COURT OF APPEAL FOR ONTARIO
CITATION: Turfpro Investments Inc. v. Heinrichs, 2014 ONCA 502
DATE: 20140630
DOCKET: C57593
Hoy A.C.J.O., Cronk and Pepall JJ.A.
BETWEEN
Turfpro Investments Inc.
Plaintiff (Respondent)
and
Vern Heinrichs and Victor Heinrichs
Defendants (Appellants)
Irwin A. Duncan and Michael A. van Bodegom, for the appellants
Paul D. Amey, for the respondent
Heard: June 9, 2014
On appeal from the judgment of Justice Donald J. Gordon of the Superior Court of Justice, dated August 9, 2013, reported at 2013 ONSC 5151.
Pepall J.A.:
Introduction
[1] The appellants, Victor and Vern Heinrichs, are brothers. Victor was the architect for a retirement residence project being developed by Rose of Sharon (Ontario) Retirement Community (“Rose”) and Vern was an officer and director of a company that was providing deposit loans to investors in the project. The two appellants guaranteed a loan made by the respondent, Turfpro Investments Inc., to Rose that was due in 2007. The respondent demanded payment on the guarantee in 2012, subsequently sued the appellants and then brought a motion for summary judgment.
[2] Before the motion judge, the appellants did not challenge the validity of the guarantee or the amount owing. The main thrust of their argument was that the terms of the loan agreement were materially altered without their consent and therefore they were released from liability under the guarantee. The appellants also argued that the action was premature and relied on the additional defences of accord and satisfaction and laches. The motion judge disagreed with the appellants’ position and awarded judgment in favour of the respondent in the amount of $994,728.92 plus interest. The appellants appeal from that judgment.
Background Facts
[3] Rose entered into a loan agreement with the respondent dated May 4, 2006, for the advance of $500,000 in standby funds to be used for the construction of retirement residences by Rose. The loan agreement provided that:
the standby funds were available for draw down by Rose until September 1, 2007;
the debt was due and payable on October 1, 2007;
Rose granted the respondent an irrevocable option to purchase a specific unit in the retirement development at a specified price;
until the standby funds had been repaid with interest, Rose would not be entitled to a discharge of either of two mortgages held by the respondent on property owned by Rose; and
the appellants agreed to guarantee repayment of the standby debt plus interest and to observe the covenants, terms and conditions of the loan agreement. In the event of default by Rose, the appellants, upon demand, would pay any amounts in default.
[4] The language of the guarantee was therefore very sparse and did not contain any provisions that expressly allowed for time extensions for repayment, renewal or forbearance.
[5] The respondent advanced the standby funds to Rose between May and September 2006. Rose never made any payments on the standby loan.
[6] By court order dated September 27, 2011, Rose was placed into receivership. By that date, significant encumbrances had been registered against title to the project.
[7] The respondent demanded payment from the appellants on April 13 and July 6, 2012. As of April 1, 2012, the debt amounted to $994,728.92. The respondent commenced an action against the appellants on August 16, 2012, and subsequently brought a motion for summary judgment.
Motion Judge’s Decision
[8] The summary judgment motion was heard after this court’s decision in Combined Air Mechanical Services v. Flesch, 2011 ONCA 764, 108 O.R. (3d) 1 but before the Supreme Court’s decision in Hryniak v. Mauldin, 2014 SCC 7. Accordingly, the motion judge applied the full appreciation test from Combined Air. He did not utilize any of the enhanced powers available on a summary judgment motion under rule 20.04(2.1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194: weighing the evidence, evaluating the credibility of a deponent, or drawing any reasonable inferences from the evidence. The motion judge observed that this was a documents case and there was no real conflict in the evidence. He was satisfied that it was an appropriate case for summary judgment.
[9] First, he briefly addressed whether there was a material alteration of the terms of the loan agreement between Rose and the respondent. He described his understanding of the applicable legal principles and determined that there was no material alteration. There was no formal document converting the loan to a demand facility; the parties knew that the standby debt continued to exist; the purported forbearance was contemplated by all parties and did not prejudice the appellants; and there was a clear benefit to them as a result of the respondent deferring collection and enabling completion of the construction project. As such, the appellants were not excused from liability on that basis. Furthermore, even if there were a forbearance agreement to not demand until completion of construction, this had been accomplished and the standby debt was due. Accordingly, the guarantors were not released.
[10] The motion judge also considered the appellants’ defence of accord and satisfaction and decided that it, too, was unavailable to the appellants. The option to purchase the unit was never exercised and the respondent did not accept the two units in the project in satisfaction of the loan.
[11] Lastly, he addressed the defence of laches. He stated that such a defence required proof of delay and prejudice but concluded that there was no prejudice. He therefore granted summary judgment in favour of the respondent.
