Court of Appeal for Ontario

Date: November 7, 2017 Docket: C62761

Judges: Laskin, Lauwers and Brown JJ.A.

Between

1162251 Ontario Limited Plaintiff (Respondent/Appellant by way of cross-appeal)

and

833960 Ontario Limited carrying on business as M-Plan Consulting Defendant (Appellant/Respondent by way of cross-appeal)

Counsel

Ronald G. Slaght and Patrick Healy, for the appellant

Sean Zeitz, for the respondent

Heard: May 4, 2017

On appeal from the judgment of Justice Paul M. Perell of the Superior Court of Justice, dated September 8, 2016.

Laskin J.A.:

A. Overview

[1] The appellant 833960 Ontario Limited ("M-Plan") loaned $500,000 to a company called Danbury Sales. Years later the respondent 1162251 Ontario Limited ("116") – whose shareholders are the wives of the two principals of Danbury Sales – guaranteed repayment of the loan. M-Plan sued to enforce the Guarantee but its action was dismissed by summary judgment. The main question on the appeal is whether the motion judge erred by holding that M-Plan's loan had been discharged, even before 116 gave the Guarantee, because the loan had been converted into a beneficial interest in another company, Danbury Financial.

[2] Jeffrey Shankman and David Ordon had been close friends for over 50 years. Shankman is a litigation lawyer; Ordon is the majority owner of Danbury Sales, which is a successful appraiser, auctioneer, and liquidator. Over the years Shankman and Ordon did business together many times.

[3] In 2005, Ordon, his minority partner Barry Lockyer, and a third man, Frank Spain, started a new business, Danbury Financial, which was to be an asset-based lender. Shankman wanted to acquire an ownership interest in Danbury Financial. Shankman's company, M-Plan, loaned Danbury Sales $500,000, which Danbury Sales then used to make a shareholder's loan of $750,000 to Danbury Financial. The motion judge found as a fact – at least three times in his lengthy reasons – that the $500,000 advanced by M-Plan "would be a loan to Danbury Sales until shares in Danbury Financial were delivered to [M-Plan] and registered on the books of the company." In other words, M-Plan was to receive registered shares in Danbury Financial as consideration for its loan to Danbury Sales. Otherwise, the loan would remain unpaid.

[4] M-Plan never obtained registered shares on the books of Danbury Financial, principally because Spain did not want any other shareholders in Danbury Financial. And, under the Shareholder Agreement between Spain's company Invar and Danbury Sales, Invar had a veto over the transfer of shares to another party.

[5] In 2010, Danbury Financial began to fail, after its principal lender refused to renew its line of credit. M-Plan, having tried without success to obtain registered shares in Danbury Financial, then pressed Danbury Sales for security for its loan.

[6] In June 2010, amidst Danbury Financial's difficulties, Danbury Sales entered into a Trust Agreement, which provided M-Plan with a beneficial interest in a portion of Danbury Sales' shares in Danbury Financial. The 2010 Trust Agreement lies at the heart of this appeal and, as I will discuss, is the basis for the motion judge's decision.

[7] After the 2010 Trust Agreement was signed and Danbury Financial had failed, M-Plan began to demand repayment of its loan. In 2013, in exchange for M-Plan's agreement to forbear from suing for recovery of its loan, 116 agreed to guarantee Danbury Sales' debt to M-Plan and to enter into a General Security Agreement with M-Plan. David Ordon and Barry Lockyer are the sole officers and directors of 116, and their wives Martine Ordon and Sonia Lockyer are the sole shareholders.

[8] 116 did not pay under its Guarantee. Instead it started an action against M-Plan and brought a motion for summary judgment for a declaration that the Guarantee and the General Security Agreement were unenforceable because the 2010 Trust Agreement had discharged Danbury Sales' debt to M-Plan. In turn, M-Plan started an action to enforce its Guarantee and brought a cross-motion for summary judgment.

[9] The motion judge found in favour of 116. In apparent contradiction to his finding that M-Plan was to obtain registered shares in Danbury Financial as consideration for its $500,000 loan, the motion judge concluded that the 2010 Trust Agreement discharged the loan by providing M-Plan with a beneficial interest in shares of Danbury Financial. Therefore M-Plan "had obtained what it paid for." The motion judge also concluded that when the parties entered into the Guarantee and General Security agreement in 2013, they "were oblivious" to the fact Danbury Sales was no longer indebted to M-Plan.

