Court File and Parties

Court of Appeal for Ontario Date: 20211221 Docket: C68978

Judges: MacPherson, Simmons and Nordheimer JJ.A.

Between: Joanne Sicotte Plaintiff (Appellant)

And: 2399153 Ontario Ltd., Josée Virgo, Philippe Grandmaitre and Denis Marchand Defendants (Respondents)

Counsel: Martin Black, for the appellant Alden Christian, for the respondents 2399153 Ontario Ltd., Josée Virgo and Philippe Grandmaitre Nadia Authier, for the respondent Denis Marchand

Heard: November 3, 2021 by video conference

On appeal from the judgment of Justice Robyn M. Ryan Bell of the Superior Court of Justice, dated December 9, 2020, with reasons reported at 2020 ONSC 7581.

Nordheimer J.A.:

A. Introduction

[1] The appellant, Joanne Sicotte, brought a motion for summary judgment on a guarantee of a commercial mortgage signed by the respondents, Josée Virgo, Philippe Grandmaitre, and Denis Marchand. The motion judge dismissed the appellant’s motion but granted summary judgment to the respondents dismissing the appellant’s action against them.

[2] The result of the motion judge’s decision is that the appellant is prevented from enforcing the guarantee until another mortgage that the corporate respondent 2399153 Ontario Ltd. (the “Borrower”) made with the Business Development Bank of Canada (“BDC”) is paid out. By the terms of the BDC mortgage, the payout may not occur until 2043, or even later if BDC grants an extension.

[3] The appellant submits that the motion judge erred in rendering a decision that has such a drastic and unfair result for her. I agree with the appellant. For the following reasons, I would grant her appeal, set aside the order below, and grant summary judgment in favour of the appellant.

B. Facts

(1) The parties and events

[4] The appellant loaned $800,000 to the Borrower in 2014 in exchange for a mortgage over the Borrower’s property pursuant to the terms of a loan agreement (the “Sicotte Loan”). The three individual respondents — Ms. Virgo, Mr. Grandmaitre, and Mr. Marchand — are officers, directors and shareholders in the Borrower and guarantors of this mortgage. Pursuant to a separate guarantee agreement, they agreed to guarantee the Borrower’s debts and liabilities “at any time owing” by the Borrower to the appellant. A fourth officer, director and shareholder of the Borrower is Marc Robert, the appellant’s spouse.

[5] The appellant says that the Borrower is obligated to make monthly mortgage payments, has failed to do so, and is, therefore, in default under the loan agreement. She looks to enforce the guarantee against Ms. Virgo, Mr. Grandmaitre and Mr. Marchand (the “guarantors”).

[6] The complicating factor is that, in 2018, BDC loaned an additional $3.9 million to the Borrower in exchange for a mortgage over the same property as the one described in the Sicotte loan. As part of the BDC loan agreement, the appellant, the Borrower and BDC signed a Postponement of Debt Agreement (the “Postponement Agreement”) which provided in part:

[T]he Creditor [the appellant] agrees with the Bank [BDC] that any claim of the Bank in respect of the Loan [the BDC loan] shall take precedence over and be fully paid in priority to the Debt [the Sicotte Loan], and repayment of the Debt is hereby expressly postponed in favour of the Bank … and the Creditor will not, so long as the Borrower is indebted to the Bank in respect of the Loan, demand payment, either in whole or in part, of the Debt … [Emphasis added.]

[7] Concurrent with the BDC loan, the original Sicotte mortgage was amended in significant respects by:

i. deleting the principal amount of $800,000 and inserting a principal amount of $1,522,757;

ii. deleting the interest rate of 5.0% and inserting an interest rate of 6.0%;

iii. extending the term for one year; and

iv. deleting the monthly payment amounts of $3,333.33 and inserting monthly payment amounts of $7,613.79 (acknowledged to be payments of interest only).

[8] The Borrower made the monthly interest payments to the appellant in July, August and September 2018. The payments then ceased. No payments have been made since. Further, the mortgage matured and became due and payable in full on July 10, 2019.

[9] In reliance upon the Postponement Agreement, BDC advised the appellant that she could not demand payment from the Borrower, or enforce her mortgage against the property, until such time as BDC is paid in full, the ultimate due date being in August 2043 or, possibly by extension, even later.