Grounds of Appeal
(1) Material Alterations
[12] The appellants submit that the motion judge erred in concluding that there were no material alterations to the terms of the loan agreement. They claim that four amendments were made to the loan agreement by the respondent and Rose without the appellants’ consent:
(i) the short-term fixed term loan payable on October 1, 2007, was converted into a demand loan;
(ii) the respondent and Rose agreed that the respondent would not demand payment of the standby loan while the construction project was ongoing (the “forbearance agreement”);
(iii) two different units were substituted for the one unit that was subject to the respondent’s option to purchase and which was specified in the loan agreement; and
(iv) the two mortgages referred to in the loan agreement were subordinated to a large new first mortgage.
(a) Applicable Legal Principles
[13] A guarantor will be released from liability where the creditor and the principal debtor agree to a material alteration of the loan agreement without the consent of the guarantor: Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415, at para. 2. In that decision, Cory J. adopted the oft-quoted description of the rule by Cotton L.J. from Holme v. Brunskill (1878), 3 Q.B.D. 495 (C.A.), at pp. 505-6:
The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court… will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.
[14] This court recently addressed the material alteration test in GMAC Leaseco Corporation v. Jaroszynski, 2013 ONCA 765, 118 O.R. (3d) 264, at paras. 76 - 77:
In Manulife at para. 10, Cory J. approves of Lord Westbury’s formulation in Blest v. Brown (1862), 4 De G.F. & J. 367, at p. 376: apart from any express stipulation to the contrary, a surety will be discharged where the contract has been changed, without his or her consent, unless the change is in respect of a matter that cannot “plainly be seen without inquiry to be unsubstantial or necessarily beneficial to the surety”.
Or, as this court put it in Royal Bank of Canada v. Bruce Industrial Sales Limited (1998), 1998 CanLII 3050 (ON CA), 40 O.R. (3d) 307, at p. 320, relying on Manulife, “alterations to the principal contract will be held to be material unless they are plainly unsubstantial or necessarily beneficial to the guarantor.”
[15] The basis for the rule relating to material alterations arises from the guarantor’s agreement to guarantee the risk arising from the contract between the creditor and the principal debtor. Fairness dictates that this risk not be altered unilaterally by the parties to that contract. Accordingly, a guarantor will be relieved from liability unless an exception applies.
[16] Applicable jurisprudence appears to recognize four exceptions to the rule. First, relief will be denied if the alteration is plainly unsubstantial. Secondly, relief will also be denied if the alteration is necessarily beneficial to the guarantor; that is, it cannot be prejudicial to the guarantor or otherwise than beneficial to the guarantor.
[17] An example of a material alteration that may discharge a guarantor from liability is described by Kevin P. McGuinness in The Law of Guarantee, 3d ed. (Markham, Ont.: LexisNexis, 2013) at para. 11.265:
A binding agreement made by a creditor with the principal debtor to allow the principal further time in which to pay or perform the guaranteed debt or obligation will discharge the surety from liability, where the length of time so granted is not trivial. This principle of law is of great antiquity. Two justifications may be advanced for the rule. The first is that any binding agreement to extend time is prejudicial to the surety, since the effect of such an agreement is to prevent the surety from claiming against the principal, in the event that the creditor calls upon the surety to pay or perform at the time originally contemplated. If the surety were able to so claim, then the practical effect would be to nullify the agreement between the principal and creditor as to the extension of time. If on the other hand the surety were precluded from claiming against the principal by virtue of the extension of time, then the principal would be in a better position than the debtor (which would be inconsistent with the secondary nature of the surety’s liability). [Citations omitted.]
[18] Thirdly, as noted by Cory J. in Manulife, at para. 4, a guarantor may contract out of protections provided by the common law or equity. For instance, typically, an institutional lender’s standard form guarantee will contain provisions allowing for time extensions for repayment, renewal, and forbearance.
[19] Lastly, alteration of the risk assumed by the guarantor may be addressed by obtaining a guarantor’s consent to the proposed or actual alteration.
(b) Analysis
[20] In my view, in addressing the issue of material alteration, the motion judge failed to consider the factual matrix underlying the arrangements between the respondent and Rose and also failed to apply the aforementioned legal principles.
[21] First, the motion judge failed to consider the totality of the evidence that supported the appellants’ position that there were material alterations to the loan agreement with respect to the repayment date and the alleged forbearance agreement. This evidence included the following:
The loan was due on October 1, 2007 but demand was not made until more than 4.5 years later. No payments were ever made on the loan.
Rose’s financial statement as at October 31, 2010, recorded the standby loan but did not describe it as being in default.[^1] This suggests that the due date of October 1, 2007, was extended.
