TD Canada Trust v. B & B Enterprises (London) Ltd., 2008 ONCA 441

DATE: 20080605

DOCKET: C48021

COURT OF APPEAL FOR ONTARIO

O’CONNOR A.C.J.O., DOHERTY and GILLESE JJ.A.

BETWEEN:

TD CANADA TRUST

Plaintiff (Respondent)

and

B & B ENTERPRISES (LONDON) LTD. and BRIAN GERRARD BERETTA also known as BRIAN G. BARETTA also known as BRIAN BERETTA

Defendant (Appellant)

Andrew C. Murray for the appellant

Ian K. Latimer for the respondent

Heard: May 21, 2008

On appeal from the judgment of Justice D. Corbett of the Superior Court of Justice, dated October 11, 2007.

DOHERTY J.A.:

[1] The relevant facts of this case are straightforward. In April 2000, B & B Enterprises (London) Ltd. entered into a credit arrangement with TD Canada Trust. The agreement provided for a $232,000 revolving line of credit. The loan was payable on demand by TD. Brian Beretta and Matthew Bralovich, the two principals of B & B, unconditionally guaranteed the line of credit advanced by TD to B & B.

[2] Mr. Beretta resigned as a director of B & B in January 2005. He did not have any further involvement in the day-to-day operation of the company, but he remained a shareholder. Beretta and Bralovich discussed removing Beretta as a personal guarantor on B & B’s line of credit, but no steps were taken to do so. Beretta remained on the guarantee.

[3] In about March 2005, TD became concerned about the financial stability of B & B’s business and, more specifically, the status of its credit arrangement with B & B. TD pressed Mr. Bralovich to reduce the debt. In June 2005, TD formally reduced the line of credit to $200,000.

[4] B & B continued to have financial difficulties, and TD remained concerned about the status of the loan. By letter dated July 22, 2005, TD advised B & B that:

• As of August 17, 2005, the revolving line of credit would be “converted” to a non-revolving demand loan;

• The interest rate would remain the same; and

• The loan would be amortized over forty-eight months. B & B would be required to make monthly payments of $4,200 plus interest beginning in September 2005.

[5] In the same letter, TD advised B & B that if it was not satisfied with the restructuring, it could repay the loan in its entirety within thirty days.

[6] B & B accepted the restructuring terms proposed in the July 22, 2005 letter. At that time, Mr. Beretta, who was no longer involved in the operation of B & B, was not aware of the bank’s position, the proposed terms for restructuring the loan, or B & B’s acceptance of those terms. Mr. Beretta became aware that the loan had been restructured in the fall of 2005. Over the next year, Mr. Beretta had various discussions with the bank in which he indicated he might be prepared to pay off B & B’s indebtedness and take an assignment of TD’s security. These discussions did not result in any change in the loan arrangement or the guarantees.

[7] B & B made the payments required under the restructuring until December 2006. Mr. Bralovich also made a substantial payment against the loan. These payments significantly reduced B & B’s indebtedness to TD. B & B failed to make the January 2007 payment. TD demanded payment of the outstanding amount ($70,645.52 plus interest and legal fees) within thirty days.

[8] Repayment was not made, and in March 2007, TD sued B & B on the debt and Mr. Beretta on the guarantee. Mr. Bralovich, the other guarantor, had declared bankruptcy in 2006. B & B did not defend the action. Mr. Beretta filed a statement of defence.

[9] In June 2007, TD moved for default judgment against B & B and summary judgment against Mr. Beretta. The motion judge, Corbett J., granted default judgment against B & B. That order has not been appealed. Corbett J. also granted summary judgment against Mr. Beretta, accepting TD’s contention that there was no genuine issue for trial in respect of Mr. Beretta’s liability under the guarantee. Mr. Beretta appealed that order.

[10] Mr. Beretta was not represented on the summary judgment motion. He was ably represented by counsel on this appeal. Not surprisingly, the arguments made in this court are somewhat different than those made by Mr. Beretta on the motion. I will address only the arguments made in this court.

A. The Failure to Give Mr. Beretta Notice of the Restructuring of the Loan in July 2005

[11] Counsel for Mr. Beretta submits that TD unilaterally, and without notice to Mr. Beretta, varied the terms of the credit agreement with B & B in July 2005 when it restructured the credit arrangement and changed it from a revolving line of credit to a term loan. Counsel submits that whether Mr. Beretta is regarded as a principal debtor or a guarantor, the variation of material terms of the loan without notice to him relieved him of any liability under the guarantee.

[12] Counsel submits that if Mr. Beretta was a principal debtor, he was entitled to notice of the amendments to the credit agreement, and that since TD did not provide such notice, he is no longer liable under that agreement. In the alternative, counsel submits that if Mr. Beretta was a guarantor only, he was entitled in equity to notice of any material variation in the credit agreement between TD and B & B, unless in his guarantee he expressly gave up the right to notice. In a careful review of the terms of the guarantee, counsel points out that while it gives TD broad authorization to unilaterally alter the credit arrangements with B & B without affecting the guarantee, it does not speak to the issue of notice. Counsel contends that even if TD could unilaterally alter the terms of the loan without affecting the validity of the guarantee, it could not do so without notice to Mr. Beretta absent an express agreement that no notice was required.

