Sr. and McLennan Jr. respectively. The appellant is Nelson Duncan McLennan, another son of McLennan Sr. and his executor and trustee. The other major players in this litigation are Kaptor Financial Inc. and its principal Eric Inspektor. In summary, the appellant alleges that Kaptor assigned to McLennan Sr. the collateral mortgage, the related promissory note, and McLennan Jr.’s personal guarantee. Dambrot J. found that McLennan Sr. failed to prove the assignment. He further found that even if there had been an assignment of the collateral mortgage, it did not secure any debt owing from McLennan Jr. to McLennan Sr. The Divisional Court accepted that there had probably been an assignment of the collateral mortgage, but agreed with Dambrot J.’s second finding and dismissed the appeal by McLennan Sr.’s estate. I agree with the Divisional Court and would dismiss the appeal with costs.

THE FACTS

[2] The facts are somewhat complex owing to the manner in which McLennan Jr. and McLennan Sr. conducted business and their deficient, incomplete and vague record keeping. The existence of the collateral mortgage and its purported assignment came to light when the solicitors for the McLennan Jr. estate attempted to sell property owned by McLennan Jr. personally at Dixie Road and Eglinton Avenue in Mississauga (the “Dixie/Eglinton property”). McLennan Jr. had granted a second collateral mortgage over the Dixie/Eglinton property to Royal Trust in the amount of $20 million. This collateral mortgage was registered in 1990 and secured the indebtedness of McLennan Jr.’s company, 726114 Ontario Limited (“726”), to Royal Trust. Other security for 726’s indebtedness included a promissory note executed by 726 and McLennan Jr.’s personal guarantee.

[3] McLennan Sr. lived in the Bahamas and from time to time had provided financial support to McLennan Jr. However, for reasons that are not entirely clear from the record, he did not do so directly. Rather, he provided security to Kaptor, which acted as McLennan Jr.’s personal banker. Thus, in 1993, Kaptor took an assignment from Royal Trust of the indebtedness owed by McLennan Jr.’s corporations, including 726 to Royal Trust. The amount of the indebtedness was $8.5 million (not $20 million). The security assigned by Royal Trust to Kaptor included the promissory note, McLennan Jr.’s personal guarantee, and the collateral mortgage. To finance this assignment, Kaptor borrowed money from the Israel Discount Bank of Canada, which was apparently[^1] secured by a letter of credit from the Israel Discount Bank of New York. The letter of credit was in turn secured by term deposits that had been pledged by McLennan Sr. McLennan Sr., however, took no security for his agreement to pledge these term deposits. In effect, in 1993, through Kaptor, McLennan Sr. provided $8.5 million to his son and did so without any security or, so far as can be ascertained, any written promise from McLennan Jr. to pay back the money. It was McLennan Sr.’s position that, since 1993, the collateral mortgage and debt were held beneficially by McLennan Sr. There is no contemporaneous document that confirms this position. Over the next few years, Kaptor provided loans to McLennan Jr. totaling $38.1 million through funds borrowed from various banks and secured by letters of credit also secured by McLellan Sr.’s pledge of term deposits.

[4] In November 1995, Kaptor issued a notice of default to 726 and McLennan Jr.’s other companies and demanded payment of the outstanding amounts. It also issued a notice of intent to enforce security against McLennan Jr. as guarantor of the indebtedness of 726. The corporate debt was not paid as required by December 4, 1995. Between February 23, 1996 and March 7, 1996, seven letters of credit totally $29.6 million were drawn upon.

[5] As to the 726 debt, it appears that on February 15, 1996, Kaptor was paid $8.5 million. While the evidence is not entirely clear, the preponderance of the evidence suggests that neither 726 nor McLennan Jr. paid $8.5 million to Kaptor. Rather, the $8.5 million letter of credit issued in favour of the Israel Discount Bank of Canada was drawn down on February 15, 1996. On March 23, 1996, a mutual release was entered into between Kaptor, 726 and McLennan Jr. That release records that the operating loan facility provided by Kaptor to McLennan Jr., and which stood at $8.5 million on February 29, 1996, “has been repaid or satisfied in full and the Borrowers have no further liability to the Lender”. Importantly, the release stated that all “security granted in support thereof shall be discharged and released by the Lenders”.

[6] Notwithstanding the March 28, 1996 release, the appellant claims that sometime in late January or early February of 1996, Kaptor had already assigned this same security to McLennan Sr. This assignment was never registered during McLennan Jr.’s lifetime and copies of the purported assignment agreement were only produced in October 2001 during an adjournment of the motion before Dambrot J.