[10] On its appeal, M-Plan submits that the motion judge's conclusions contradict his own principal finding, misconstrue the purpose and effect of the 2010 Trust Agreement, do not reflect the reasonable intentions of the parties, and produce a commercially absurd result. In response, 116 submits that the motion judge's conclusions rest on findings of fact and inferences from the evidence supported by the narrative put forward by both parties, and thus appellate intervention is not justified.

[11] Alternatively, 116 cross-appeals and argues that its Guarantee and General Security Agreement are unenforceable because M-Plan knew that both of 116's shareholders had refused to consent to either document. In response to the cross-appeal, M-Plan points out that the motion judge considered this argument in his reasons, and concluded that the General Security Agreement and Guarantee were enforceable under Ontario's Business Corporations Act. M-Plan asks this court to uphold that conclusion.

[12] Although this appeal and cross-appeal turn mainly on the 2010 Trust Agreement, the Guarantee, and the General Security Agreement, the appeal also raises a subsidiary issue. In 2011 and 2012, Danbury Financial made three payments totalling $130,000 to M-Plan. The motion judge found that Danbury Financial made these three payments "to reduce the perceived but mistaken indebtedness of its majority shareholder Danbury Sales to [M-Plan]." M-Plan submits that the payments were made to reduce Danbury Financial's debt on a different transaction. 116 submits that the motion judge's finding was reasonable and that we should not interfere with it.

[13] Broadly stated then, the three issues on the appeal and the cross-appeal are the following:

1. Did the motion judge err in holding that the 2010 Trust Agreement discharged M-Plan's $500,000 loan to Danbury Sales?

2. If the answer to question 1 is yes, are the Guarantee and General Security Agreement unenforceable because M-Plan knew that neither shareholder of 116 consented to either document?

3. Did the motion judge commit a palpable and overriding error in finding that Danbury Financial mistakenly paid M-Plan $130,000 to reduce Danbury Sales' indebtedness to M-Plan?

[14] I would answer the questions raised by these three issues "yes", "no" and "yes". Thus, I would allow M-Plan's appeal and dismiss 116's cross-appeal.

B. The Issues

(1) Did the motion judge err in holding that the 2010 Trust Agreement discharged M-Plan's $500,000 loan to Danbury Sales?

Factual Background

[15] To put this issue and the parties' positions in context, I will review the following:

• The incorporation of Danbury Financial and the Shareholder Agreement between Danbury Sales and Invar;
• M-Plan's $500,000 loan to Danbury Sales and the motion judge's finding of fact on the consideration for the loan;
• Ordon's misrepresentations to Shankman and Spain;
• The 2010 financial crisis of Danbury Financial and the subsequent 2010 Trust Agreement;
• The recitals in the Share Pledge and Assignment Agreement, the Guarantee, the General Security Agreement, and the 2013 Revised and Restated Promissory Note;
• The motion judge's credibility findings; and
• The motion judge's reasons for holding that the 2010 Trust Agreement discharged M-Plan's loan.

(a) The incorporation of Danbury Financial and the Shareholder Agreement between Danbury Sales and Invar

[16] In April 2005, Ordon incorporated Danbury Financial. When it was incorporated, 100 common shares were issued: 57 to Danbury Sales, 33 to Invar, and 10 to a consulting firm, which plays no role in this litigation. Danbury Financial's main financier was CIT Business Credit Canada Inc. The new venture was capitalized by a $750,000 loan from Danbury Sales and a $1,000,000 loan from Invar. Danbury Financial gave Danbury Sales a General Security Agreement for its loan.

[17] In November 2005, Danbury Sales and Invar signed a Shareholder Agreement. Two articles of the Agreement are relevant: article 3.2 and article 6.01.

[18] Article 3.2 provided that Danbury Sales and Invar's loans would each "be secured on a pari passu basis subject to the security granted by [Danbury Financial] to CIT". Importantly, article 3.2 also provided that no amount of the principal of Danbury Sales' loan would be repaid until Invar's loan had been repaid in full.

[19] Article 6.01 provided that no shares in the capital of Danbury Financial could be transferred without the consent of the holders of not less than 80% of the issued and outstanding shares of the company. As Danbury Sales held 57% of the shares and Invar held 33% of the shares, each effectively had a veto, which meant that Invar could block any proposed transfer of shares to M-Plan.

