JGB Collateral, LLC, a Delaware Limited Liability Company v. Rochon et al.
[Indexed as: JGB Collateral, LLC v. Rochon]
Ontario Reports
Court of Appeal for Ontario
Rouleau, Hoy and Hourigan JJ.A.
July 17, 2020
151 O.R. (3d) 601 | 2020 ONCA 464
Case Summary
Creditors and debtors — Guarantees and indemnities — Defences — Appeal by plaintiff from order dismissing appellant's application for summary judgment for possession and sale of respondent wife's property allowed — Respondent spouses had guaranteed indebtedness of US corporation to appellant — Wife granted mortgage on her property as collateral — Corporation defaulted — Motion judge concluded mortgage was not enforceable due to presumed undue influence on wife by husband — Motion judge considered only nature of relationship between spouses and failed to consider nature of the transaction between them — Even if presumption of undue influence arose, appellant ensured wife was entering into transaction freely.
Appeal by the plaintiff from an order dismissing the appellant's application for summary judgment for possession and sale of the respondent wife's Ontario property. The respondent spouses had guaranteed the indebtedness of a Florida corporation to the appellant. The wife granted a mortgage over her Ontario property as collateral security for the corporation's indebtedness to the appellant. The corporation went bankrupt and defaulted under the loan. The US court found that the respondents' guarantee was valid and enforceable. The respondents did not appear to have argued before the US court that the wife's guarantee was the product of undue influence. The motion judge concluded that the mortgage on the Ontario property was not enforceable because it was the product of presumed undue influence on the wife by the husband, the appellant had constructive notice thereof, and it did not adequately ensure that the wife received independent legal advice before she agreed to the mortgage.
Held, the appeal should be allowed.
The motion judge erred in his articulation and application of the doctrine of presumption of undue influence. The motion judge considered only the nature of the relationship between the spouses and failed to consider the nature of the transaction between them. The wife had a significant interest in the corporation. This was not a transaction which, from a business point of view, was of no benefit to her. The relationship between the spouses in which the motion judge found the wife unquestioningly complied with any and all requests by her husband to sign documents, when coupled with the nature of the transaction between them, did not justify an inference that the mortgage was procured by the undue influence of the husband over the wife. Even if a presumption of undue influence did arise such that the appellant was put on notice to ensure the wife was entering into the transaction freely, the appellant did so by inquiring of both attorneys representing both spouses whether everything that was stated in the guarantee had been explained to them, including the statement in the guarantee that it was explained to them by an independent solicitor, and both counsel confirmed that this was the case for both spouses. On these facts, this inquiry was sufficient to protect the appellant from the wife's assertion of presumed undue influence. [page602]
Cases referred to
Bank of Montreal v. Duguid, 2000 5710 (ON CA); Barclays Bank plc v. O'Brien, [1994] 1 FC 357, [1994] 1 AC 180, [1993] 3 WLR 786, [1993] 4 All ER 417; CIBC Mortgage Corp. v. Rowatt, 2002 45110 (ON CA); Geffen v. Goodman Estate, 1991 69 (SCC), [1991] 2 SCR 353; JGB Collateral, LLC v. Rochon, 2019 ONSC 4920; JGB Collateral, LLC v. Rochon, 2019 ONSC 5867; Royal Bank of Scotland v. Etridge (No. 2), [2001] 4 All ER 449 (not available)
APPEAL from the order of Mew J., 2019 ONSC 4920, 11 R.P.R. (6th) 334, and from the costs order, 2019 ONSC 5867.
Melanie Ouanounou and Kirby Cohen, for appellant.
Jonathan P.M. Collings, for respondent Donna Jean Hewitt Rochon.
Taayo Simmonds, for respondent John Rochon.