[7] As I indicated, the question of the collateral mortgage and the other security came to light when the solicitors for McLennan Jr.’s estate attempted to sell the Dixie/Eglinton property. To effect the sale, the solicitors approached Kaptor for a discharge of the collateral mortgage. Kaptor refused and took the position that the collateral mortgage had been assigned to McLennan Sr., even though the records in the hands of the McLennan Jr. solicitors indicated that Kaptor had released the mortgage. To facilitate the sale, the solicitors prepared an assignment of the collateral mortgage to McLennan Sr., which was executed and registered on title in July 1999. The solicitors then sought (unsuccessfully) to obtain a discharge of the collateral mortgage from McLennan Sr., who was then still alive, although incompetent. McLennan Jr.’s estate trustee (the respondent in this appeal) brought a motion before Cullity J. Cullity J. made an order authorizing the sale of the Dixie/Eglinton property, and directing that the first mortgagee be paid out and the balance of the sale proceeds (approximately $5.7 million) be held in trust by McLennan Sr.’s solicitor. The motion before Dambrot J. was to include determination of whether McLennan Jr.’s estate or McLennan Sr. was entitled to these proceeds. McLennan Sr. passed away during an adjournment of the motion before Dambrot J. and so his estate now claims to be entitled to the funds.

THE REASONS OF DAMBROT J.

[8] McLennan Sr.’s estate’s claim to the $5.7 million turns on the assignment in 1996 from Kaptor to McLennan Sr. Despite the assignment, the promissory note always remained in Kaptor’s possession. Further, the motions judge found that the assignment agreement that surfaced in the course of the motion deals only with an assignment of the collateral mortgage, not the promissory note or McLennan Jr.’s personal guarantee. Two copies of the assignment agreement between Kaptor and McLennan Sr. were produced during the proceedings before the motions judge. There are significant differences between the two documents. The motions judge drew an adverse inference from the fact that Kaptor’s solicitor, who probably drew up the documents, did not provide evidence on the motion on behalf of the appellant. The original assignment agreement has never been produced. The motions judge noted a number of problems with the documents that led him to conclude:

This sorry evidence is simply incapable of satisfying me that the document is a true copy of the assignment agreement, or indeed that any such assignment agreement was actually executed.

[9] He went on to hold that the documents were probably fabrications, but in any event, concluded that the “terms of a finalized assignment agreement, if there was one, have not been proved”. In the alternative, the motions judge held that even if the assignment agreement was not a fabrication and had been executed, on its face it only purported to assign the collateral mortgage. He held that for this collateral mortgage to acquire any value, the mortgage must secure a debt owing from McLennan Jr. to McLennan Sr. This, in turn, depended on an assignment of the underlying loan agreement, including the promissory note and McLennan Jr.’s personal guarantee. The motions judge found that there was good reason to doubt that the promissory note was ever assigned but, in any event, since the promissory note was only a debt of 726, it was not sufficient to secure a debt between McLennan Jr. and McLennan Sr. This depended on McLennan Jr.’s personal guarantee and the motions judge found that this had not been assigned to McLennan Sr. The motions judge concluded that, in these circumstances, the collateral mortgage did not secure any debt owing to McLennan Sr. and, therefore the collateral mortgage was without value to McLennan Sr. Accordingly, the motions judge ordered that the collateral mortgage be discharged and that the sum of approximately $5.8 million held by McLennan Sr.’s solicitor be paid to the McLennan Jr. estate.

THE REASONS OF THE DIVISIONAL COURT

[10] The Divisional Court was not as skeptical as the motions judge about the authenticity of the assignment agreement. It held that while the motions judge’s concerns were valid, its review of the documents and accompanying correspondence persuaded it that the assignment agreement was not a fabrication and that it “appears to record a meeting of intentions”. The legal effect of the assignment agreement remained to be determined. The court concluded, as did the motions judge, that the assignment agreement only assigned the collateral mortgage and not McLennan Jr.’s personal guarantee. This personal guarantee was released by the March 28, 1996 mutual release and acknowledgment between Kaptor, 726 and McLennan Jr. The Divisional Court therefore dismissed the appeal.

ANALYSIS

[11] The motions judge and the Divisional Court both recognized, correctly, that the collateral mortgage secured a debt owing by 726 to Royal Trust and, by itself, did not create any debt. The lower courts also recognized that McLennan Sr. would acquire value from the collateral mortgage only if the related loan documents (including McLennan Jr.’s personal guarantee) were also assigned to McLennan Sr., thereby giving rise to a debt between McLennan Jr. and McLennan Sr.