[10] The appellant appears to have accepted BDC’s warning about the mortgage. Instead, she commenced this action on the guarantee and brought a motion for summary judgment against the guarantors. All parties agreed that the motion for summary judgment was an appropriate method for resolving the dispute and that there were two possible outcomes – summary judgment could be granted in favour of the appellant or an order could be made dismissing her action, notwithstanding the absence of a cross-motion for such relief: see Meridian Credit Union Limited v. Baig, 2016 ONCA 150, 346 O.A.C. 57, at para. 17, leave to appeal to S.C.C. refused, 36974 (March 2, 2017).

(2) The motion judge’s decision

[11] The motion judge dismissed the appellant’s motion. In its place, she granted an order dismissing the appellant’s entire action. The core of her reasoning was as follows:

Are 239 Ontario’s liabilities to Ms. Sicotte under the Mortgage presently “owing”? In my view, the answer to this question is “no”, based on a plain reading of the Postponement executed by Ms. Sicotte.

Giving the words used in the Postponement their ordinary and grammatical meaning, Ms. Sicotte agreed:

(i) the repayment of the BDC loan takes precedence over and shall be fully paid in priority to the Sicotte Loan;

(ii) repayment of the Sicotte Loan is postponed in favour of the BDC;

(iii) Ms. Sicotte’s right, title, and interest in any security in respect of the Sicotte Loan is postponed in favour of the BDC; and

(iv) while 239 Ontario is indebted to BDC, Ms. Sicotte is not entitled to demand payment of the Sicotte Loan.

As the Postponement expressly states, BDC made its loan to 239 Ontario conditional on the Sicotte Loan being postponed.

The wording of the Postponement is clear and unequivocal. I find that the intention of the parties to the Postponement — BDC, Ms. Sicotte, and 239 Ontario — was that no payments (interest or otherwise) could or would be made on the Sicotte Loan until such time as the BDC loan is repaid in full. The BDC loan has not been repaid in full; it matures in August 2043. I find that 239 Ontario remains indebted to Ms. Sicotte but, by operation of the Postponement, no amounts are presently “owing” by 239 Ontario under the Sicotte Loan and Ms. Sicotte has no right to insist on payment.

I reject Ms. Sicotte’s contention that the Postponement is irrelevant and her argument that the guarantors are not entitled to rely on an agreement to which they are not parties. To the contrary, Ms. Sicotte must be held to the clear terms of the agreement she and 239 Ontario made with BDC. Because of that bargain, there are no amounts presently owing by 239 Ontario to Ms. Sicotte under the Mortgage. Therefore, the Mortgage is not in default and the guarantors’ obligations are not triggered.

C. Issues

[12] The appellant advances three issues on the appeal:

1. Did the motion judge err by failing to distinguish between a debt being “owed” and a debt being subordinated and temporarily unenforceable against the borrower?

2. Did the motion judge err by failing to distinguish between the obligations of the primary debtor/borrower to the appellant as a lender and those of the guarantors?

3. Did the motion judge err by applying a lease-up pre-condition to the repayment of the subject loan after such pre-condition had ceased to apply on the pay-out of the previous construction financing?

[13] For the following reasons, I conclude that the motion judge made each of these three errors.

D. Analysis

(1) Standard of review

[14] I begin by noting that the motion judge was required to interpret several types of documents – loan, mortgage, guarantee, and postponement of debt. All these documents were commercial and contractual and, taken together, they involved several commercial and individual parties.

[15] In Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50 and 52, the Supreme Court of Canada held that “[c]ontractual interpretation involves issues of mixed fact and law” and that, therefore, deference is owed “to first instance decision-makers on points of contractual interpretation”. Accordingly, the “palpable and overriding error” standard applies to these issues, which are issues of contractual interpretation with no extricable question of law: see Heritage Capital Corp. v. Equitable Trust Co., 2016 SCC 19, [2016] 1 S.C.R. 306, at paras. 21-24. The appellant, fairly, acknowledges in her factum that this is the appropriate standard of review on each of the three issues she raises on this appeal.