BY THE COURT: --
[1] The respondents, Donna Rochon and her husband, John Rochon, guaranteed the indebtedness of JRjr33, Inc. (the "Corporation"), a publicly traded Florida corporation, to the appellant, JGB Collateral, LLC. Ms. Rochon granted a mortgage over a property she owns in Lanark, Ontario to the appellant as collateral security for the Corporation's indebtedness to the appellant.
[2] The Corporation defaulted under the loan and filed for bankruptcy relief in the United States Bankruptcy Court. The guarantee is governed by New York law, and the New York Supreme Court found that the respondents' guarantee was valid and enforceable. Based on a review of the transcript of argument made to and the oral decision of the New York court, the respondents do not appear to have argued before the New York court that Ms. Rochon's guarantee was the product of undue influence. The appellant, who had commenced an action in Ontario seeking possession and the subsequent sale of the Ontario property, brought a motion for summary judgment.
[3] More than 50 per cent of the Corporation's outstanding shares were owned by entities controlled by Mr. Rochon and Mr. Rochon was the Corporation's chairman and chief executive officer.
[4] The motion judge concluded that the mortgage on the Ontario property was not enforceable because it was the product of presumed undue influence on Ms. Rochon by Mr. Rochon, the appellant had constructive notice thereof, and it did not adequately ensure that Ms. Rochon received [page603] independent legal advice before she agreed to the mortgage. He dismissed the appellant's action for enforcement of the mortgage.
[5] We agree with the appellant that the motion judge erred in his articulation and application of the doctrine of presumption of undue influence. Applying the correct legal test, Ms. Rochon's allegation of undue influence fails.
[6] Below, we outline the doctrine of presumption of undue influence and the motion judge's reasons on this issue and explain where the motion judge fell into error and why Ms. Rochon's allegation of undue influence fails.
Presumed Undue Influence
[7] The doctrine of undue influence and its evidentiary companion, the presumption of undue influence, is set out in Geffen v. Goodman Estate, 1991 69 (SCC), [1991] 2 S.C.R. 353; Bank of Montreal v. Duguid (2000), 2000 5710 (ON CA), 185 D.L.R. (4th) 458 (Ont. C.A.), leave to appeal allowed, [2000] S.C.C.A. No 298, appeal discontinued August 2, 2001; and CIBC Mortgage Corp. v. Rowatt (2002), 2002 45110 (ON CA), 220 D.L.R. (4th) 139 (Ont. C.A.), leave to appeal refused, [2002] S.C.C.A. No. 526. Rowatt draws heavily on the House of Lords' decision in Royal Bank of Scotland v. Etridge (No. 2), [2001] 4 All E.R. 449, which clarified and modified Barclays Bank plc v. O'Brien, [1993] 4 All E.R. 417 (H.L.).
[8] To summarize, the presumption of undue influence is a rebuttable evidential presumption.
[9] It arises if the nature of the relationship between the debtor and the surety coupled with the nature of the transaction between them justifies, without any other evidence, an inference that the transaction was the result of the undue influence of one party over the other: Geffen, at p. 378; Rowatt, at para. 20.
[10] When the presumption arises, there are two results.
[11] First, a lender is put on notice and inquiry. In order to protect itself from a claim that the guarantee provided to it was obtained by undue influence by the benefitting spouse or party, the lender must take reasonable steps to try to ensure that the proposed guarantor understands the transaction and is entering into it voluntarily by encouraging the guarantor to seek and obtain independent legal advice and a full explanation of the transaction: Rowatt, at para. 16; Bank of Montreal,at paras. 17-18.
[12] Second, if the lender has not taken the reasonable steps and the guarantor seeks to avoid liability on the guarantee or security by claiming that it was obtained by undue influence, [page604] the evidential onus is on the lender to adduce sufficient evidence to rebut the presumption: Rowatt,at para. 20.
[13] The judge must decide on the totality of the evidence whether the allegation of undue influence has been proved. The nature and ingredients of the impugned transaction between the benefitting spouse or party and the other party are essential factors in deciding both whether the evidential presumption has arisen and whether the lender has rebutted it. If the judge concludes that there was no undue influence, the presumption is rebutted and does not apply: Rowatt, at para. 20.