(b) M-Plan's $500,000 loan to Danbury Sales and the motion judge's finding of fact on the consideration for the loan

[20] In 2005, M-Plan loaned Danbury Sales $500,000. The loan is evidenced by a Promissory Note, which Danbury Sales signed on November 29, 2005. Danbury Sales used the $500,000 for its $750,000 loan to Danbury Financial.

[21] M-Plan made the loan to Danbury Sales because Shankman wanted an equity interest in Danbury Financial. Early in his reasons, the motion judge noted that "between Mr. Shankman and Mr. Ordon, there was an understanding that the $500,000 unsecured loan would remain a debt until [M-Plan] got an ownership interest in Danbury Financial."

[22] Later in his reasons, at para. 29, the motion judge made a finding of fact that a 22% ownership interest (or 22 shares) in Danbury Financial was intended to be consideration for the loan:

I also find as a fact that in 2005, Mr. Ordon and Mr. Shankman orally agreed that the ultimate goal was to use [M-Plan's] $500,000 loan as consideration for [M-Plan] being allocated a 22% interest (22 common shares) in Danbury Financial. From the outset, Mr. Shankman's primary aspiration was that [M-Plan] acquire an ownership interest in Danbury Financial.

[23] Two paragraphs later, the motion judge specified that the $500,000 would remain a loan until shares in Danbury Financial were delivered to M-Plan and registered on the books of the company:

Mr. Ordon and Mr. Shankman agreed that the [M-Plan's] $500,000 would be a loan to Danbury Sales until shares in Danbury Financial were delivered to [M-Plan] and registered on the books of the company.

[24] At para. 38, the motion judge repeated this specific finding of fact:

I find as a fact that the situation from 2005 to 2010 was that Danbury Sales was indebted to [M-Plan] for $500,000 pending delivery of an ownership interest in Danbury Financial registered in the book of that company.

[25] And he did so again at para. 45 of his reasons:

However, I find that … the status quo remained that the $500,000 loan would remain a loan until an ownership interest was registered on the books of Danbury Financial. This, in turn, required that Mr. Spain would agree that [M-Plan] was a partner in Danbury Financial.

[26] But M-Plan never received registered shares in Danbury Financial.

(c) Ordon's misrepresentations to Shankman and Spain

[27] Ordon misled both Shankman and Spain in the setting up and early management of Danbury Financial.

[28] Most important, Ordon did not disclose to Shankman that Invar had a veto over the transfer of shares to M-Plan, or give Shankman a copy of the Shareholder Agreement setting out this veto, until well after M-Plan loaned Danbury Sales the $500,000. Ordon did not tell Shankman about Invar's veto because he knew Spain would only deal with Danbury Sales and did not want another investor in Danbury Financial. Instead, Ordon used his friendship to placate Shankman by promising that he would find the right time to persuade Spain to bring M-Plan "on board." For a number of years, Ordon also did not disclose to Shankman that Danbury Financial had given Danbury Sales a General Security Agreement.

[29] Ordon did not disclose to Spain that $500,000 of Danbury Sales' $750,000 loan to Danbury Financial had come from M-Plan. Instead, Ordon told Spain that the entire $750,000 had come from Danbury Sales' own resources.

(d) The 2010 financial crisis of Danbury Financial and the subsequent 2010 Trust Agreement

[30] When Shankman eventually learned that Ordon had been misleading him about Invar's veto, he became concerned about M-Plan's unsecured loan. He began seeking security from Ordon. Then, in early 2010, Danbury Financial's major financier, CIT, announced that it would not renew Danbury Financial's line of credit. This announcement placed M-Plan's unsecured loan at further risk.

[31] In the face of the financial crisis of Danbury Financial precipitated by CIT's withdrawal, and after Shankman learned about Invar's veto, M-Plan and Danbury Sales signed the 2010 Trust Agreement. The Agreement was signed around June 2010, but was backdated to November 29, 2005 to coincide with the date Danbury Sales signed the Promissory Note in favour of M-Plan.

[32] By its terms, the 2010 Trust Agreement did three things for M-Plan. First, it expressly acknowledged that a portion of Danbury Sales' loan to Danbury Financial came from M-Plan and that M-Plan's $500,000 loan was still outstanding. Second, it expressly acknowledged that M-Plan had a beneficial interest in 22 of Danbury Sales' 57 shares in Danbury Financial. And third, it provided that M-Plan had an interest to the extent of its $500,000 loan in the General Security Agreement given by Danbury Financial to Danbury Sales.