(2) Issues 1 and 2: Failure to distinguish between the primary debt and the guarantee, and between “owing” and “enforceable” debt obligations

[16] The first two issues greatly overlap and can be dealt with together. In my view, the motion judge’s central error is that she confused the appellant’s rights as they relate to the underlying debt with her rights as they relate to the guarantee. The two are separate and distinct contractual obligations, and that distinction must be respected. The result arrived at by the motion judge improperly conflates the two. In the circumstances, this amounts to an error of law, or at the very least a palpable and overriding error of mixed fact and law, as those concepts relate to the standard of review.

[17] The Postponement Agreement, upon which both the guarantors and the motion judge placed exclusive reliance, was made between the appellant, the Borrower, and the BDC. The guarantors were not parties to the Postponement Agreement. Nothing in the Postponement Agreement purports to, or does, involve, much less alter, the relationship between the appellant and the guarantors. Simply put, there is nothing in the Postponement Agreement that purports to address or affect the appellant’s rights vis-à-vis the guarantors.

[18] On that latter point, I do not accept that the reference in the Postponement Agreement that “the [appellant] at the request of the [BDC] shall postpone in favour of the [BDC], all its or his right, title and interest in any security in respect of the Debt postponed by these presents” refers to the guarantee. First, the guarantee is not a security “postponed by these presents”. Second, if the BDC had intended to impact on the rights and obligations of the guarantors, it presumably would have sought their concurrence to that impact, either by making them parties to the Postponement Agreement or through the execution of a separate agreement.

[19] The motion judge also erred in concluding that the indebtedness of the Borrower to the appellant was not “owing” to the appellant. The motion judge recited this conclusion at para. 30, and again at para. 41, of her reasons. That conclusion reflects both a factual and a legal error. The mortgage, which secured the debt due by the Borrower to the appellant, has matured in accordance with its terms. It is an error to conclude that a matured mortgage does not represent monies that are due and owing.

[20] If those facts were not, on their own, sufficient to address this point, I would also note that the guarantee refers to debts “owing by the Borrower to the Lender or remaining unpaid by the Borrower to the Lender” (emphasis added). It should be self-evident that the debt remains unpaid by the Borrower. Neither the principal amount of the mortgage has been paid nor have the monthly interest payments been made. The motion judge does not make reference to this language in her analysis. Nevertheless, the motion judge does note that section 2.02 of the guarantee entitles the appellant to demand payment or performance from the guarantors, even if she has not exhausted her remedies as against the Borrower. Yet the motion judge gives no effect to this section.

[21] What the motion judge confused, with the active support of the guarantors, is the question of whether a debt is due and owing and whether a lender can enforce payment of a debt that is due and owing. The former addresses liability and the latter addresses enforcement. As this case demonstrates, just because a debt is due and owing does not necessarily mean that a lender can take steps to enforce payment of the debt. In this case, the appellant disentitled herself to enforce payment of the debt by the Borrower because of the contractual arrangements she entered into with the BDC, so as to permit the BDC to advance other monies to the Borrower. Understandably, the BDC insisted on being first in priority in terms of any enforcement rights against the Borrower (and its assets). The appellant contractually agreed to give the BDC that priority by postponing her enforcement rights as against the Borrower.

[22] What the appellant did not do, and which is central to the issues in this case, is postpone or otherwise alter her rights of enforcement against the guarantors. Contrary to the finding of the motion judge, the Postponement Agreement did not do so. The first clue to that conclusion, as I alluded to above, ought to have arisen from the salient fact that the guarantors were not parties to the Postponement Agreement.

[23] The motion judge’s conclusion about the Postponement Agreement is also inconsistent with the terms of the guarantee. The guarantee makes it clear that the obligations of the guarantors are independent of the obligations of the Borrower. By way of example, section 1.02 of the guarantee states:

The liability of the Guarantor in this Guarantee will be absolute and unconditional and will not be affected by:

(a) any lack of validity or enforceability of any agreement between the Borrower and the [appellant]…

[24] To a similar effect is section 2.01 of the guarantee, which states:

The liability of the Guarantor in this Guarantee will not be released, discharged, limited or in any way affected by anything done, suffered or permitted by the [appellant] in connection with any duties or liabilities of the Borrower to the [appellant] or any security therefor including any loss of or in respect of any security received by the [appellant] from the Borrower or others.