The Motion Judge's Approach
[14] At para. 84 of his reasons, the motion judge described the presumption of undue influence as follows:
It is a presumption which flows from the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer. It is the establishment of that relationship which raises the presumption of undue influence. Unless the [sic] JGB can then disprove undue influence, for example by showing that Donna Rochon had independent legal advice, she will succeed in setting aside the impugned transaction merely by proof that she reposed trust and confidence in her husband without having to prove that he exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned.
[15] The motion judge found that the essential facts supporting a presumption of undue influence were met: "[t]his is a classic case of a spouse who unquestioningly complied with any and all requests by her husband to sign documents related to his business".
[16] He noted that two lawyers acted for the respondents, one of whom was the Corporation's general counsel and the respondents' daughter. He also noted the evidence of Mr. Barlev-Ehrenberg, an officer of the appellant, that he had obtained oral confirmation from both lawyers that everything in the guarantee, including the statement in it that its terms had been explained to the respondents by an independent lawyer, had been explained to both respondents.
[17] However, in the motion judge's view, this was insufficient. The appellant did not obtain written confirmation of Ms. Rochon having been given independent legal advice. Moreover, there was "no indication that Ms. Rochon received legal advice independent from (and by a different lawyer) to any legal advice given to Mr. Rochon".
[18] He commented that Ms. Rochon's challenge to the enforceability of the mortgage would have been neutralized by [page605] "the simple device of requiring adequate evidence, through a Certificate of Independent Legal Advice (or similar), that Donna Rochon was fully aware of the import of the security that she was providing...".
[19] He concluded:
I am satisfied that Donna Rochon has established, on a balance of probabilities, that she was subject to undue influence by her husband at the time that she agreed to the mortgage conditions and, subsequently, when she agreed to the registration of the charge against the Lanark property. I am further satisfied that the circumstances gave rise to constructive notice of undue influence to JGB and that in the circumstances, JGB unreasonably failed to take adequate steps to enquire (whether by determining that she had received independent legal advice, or otherwise) and thereby satisfy itself that Donna Rochon understood the nature, import and legal effect of her agreement to the mortgage terms and the registration of the charge against the Lanark property.
Analysis
[20] Respectfully, the motion judge's analysis is tainted by several errors.
[21] First, in determining whether the presumption arose, the motion judge considered only the nature of the relationship between Mr. and Ms. Rochon. He failed to consider the nature of the transaction between them.
[22] While the respondents swore in their affidavits before the motion judge that Ms. Rochon had no financial interest in the Corporation, they acknowledge in their factums on appeal that Ms. Rochon had a financial interest in the Corporation. However, they argue that it was not significant, and, therefore, the motion judge's failure to explicitly consider it is of no moment.
[23] We disagree.
[24] Ms. Rochon had a significant interest in the Corporation.
[25] The materials before the motion judge included the Schedule 13D filing with the U.S. Securities and Exchange Commission, dated June 6, 2017, signed by Mr. Rochon and filed with the Securities and Exchange Commission. It indicates that Ms. Rochon was a limited partner of and owned 20 per cent of the outstanding partnership interests of Rochon Capital Partners, Ltd., an entity that held approximately 35 per cent of the common shares of the Corporation. The Schedule 13D filing further indicates that Ms. Rochon had the indirect right, through her ownership of the limited partnership interests, to receive dividends from, or proceeds from the sale of, any common stock owned by Rochon Capital Partners, Ltd. [page606]
[26] As well, the Corporation was in many respects a family business. Both Ms. Rochon's son and daughter held positions. Separate and apart from her significant financial interest in the Corporation, Ms. Rochon had an interest in doing what she could to support it. As she admitted on cross-examination, executing documents at the request of her husband, such as those relating to the loan from the appellant, was in both her and her husband's interests.