[33] The 2010 Trust Agreement also provided that Danbury Sales held the 22 shares for M-Plan as a bare trustee and that on the written direction of M-Plan, Danbury Sales would transfer or convey title of the shares to M-Plan. As I will discuss, the motion judge relied on these two provisions in holding that the 2010 Trust Agreement discharged M-Plan's $500,000 loan.

[34] After the 2010 Trust Agreement was signed, Danbury Financial continue to flounder. Eventually CIT's withdrawal and Danbury Financial's failure to secure alternative financing proved fatal. In the latter half of 2011, Danbury Financial stopped operating.

(e) The recitals in the Share Pledge and Assignment Agreement, the Guarantee, the General Security Agreement, and the 2013 Revised and Restated Promissory Note

[35] In 2013, some three years after the 2010 Trust Agreement was signed, the principal parties to this litigation, with the benefit of legal advice, executed four documents: a Share Pledge and Assignment Agreement, a Guarantee, a General Security Agreement, and a Revised and Restated Promissory Note. The first three documents gave M-Plan security for its $500,000 loan to Danbury Sales. All four documents recited that the loan was still outstanding.

[36] In February 2013, Danbury Sales and M-Plan signed the Share Pledge and Assignment Agreement, which was backdated to November 2005. The purpose of the Assignment Agreement was to give M-Plan some security for its $500,000 loan, which the parties expressly acknowledged was still owing. Under the terms of this agreement, Danbury Sales assigned its shares in Danbury Financial, as well as Danbury Financial's indebtedness to it, to M-Plan as security for M-Plan's loan.

[37] On June 7, 2013, Ordon, on behalf of 116, signed the Guarantee and General Security Agreement given to M-Plan. Both documents recited that Danbury Sales was indebted to M-Plan in the sum of $500,000. On June 20, 2013, a lawyer instructed by Ordon registered the General Security Agreement under the Personal Property Security Act.

[38] The Guarantee also recited that the debt was evidenced by a Revised and Restated Promissory Note. This Promissory Note was also signed in June 2013, but was backdated to October 2006. In it, Danbury Sales acknowledged that the $500,000 had been advanced to it, and that the $500,000 "continue[d] to be outstanding and payable to [M-Plan] under the terms of this Revised and Restated Note".

(f) The motion judge's credibility findings

[39] Early in his reasons, the motion judge addressed the credibility of the two principal protagonists who gave evidence on the motion: Ordon and Shankman. He said at para. 8 that "there [we]re reasons not to believe all of the evidence of either". He concluded, however, that "Mr. Ordon's version of the narrative by-and-large confirm[ed] Mr. Shankman's version of the factual background".

[40] But the motion judge also found that Ordon's conduct was dishonorable:

I find that Mr. Ordon's conduct was dishonorable, but there is a difference between being dishonourable and being untruthful, and Mr. Ordon got himself into a double ethical bind, an unresolvable situation from which there was no escape without undesirable consequences. He had a conflict of interest, and in the end, he could not be loyal to all of his close friend, Mr. Shankman, his business partner's wife, Mrs. Lockyer, and his own spouse, Mrs. Ordon, who co-owned [116]. Ultimately, Mr. Ordon betrayed both his friend and the spouses.

[41] In the next paragraph, the motion judge then said that he "mainly" believed Mr. Shankman's account of the events, and where he did not believe Shankman, it was not because he favoured Ordon's evidence.

(g) The motion judge's reasons for holding that the 2010 Trust Agreement discharged M-Plan's loan

[42] The motion judge concluded at paras. 57 and 58 of his reasons that the 2010 Trust Agreement "was a genuine conveyance of an ownership interest and not a security interest":

Under the 2010 Trust Agreement there was a conveyance of Danbury Sales' ownership interest in 22 shares of Danbury Financial to [M-Plan]. This conveyance of ownership was achieved by Danbury Sales acknowledging that it was holding 22 shares as bare trustee for the beneficial owner of those shares, [M-Plan]. The Trust Agreement acknowledges that 22 out of the 57 common shares held by Danbury Sales were acquired by the advance of funds by [M-Plan]. The Trust Agreement provides that upon the written direction of the [M-Plan], Danbury Sales will execute a transfer, or other documents necessary to convey title to the 22 shares.

[43] And so, according to the motion judge, the 2010 Trust Agreement gave M-Plan an ownership interest in Danbury Financial. Danbury Sales was no longer indebted to M-Plan for $500,000. M-Plan "had obtained what it paid for."