[13] I cannot accept the basic premise of these submissions. I do not think that TD’s restructuring of the loan in July 2005 altered the terms of the credit arrangement between itself and B & B. Rather, I think the restructuring was an enforcement measure that was clearly contemplated by the terms of the credit agreement. I acknowledge that some of the language used by the TD officials in July 2005 (“restructuring”, “conversion”) could suggest new terms. My analysis, however, turns on the language used in the credit agreement and the guarantee.

[14] As the appellant’s arguments depend on the contention that the bank materially altered the terms of the credit agreement with B & B, it is appropriate to begin with an examination of those terms. The credit agreement provided for an operating line of credit in the amount of $232,000. The credit facility could be terminated at any time by TD. Paragraph 8 of the credit agreement set out the various conditions giving rise to a default by B & B. These included “an adverse change … in the Customer’s [B & B] financial condition …” and TD’s reasonable belief that “any of the security granted by the Customer is in jeopardy”. B & B’s inventory was part of the security for the loan.

[15] Paragraph 9 of the agreement speaks to the remedies or enforcement mechanisms available to TD upon default. These include:

If a default occurs, Canada Trust may demand repayment of all or any part of the indebtedness, either as soon as it occurs or at any other time Canada Trust chooses (it is not required to give any notice to the customer or grant any grace period or cure time). If Canada Trust demands repayment of any part of the indebtedness, it becomes due and payable immediately. [Emphasis added.]

[16] Paragraph 2.1 of the credit agreement is also relevant. It reads in part:

The fact that this Agreement provides for events of default, periodic required repayment and rights of acceleration in no way changes the demand nature of these Credit Facilities.

[17] The steps taken by TD in July 2005 were in response to a default by B & B under the terms of the agreement and amounted to a demand for the repayment of the credit facility by B & B. TD gave B & B a choice – it could repay the debt over time on the schedule set out by TD or it could repay the entire debt within thirty days. TD’s decisions not to advance further funds and to make the demand in the form that it did were clearly envisioned by the terms of the credit agreement. Resort to the remedial provisions available under the agreement cannot amount to a material change of the terms of the agreement.

[18] Nor can Mr. Beretta complain that he was unaware of the terms of the agreement. He acknowledged the following in para. 2 of his guarantee.

The Guarantor [Beretta] acknowledges that the obligations of the Customer which make up the Guaranteed Indebtedness are described in, and governed by, the provisions of the Credit Agreement.

[19] Consequently, Mr. Beretta knew that TD could, if it chose to do so, proceed exactly as it did upon B & B’s default. He cannot now say that in doing so TD altered the terms of the credit arrangement and was required to give him notice of that alteration.

[20] Although Mr. Beretta, acting personally before Corbett J., understandably did not make the specific argument I am now addressing, Corbett J. did refer to the nature of the credit agreement in the course of addressing an issue that arose on the motion. His reading of that agreement is consistent with mine. He observed:

However, in reading s. 9 of the Loan Agreement [the remedy provision], it is clear that Canada Trust may demand repayment of all or any part of the indebtedness as soon as it occurs, or at any time later, and that the demand for refinancing was not a demand to change the terms of the loan agreement, but rather a demand that the indebtedness be paid down. [Emphasis added.]

[21] As I am satisfied the appellant’s submission fails because TD’s actions in July 2005 cannot be characterized as altering the material terms of the loan, it is unnecessary for me to address the arguments that the failure to give Mr. Beretta, either as principal debtor or guarantor, notice of the alterations in the terms of the agreement rendered the guarantee unenforceable against him. I would, however, make one observation. On a plain reading of the documents, Mr. Beretta was a guarantor of the loan and not a principal debtor.

B. Did TD Ignore Its Duty to Protect Its Security Under the Credit Agreement?

[22] B & B’s credit facility was secured against its inventory. Mr. Beretta argued that in the months prior to B & B’s default in January 2007, he repeatedly expressed concerns to TD about the operation of B & B’s business. Counsel submits that there was evidence before the motion judge that TD had acted negligently in failing to take steps to preserve the value of the inventory, thereby increasing Mr. Beretta’s indebtedness under the guarantee. Counsel submits that this evidence raised a triable issue.

[23] A similar argument was made before the motion judge. He rejected the submission for two reasons. First, he pointed to s. 5 of the guarantee. It reads:

This Guarantee is unconditional. The Guarantor’s obligations are independent of the Customer’s obligations and Canada Trust may demand payment from the Guarantor even if Canada Trust does not do any of the following things.

• Protect any security interest; [or]

• Proceed against any security.

[24] TD did not move against the security interest that it had in the inventory. I agree with Corbett J. that, “section 5 of the guarantee agreement is a complete answer to this argument.”

[25] Corbett J. also rejected the argument on the basis that TD was never in a position to control the inventory before it made its demand. TD did not appoint a receiver, and the B & B management remained in control of the company until the demand was made. As Corbett J. observed:

Duties to manage or supervise the Company and its assets simply do not arise for the bank in this circumstance.

[26] Once again, I agree with the analysis of Corbett J. This ground of appeal cannot succeed.

[27] I would dismiss the appeal. Under the terms of the guarantee, TD is entitled to costs on a substantial indemnity basis. Counsel for TD proposes costs in the amount of $4,681.25, inclusive of disbursements and GST. I would grant costs in that amount.

RELEASED: “DOC” “JUN 05 2008”

“Doherty J.A.”

“I agree D. O’Connor A.C.J.O.”

“I agree E.E. Gillese J.A.”