[27] This was not a transaction which, from a business point of view, was of no benefit to Ms. Rochon.
[28] Moreover, while the Ontario property was a farm that had been in Ms. Rochon's family for generations, Mr. Rochon had purchased the property from Ms. Rochon's family and gifted it to Ms. Rochon. The property was presumably acquired with the fruits of Mr. Rochon's business activities.
[29] The relationship between Mr. and Ms. Rochon -- one in which, as the motion judge found, Ms. Rochon "unquestioningly complied with any and all requests by her husband to sign documents" -- when coupled with the nature of the transaction between them, does not justify an inference that the mortgage was procured by the undue influence of Mr. Rochon over Ms. Rochon.
[30] Second, even if a presumption of undue influence did arise such that the appellant was put on notice to ensure Ms. Rochon was entering into the transaction freely, the appellant did so. The motion judge incorrectly elevated what Rowatt and Bank of Montreal say a lender must do to protect itself from an assertion of presumed undue influence (namely, take reasonable steps to try to ensure that the proposed guarantor understands the transaction and is entering into it freely by suggesting that the guarantor seek and obtain independent legal advice and a full explanation of the transaction) to a requirement that a lender obtain a written certificate from a lawyer that the lawyer has provided independent legal advice to the guarantor.
[31] The evidence of Mr. Barlev-Ehrenberg of the appellant was that he inquired of both attorneys representing both Mr. Rochon and Ms. Rochon whether everything that was stated in the guarantee had been explained to them, including the statement in the guarantee that it was explained to them by an independent solicitor, and both counsel confirmed that this was the case for both Mr. and Ms. Rochon.
[32] On these facts, this inquiry was sufficient to protect the appellant from Ms. Rochon's assertion of presumed undue influence. [page607]
[33] Third, having found that the presumption arose, and that the appellant was not protected from Ms. Rochon's allegation of undue influence by the steps it had taken, the motion judge did not go on to consider whether, on the totality of the evidence, the allegation of undue influence was proved. Essentially, he treated his finding that the appellant had not taken sufficient steps as dispositive of the question of undue influence. But the presumption of undue influence can be rebutted in the absence of independent legal advice: Bank of Montreal, at paras. 25-27.
[34] While Ms. Rochon swore in her affidavit that she believed that she did not have any alternative but to sign the loan documents, as the motion judge noted, in her cross-examination she admitted that she signed the loan documents of her own free will and that her husband did not threaten or force her to sign any of the documents. She said in cross-examination "I have a choice, yes, I do". When pressed on the inconsistency, she said "I had no choice but to sign the document because my choice was to ignore it and just sign the thing". She also admitted that she swore and signed her affidavit because her husband asked her to. Ms. Rochon's own evidence rebuts the presumption on which she seeks to rely.
[35] Although Ms. Rochon may have "unquestioningly complied with any and all requests by her husband to sign documents" the motion judge stated that "the assertion that she was wilfully blind has merit". Wilful blindness is not proof of undue influence.
[36] Further, as noted above, the nature and ingredients of the impugned transaction between Mr. and Ms. Rochon are essential factors in deciding both whether the evidential presumption has arisen and whether the appellant has rebutted it. We have discussed the nature of the transaction above. If the presumption arose, the nature of the transaction joins Ms. Rochon's own evidence in rebutting it.
Disposition
[37] Accordingly, the appeal is allowed and the order of the motion judge dated August 21, 2019 dismissing the appellant's summary judgment motion and its action is set aside.
[38] Summary judgment in favour of the appellant is granted.
[39] The costs order of the motions judge dated October 19, 2019 is also set aside. If the parties are unable to agree on costs below, the determination of costs below shall be returned to the motion judge. If the parties are unable to agree on costs of [page608] the appeal, and the motion for a stay pending appeal, they may make written submissions not exceeding three pages, to be made within 21 days of the release of these reasons.
Appeal allowed.
End of Document