[44] The motion judge appeared to buttress his conclusion by noting that in the fall of 2010, after the 2010 Trust Agreement was signed, Spain told Ordon that Invar would be prepared to recognize M-Plan's ownership of 22 shares in Danbury Financial. Yet the motion judge also noted at para. 74 that negotiations for a new shareholder agreement had "floundered". They had floundered because Invar insisted Danbury Sales vote any shares issued to M-Plan and because Invar insisted its percentage shareholding be increased as it had put up the most money.

[45] Still, having concluded that the 2010 Trust Agreement had discharged the loan, the motion judge had to address why, in 2013, M-Plan and Danbury Sales had signed a Share Pledge and Assignment Agreement. He also had to address why 116 had agreed to guarantee M-Plan's $500,000 loan, which 116 acknowledged remained outstanding and unpaid. The motion judge's answer, given at para. 103 of his reasons, was that Shankman and Ordon "were oblivious" to the fact M-Plan already owned an interest in Danbury Financial.

Discussion

[46] 116's basic position rests on the standard of appellate review. It submits that we should defer to the motion judge's interpretation of the relevant documents and the largely uncontradicted narrative of events. Simply because this court might weigh the evidence differently or might have drawn different inferences from the evidence does not justify our intervention.

[47] I accept that the motion judge's findings and his ultimate conclusion on the effect of the 2010 Trust Agreement attract a deferential standard of appellate review. But if his findings or his conclusion is tainted by palpable and overriding error, or more simply is unreasonable, appellate intervention is justified. And in my view, though the motion judge's reasons are lengthy and thoroughly analyze the evidence, his conclusion that the 2010 Trust Agreement discharged M-Plan's loan is unreasonable.

[48] It is unreasonable for three main reasons: it contradicts the motion judge's own finding on the consideration for the loan; it fails to take into account all of the terms of the 2010 Trust Agreement and importantly the context or circumstances in which the Agreement was made; and it disregards the conduct and understanding of the parties themselves after they signed the 2010 Trust Agreement. These errors yielded a result that is not supportable.

(a) The contradiction between the motion judge's finding of fact and his conclusion

[49] The motion judge found as a fact that M-Plan's $500,000 loan to Danbury Sales could be discharged only by issuing to M-Plan registered shares in Danbury Financial. Until then the loan remained a loan. That bargain never changed. And as the motion judge recognized at para. 45 of his reasons, M-Plan could obtain registered shares in Danbury Financial only if Spain agreed to it.

[50] Yet contrary to his finding of fact, the motion judge concluded that M-Plan's beneficial interest in 22 shares of Danbury Financial, which was acknowledged in the 2010 Trust Agreement, discharged M-Plan's loan. The motion judge's finding of fact on the consideration for the loan and his conclusion on the effect of the 2010 Trust Agreement cannot stand together.

[51] M-Plan did not get what it paid for when it received a beneficial interest in the shares of Danbury Financial. It was entitled to a legal interest – registered shares. With only a beneficial interest M-Plan was denied the most fundamental right of share ownership – the right to vote the shares.

[52] It is no answer to M-Plan's position that in the fall of 2010, Spain said he would recognize M-Plan as an owner of Danbury Financial. His recognition, and that of his company Invar, were limited. Invar never agreed to forgo its veto and permit the transfer of shares to M-Plan. Invar did not even agree M-Plan could vote the shares that it held beneficially. According to Spain and Invar, Danbury Sales had to vote those shares. And Spain and Invar would agree to a shareholder agreement that included M-Plan only if Invar's percentage shareholding were increased.

[53] The beneficial interest in the shares of Danbury Financial, which the motion judge said M-Plan acquired in the 2010 Trust Agreement, was not a substitute for the consideration M-Plan had bargained for when it loaned Danbury Sales $500,000. On this ground alone I would set aside the motion judge's conclusion.

(b) The terms of the 2010 Trust Agreement and the context or circumstances in which it was made

[54] The 2010 Trust Agreement is a contract. In interpreting it, ordinary principles of contract interpretation apply. To ascertain what the parties meant, the terms of the contract must be read as a whole, and they must be read in the context or circumstances in which the contract was made: see Dumbrell v. The Regional Group of Companies Inc.