[12] Mr. Finlay, on behalf of the appellant, took as his starting point the finding by the Divisional Court that the assignment agreement was not a fabrication and “appears to record a meeting of intentions”. He submitted that the parties must have intended that McLennan Sr. would receive some value for having provided $8.5 million to Kaptor in 1996. It would make no sense for Kaptor to have only assigned the collateral mortgage, which, by itself, was without value to McLennan Sr. Mr. Finlay submitted that the parties obviously intended that Kaptor transfer everything that Kaptor received from Royal Trust, including McLennan Jr.’s personal guarantee.

[13] The appellant is faced with findings of fact by the motions judge and the Divisional Court that the assignment agreement only assigned the collateral mortgage. He must therefore demonstrate that their findings were unreasonable; that they made a palpable and overriding error. I have not been persuaded that the motions judge or the Divisional Court made such an error.

[14] There a number of difficulties with the appellant’s position that the parties intended that McLennan Sr. would receive an assignment of the personal guarantee. While the appellant relies on several pieces of evidence to support his view of the transaction, that evidence is unsatisfactory. Further, while the appellant focuses on the assignment in 1996, this ignores the fact that the actual disposition occurred back in 1993, when McLennan Sr. provided security for the letter of credit that enabled Kaptor to purchase from Royal Trust the collateral mortgage, the promissory note and McLennan Jr.’s personal guarantee. In 1993, McLennan Sr. took no security from McLennan Jr. and, as I have indicated, there are no contemporary documents that record any intention in 1993 that McLennan Sr. expected to obtain anything from McLennan Jr. While Mr. Inspektor, Kaptor’s principal, later claimed that McLennan Sr. had a beneficial interest in the collateral mortgage, Mr. Inspektor’s conduct in November 1995 indicates that he intended to realize on the collateral mortgage and the personal guarantee. This seems inconsistent with his subsequent assertion that McLennan Sr. was the beneficial owner of the collateral mortgage.

[15] The Divisional Court placed considerable emphasis on the March 28, 1996 release. It said the following:

Inspektor’s vague evidence as to his view that son and Kaptor did not intend to discharge the collateral mortgage when they executed the mutual release, as it had already been committed to father, does not deal with the personal guarantee of son.

[16] In my view, it was reasonably open to the motions judge and the Divisional Court to take the view that, in view of the unreliability of the evidence provided by the appellant, the lack of documentation and, particularly the wording of the March 28, 1996 release, the parties did not intend to assign the personal guarantee to McLennan Sr., even if, as found by the Divisional Court, they did intend to assign the collateral mortgage to him. Mr. Inspektor was the only person with actual knowledge of the parties’ intention either in 1993 and 1996 and his evidence is wholly unsatisfactory. Kaptor’s lawyer drafted the documents and might have shed light on the transaction but the appellant did not provide any evidence from him. The other evidence relied upon by the appellant is mostly hearsay and mostly unreliable. These were sophisticated parties dealing with large amounts of money, acting with the advice of solicitors. The motions judge and the Divisional Court found that the assignment agreement dealt only with an assignment of the collateral mortgage and not an assignment of the personal guarantee. It seems to me that the courts were entitled to find that the parties did not intend to assign the personal guarantee and intended to deal with, and dealt only with, the collateral mortgage, as recorded in the assignment agreement.

[17] Mr. Finlay submits that an interpretation of the assignment agreement that assigns only the collateral mortgage results in a commercial absurdity—that in exchange for $8.5 million McLennan Sr. received only a worthless mortgage. But this was no ordinary commercial transaction. This was one of several transactions involving family members in which very large sums of money were dealt with, without the father taking any kind of security from the son. As the respondent points out, despite the vast sums of money that McLennan Sr. put at risk to support Kaptor’s loans to McLennan Jr.’s companies, there is no evidence that McLennan Sr. ever took security, or ever intended to take security. The commercial absurdity argument also fails to account for the fact that the $8.5 million had been pledged by McLennan Sr. back in 1993 to support the letter of credit. These were unusual transactions but I cannot say that the Divisional Court’s and motions judge’s view of them was unreasonable.

[18] The appellant made other submissions concerning subrogation and equitable assignment. However, as Mr. Finlay fairly conceded, those arguments depended on a finding by this court that the parties intended an assignment of the personal guarantee to McLennan Sr. Since I am not prepared to make that finding, it is unnecessary to deal with those submissions.

DISPOSITION

[19] Accordingly, I would dismiss the appeal with costs. The respondent may file brief written submissions with respect to costs within 21 days from the release of these reasons. The appellant may file submissions in response within 14 days.

Signed: “M. Rosenberg J.A.”

“I agree Dennis O’Connor A.C.J.O.”

“I agree K.M. Weiler J.A.”

RELEASED: “DO’C” FEBRUARY 11, 2003

[^1]: I say “apparently” because this letter of credit has never been produced and the respondent suggests that the letter of credit was actually issued by CIBC and Trust Company (Cayman) Limited.