In letters dated March 9, 2009, and February 8, 2010, on Rose’s letterhead, signed by its CEO and authored by Rose’s auditor, confirmation of details relating to the standby loan was requested of the respondent. This included a request for confirmation from the respondent that the “[b]alance of principal [is] due on demand however there is no intent by [the respondent] to demand payment prior to completion of the construction project.” In response, both letters were acknowledged by the principal of the respondent, William Campbell, by his signature.
Mr. Campbell admitted in evidence that he had “committed to Rose” that no steps would be taken to enforce collection of the standby loan prior to completion of the construction project.
[22] Having failed to consider the totality of the evidence, the motion judge was not persuaded that the loan agreement was changed.
[23] As an alternative basis for his decision, the motion judge focused his attention on whether the alteration fell within the second exception: was the alteration necessarily beneficial to the guarantor; that is, could it be prejudicial to the guarantor or otherwise than beneficial to the guarantor? However, the motion judge applied the incorrect test. He considered that the parties had knowledge of the continuation of the standby debt and that there was “a clear benefit” to the appellants that arose from any forbearance by the respondent.
[24] Knowledge is not determinative and the motion judge failed to decide whether the alterations were necessarily beneficial or otherwise than beneficial to the appellants. His finding that there was no prejudice was infected with an absence of any consideration of the impact of the potential for prejudice arising from a change in, or extension of, the due date in the loan agreement. This included the passage of more than 4.5 years and the possible expiry of limitation periods, the increase in the quantum of the underlying indebtedness, and prejudicial events such as the receivership that occurred in the period between the due date in the loan agreement and the date of demand against Rose.
[25] In my view, the motion judge erred in concluding that there was no genuine issue requiring a trial on the material alterations relied upon by the appellant and described in para. 12 (i) and (ii) of these reasons which relate to the repayment date and the alleged forbearance agreement.
[26] The same does not hold true for the remaining material alteration allegations. Dealing firstly with the substitution of the two units for the one originally described in the loan agreement, based on the record before him, it was open to the motion judge to conclude that this did not constitute a material alteration. The unit was not pledged as security. In August 2011, the respondent and Rose agreed to replace the unit described in the loan agreement with two units. There was evidence that supported a finding that the two units had a value equivalent to that of the original unit described in the loan agreement.
[27] Additionally the appellants allege that there was a material alteration in that the two mortgages described in the loan agreement were postponed by the respondent in favour of a construction mortgage in the amount of approximately $17 million obtained by Rose from a third party. I would not give effect to this argument as it was raised for the first time on appeal.
[28] Lastly, I note that on appeal, counsel agreed that the issue of consent was not argued before the motion judge. While the motion judge stated that the appellants were aware of most matters including financial matters, delay in construction and cash flow problems and that the purported forbearance was contemplated by all parties, the motion judge did not address whether the appellants had actually consented to any change in the terms of the loan agreement.
(2) Prematurity
[29] The appellants argued that the motion judge should have accepted their submission that the respondent’s action was premature because the respondent had agreed to forbear from enforcement until the completion of the construction project. The appellants did not press this argument in oral submissions but in any event, I would not give effect to it. There was ample evidence to support the motion judge’s conclusion that construction had been completed and that the action was not premature.
(3) Accord and Satisfaction
[30] On the issue of accord and satisfaction, there was no evidence that the respondent ever accepted any units in satisfaction of the debt owing under the loan agreement with Rose. As mentioned, the original unit was not pledged as security and in any event, the respondent never exercised the option to purchase. The motion judge correctly concluded that the defence of accord and satisfaction did not relieve the appellants of liability under the guarantee.
(4) Laches
[31] Lastly, the respondent did not argue that laches was unavailable as a legal defence. Assuming without deciding that it is, I am of the view that there is a genuine issue requiring a trial with respect to the defence of laches and, more particularly its requisite component of prejudice. Apart from a blanket finding of no prejudice, the motion judge did not assess the evidence of potential prejudice found in the record. This included the significant time that had elapsed between the due date of the standby loan and demand for payment from the guarantors and the ramifications associated with that delay. In my view, there is a genuine issue requiring a trial on this issue as well.
Disposition
[32] In conclusion, I would allow the appeal, set aside the summary judgment and refer the action to trial on the defences of the material alterations described in para. 12 (i) and (ii) of these reasons and on laches.
[33] I would order the respondent to pay the appellants’ costs of the appeal fixed in the amount of $20,000 and their costs below fixed in the amount of $30,000, both inclusive of all disbursements and applicable tax.
Released:
“JUN 30 2014” “S.E. Pepall J.A.”
“AH” “I agree Alexandra Hoy A.C.J.O.”
“I agree E.A. Cronk J.A.”
[^1]: No other financial statements were filed in evidence.