[55] The motion judge concluded that the 2010 Trust Agreement gave M-Plan a beneficial interest in 22 shares of Danbury Financial, which had the effect of discharging M-Plan's loan to Danbury Sales. In his words at para. 57, the 2010 Trust Agreement was a "genuine conveyance of an ownership interest" in the shares. In so concluding, the motion judge focused on two terms of the Agreement: the term providing that Danbury Sales held 22 of its shares in Danbury Financial as a bare trustee for M-Plan; and the term providing that on a direction from M-Plan, Danbury Sales would be required to transfer the shares.

[56] The motion judge, however, did not take account of the 2010 Trust Agreement as a whole or the context in which it was made. It is evident from both the 2010 Trust Agreement itself and the context that the Agreement did not convey ownership of the shares to M-Plan. Its purpose, at most, was to give M-Plan some security for its loan.

[57] Nothing in the 2010 Trust Agreement itself says that M-Plan's beneficial interest in the shares satisfied its loan. Nothing in the Agreement says that the shares were conveyed to M-Plan. And term 8 of the 2010 Trust Agreement gives M-Plan not an ownership interest in the shares, but instead a security interest in the General Security Agreement held by Danbury Sales. If the motion judge is correct that the 2010 Trust Agreement was a genuine conveyance of an ownership interest in the shares, term 8 would have been unnecessary.

[58] That the purpose of the 2010 Trust Agreement was to provide security for M-Plan's loan, rather than to discharge it, is consistent with the context in which the Agreement was made. Shankman had been pressing Ordon for security for his loan after he became aware that Ordon had misled him about Invar's veto and had misled Spain about the nature of M-Plan's contribution. Eventually, to give Shankman some reassurance, Ordon revealed to him the existence of the General Security Agreement between Danbury Sales and Danbury Financial, and offered Shankman an interest in that Agreement. The 2010 Trust Agreement is the result of that offer.

[59] The 2010 Trust Agreement was also made in the context of the Shareholder Agreement between Danbury Sales and Invar. The two agreements have to be looked at together. By the time Shankman signed the 2010 Trust Agreement, he was aware of the Shareholder Agreement. The Shareholder Agreement gave Invar a veto over the transfer of shares to M-Plan, a veto that it never relinquished. The term in the 2010 Trust Agreement providing that on M-Plan's direction Danbury Sales was to transfer the shares to M-Plan, a term on which the motion judge relied, was ineffective. Because of Invar's veto, the 2010 Trust Agreement could not convey a legal ownership interest in the shares to M-Plan.

(c) The conduct and understanding of the parties after the 2010 Trust Agreement was signed

[60] After the 2010 Trust Agreement was signed, both Shankman and Ordon conducted themselves on the basis M-Plan's loan was still outstanding. After Danbury Financial had failed, Shankman began pressing Ordon for repayment of the loan, and Ordon tried to find a way to forestall a lawsuit. He knew that neither Danbury Sales nor Danbury Financial had the money to repay M-Plan's loan. So he offered a guarantee and other security for the loan in another company he was associated with, 116. 116 could give security because it had a 17 percent ownership interest in five properties on Queen Street East in Toronto. Shankman accepted this security. In June 2012, the parties began negotiating a series of agreements, and eventually signed three security documents and a promissory note the following year.

[61] Each of the three security documents signed in 2013 – the Guarantee, the Share Pledge and Assignment Agreement, and the General Security Agreement – together with the Revised and Restated Promissory Note, recited that M-Plan's $500,000 loan was still outstanding. Each document was negotiated and drafted with legal advice. Three of the documents were the subject of a year-long negotiation. Shankman and Ordon were not neophytes. They were sophisticated individuals, knowledgeable in commercial matters. To suggest that when these four documents were negotiated and signed Shankman and Ordon were "oblivious" to their legal rights is implausible. Both knew – and rightly so – that M-Plan's loan still had not been satisfied.

[62] The motion judge's conclusion that the 2010 Trust Agreement discharged M-Plan's loan was unreasonable. Subject to 116's cross-appeal, both the Guarantee and the General Security Agreement are valid and enforceable.

(2) Are the Guarantee and General Security Agreement unenforceable because M-Plan knew that neither shareholder of 116 consented to either document?

[63] As I said, Ordon and Lockyer were the directors of 116; their wives were the two shareholders. Although David Ordon agreed that 116 would secure M-Plan's $500,000 loan, neither Martine Ordon nor Sonia Lockyer consented to giving security; both were unwilling to do so.

[64] Before the motion judge, 116 submitted that if M-Plan's loan was still outstanding, both the Guarantee and the General Security Agreement were unenforceable because Shankman and M-Plan knew the shareholders of 116 had not authorized giving this security. Although the motion judge agreed with 116's principal submission that the 2010 Trust Agreement discharged M-Plan's loan to Danbury Sales, he addressed 116's alternative submission. And he concluded that if the loan were still outstanding, both security documents would be enforceable because of s. 184 of Ontario's Business Corporations Act.

[65] Subsection 184(1) stipulates that a director of a corporation can give a Guarantee and a General Security Agreement on behalf of a corporation without shareholder authorization unless the articles, by-laws, or a unanimous shareholder agreement of the corporation provides otherwise:

184 (1) Unless the articles or by-laws of or a unanimous shareholder agreement otherwise provide, the articles of a corporation shall be deemed to state that the directors of a corporation may, without authorization of the shareholders,

(c) give a guarantee on behalf of the corporation to secure performance of an obligation of any person; and

(d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the corporation, owned or subsequently acquired, to secure any obligation of the corporation.

[66] 116 did not have a shareholder agreement, and nothing in its articles or by-laws prevented a director from giving security without shareholder approval. To the contrary, the corporation's general By-Law No. 2 allowed the directors to guarantee the repayment of debts, and so supplemented s. 184 of the statute. The motion judge held that the Guarantee was enforceable under s. 184(1)(c) and the General Security Agreement was enforceable under s. 184(1)(d).

[67] In this court, 116 submits that the motion judge committed a palpable and overriding error in relying on s. 184 because M-Plan knew that Martine Ordon and Sonia Lockyer did not consent to giving security and therefore knew that Ordon did not have authority to bind 116. In support of its submission, 116 makes three points. First, although Shankman received a certificate signed by Barry Lockyer certifying that a special resolution of the shareholders had been passed authorizing the security, the certificate omitted signature lines for Martine Ordon and Sonia Lockyer. Second, 116 points to a special resolution of the shareholders consenting to the security, which though signed by David Ordon and Barry Lockyer, left the signature lines for Martine Ordon and Sonia Lockyer blank. Finally, 116 relies on s. 19 of the Business Corporations Act, which, in substance, legislates "the indoor management rule".

[68] I do not agree with 116's submission. The motion judge did not err in determining that the Guarantee and General Security Agreement were enforceable under s. 184 of the Business Corporations Act.

[69] As the motion judge found, Shankman never insisted that there had to be a shareholders' resolution authorizing the security. The motion judge held at para. 111 that "it was nice but not a legal necessity." Even so, in the certificate of the special resolution of shareholders that Shankman received, Barry Lockyer certified that a shareholders' resolution had been passed in June 2013. In the absence of any other evidence – and there was none – M-Plan had no reason to think that the resolution was unreliable. The absence of signature lines for Martine Ordon and Sonia Lockyer did not undermine the certificate's reliability. Nor did the absence of their signatures on the special resolution of shareholders itself. Indeed, it is unclear that Shankman ever received the special resolution.

[70] Section 19 of the Business Corporations Act entitled M-Plan to assume that Ordon was authorized to give the Guarantee and General Security Agreement on behalf of 116 unless M-Plan or Shankman knew otherwise:

19 A corporation or a guarantor of an obligation of a corporation may not assert against a person dealing with the corporation or with any person who has acquired rights from the corporation that,

(d) a person held out by a corporation as a director, an officer or an agent of the corporation has not been duly appointed or does not have authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for such director, officer or agent;

(e) a document issued by any director, officer or agent of a corporation with actual or usual authority to issue the document is not valid or genuine;

except where the person has or ought to have, by virtue of the person's position with or relationship to the corporation, knowledge to that effect.

[71] But the motion judge found at para. 114 of his reasons that, in the light of its receipt of the certificate of the shareholders resolution, M-Plan did not know the shareholders had not authorized the security:

In the immediate case the short answer to the matter of the application of the Indoor Management Rule is that Mr. Shankman had been told that only Mrs. Lockyer was holding out opposition but subsequently [M-Plan] received a certificate of the shareholders' resolution signed by Mr. Lockyer and by the time of the closing of the transaction [M-Plan] did not have knowledge that the transaction did not have the authorization of the shareholders.

[72] That finding of fact was reasonably available to the motion judge. It is not tainted by any palpable and overriding error. I therefore agree with the motion judge that the Guarantee and General Security Agreement are enforceable.

(3) Did the motion judge commit a palpable and overriding error in finding that Danbury Financial mistakenly paid M-Plan $130,000 to reduce Danbury Sales' debt to M-Plan?

[73] Between October 2011 and March 2012, Danbury Financial made three payments to M-Plan – two of $50,000 and one of $30,000, for a total of $130,000. M-Plan's position was that the payments were made to reduce a $300,000 debt owed to M-Plan by a related company, Danbury Industrial, in a separate transaction – the Progressive Molded transaction. The payments had nothing to do with Danbury Sales' $500,000 debt to M-Plan. The motion judge found otherwise. He found that Danbury Financial mistakenly made all three payments to reduce the debt of its majority shareholder, Danbury Sales, to M-Plan. In the motion judge's view the payments were mistaken because they were made after the 2010 Trust Agreement had discharged M-Plan's $500,000 loan.

[74] M-Plan submits that the motion judge's finding is palpably and overridingly wrong. As it did on the motion, M-Plan says that Danbury Financial made the three payments to reduce Danbury Industrial's debt on the Progressive Molded transaction. 116 submits that the motion judge's finding is reasonable and we should not interfere with it.

[75] I agree with M-Plan's submission for two reasons. First, the timing and size of the payments correspond to payments Danbury Industrial admittedly made to reduce its debt to M-Plan on the Progressive Molded transaction. In his affidavit filed on the motion, Ordon admitted that in August 2011, Danbury Industrial made two $50,000 payments to M-Plan to reduce its indebtedness on the Progressive Molded transaction. Beginning two months later, after Danbury Industrial encountered its own financial difficulties, Danbury Financial made the three payments in issue – two further $50,000 payments and one $30,000 payment to M-Plan. The amount of the payments and their timing strongly suggest that they were also made in connection with the Progressive Molded transaction.

[76] Second, the three payments of $130,000 were made well before the Guarantee and General Security Agreement were given. If the parties intended that the payments were made to reduce Danbury Sales' debt to M-Plan, then these documents would have stated that only $370,000 was owing on M-Plan's loan to Danbury Sales. But both documents reflect the full amount of the debt, $500,000. Similarly, correspondence between Ordon and his lawyer in November 2012 (long after the three payments of $130,000 were made to M-Plan) confirms that Ordon understood Danbury Sales still owed M-Plan the full $500,000. In cross-examination on his affidavit on the motion, Ordon admitted that he believed as much up until shortly before 116 filed its statement of claim in this proceeding.

[77] I would therefore set aside the motion judge's finding that the $130,000 was paid to reduce Danbury Sales' debt to M-Plan.

C. Conclusion

[78] I would allow the appeal, set aside the judgment of the motion judge, and in its place grant judgment as follows:

a) A Declaration that 116's Guarantee of the debt of Danbury Sales to M-Plan is a valid and binding guarantee;

b) A Declaration that the General Security Agreement between M-Plan and 116 is a valid and binding security;

c) Judgment on the Guarantee in the amount of $500,000 plus pre-judgment and post-judgment interest at the rate of 3% per annum from November 29, 2005 to the date of payment;

d) An order that the judgment in favour of M-Plan be paid out from the funds held in court to the credit of the action under the consent order of Conway J. dated September 25, 2015; and

e) An order dismissing 116's summary judgment motion.

[79] M-Plan is entitled to its costs of the appeal and the cross-appeal, which I would fix in the amount of $40,000 inclusive of disbursements and HST. If the parties cannot agree on the costs of the motion before the motion judge, they may make brief submissions in writing to the panel.

Released: November 7, 2017

John Laskin J.A.

I agree. P. Lauwers J.A.

I agree. David Brown J.A.

Footnotes

[1] R.S.O. 1990, c. B.16.

[2] The motion judge refers to the appellant numbered Ontario company as the Shankman Corporation. I have referred to it as M-Plan, the name used by the appellant in its factum. Also, the motion judge refers to 116 as the Wives' Corporation.

[3] Two previous trust agreements had been prepared but M-Plan did not sign either one of them.

[4] R.S.O. 1990, c. P.10.

[5] 2007 ONCA 59, 85 O.R. 3(d) 616.

[6] Under the indoor management rule if a corporation holds someone out as a director, officer, or agent to a third party, the corporation cannot deny that the person has the authority usual for the position. The third party is entitled to assume that the corporation's internal procedures have been complied with unless the third party knew or ought to have known otherwise. See: Midas Investment Corp. v. Bank of Montreal, 2016 ONSC 3003, at para. 4.