[25] With respect, these provisions in the guarantee could not be clearer or more broadly worded. While the motion judge made reference to these provisions, she failed to give them any effect.

[26] Consistent with the interpretative principles set out in Sattva, the surrounding circumstances are relevant to a proper interpretation of the contractual document. Rothstein J. said, at para. 47:

[T]he interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding”. To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. [Citations omitted.]

[27] The surrounding circumstances known to the parties here was that the Borrower needed to obtain construction financing to ensure that the vacant land that it held as its only asset could be developed so as to generate revenues to pay the Borrower’s obligations. The appellant, recognizing that reality, agreed to postpone her rights as against the Borrower to enable that financing to take place. Indeed, she did so twice: once for the Borrower to obtain construction financing, and then again when the Borrower negotiated the loan with the BDC that, among other things, paid out the construction financing.

[28] However, there was never any agreement that the appellant’s rights against the guarantors were to be similarly postponed. That conclusion flows inevitably from the factual record. In particular, there was an express agreement, at the time of the BDC financing, to amend the mortgage in four specific respects, as I set out above.

[29] The respondents expressly agreed to these changes. [1] If the appellant’s rights were to be, in all respects, entirely subsumed and postponed to the BDC financing, as now urged by the guarantors, and as found by the motion judge, then there was no need for a one-year extension of the mortgage since, on the motion judge’s findings, the appellant was not able to enforce the mortgage, or the guarantee, until the BDC financing became due in 2043. Nor does it appear that there was much practical purpose for providing that interest-only payments were to be made since, as the respondents would have it, there is no remedy for any failure to make those payments. Indeed, those interest-only payments, that the respondents expressly agreed were to be made, stopped only three months after they began and yet, in the result, the appellant is precluded from obtaining any relief arising from the failure to make those payments.

[30] I would add, on this point, that there is evidence in the record that at least one of the purposes of the one-year extension was to allow time for the parties to pay out the Borrower’s debt to the appellant. This intent is set out in an email from the appellant’s lawyer to the guarantors dated July 3, 2018, the same email that confirmed the guarantors’ acceptance of the terms, and the understanding upon which the appellant was postponing her rights against the Borrower to those of the BDC. If, as found by the motion judge, the appellant had waived her rights to payment of the debt, not only from the Borrower but also from the guarantors, there was no practical purpose to paying the appellant out, since the appellant had no rights of collection for the next twenty-five years. The motion judge did not address this evidence.

(3) Issue 3: The lease-up of the property

[31] The third issue arises from an alternative argument advanced by the guarantors. The guarantors contend that the construction financing contained a term that the loan amount did not have to be repaid until all of the units to be constructed in the buildings were leased. That has never happened. The guarantors submit that this is another reason that no amounts are owing by the Borrower, or by them, to the appellant.

[32] That contention not only suffers from the same flaw of ignoring the distinction between the obligations under the principal debt and the obligations under the guarantee, but it also ignores the salient fact that the construction financing was paid out by the BDC financing. There is no basis in the record for concluding that the terms attached to the construction financing survived that payout and remained in force.

(4) Potential new issue: Section 3.01 of the guarantee

[33] Finally, the respondent Mr. Marchand raises what appears to be a new issue, and that is the effect of section 3.01 of the guarantee. Section 3.01 reads:

At any time that the [appellant] is entitled to enforce its security in accordance with the provisions of the Mortgage, the [appellant] shall be entitled to make demand upon any one or all persons comprising the Guarantor for payment and performance of all Obligations.

[34] Mr. Marchand contends that because the appellant was not in a position to enforce her rights against the Borrower, she was not entitled to make a demand for payment under the guarantee. It is not clear if this issue was raised before the motion judge. Certainly, it is not referred to in her reasons. In any event, it does not assist the guarantors.

[35] The appellant was entitled to enforce her security “in accordance with the provisions of the Mortgage”. Default had been made in the payments required and the mortgage had matured. The argument that there was no right to enforce because of the Postponement Agreement ignores the fact that section 3.01 of the guarantee refers expressly to the provisions of the mortgage, not any other document. The argument also ignores the specific provisions of the guarantee in sections 1.02 and 2.01 that I have referred to above, and it ignores section 4.02 which provides that the guarantee “constitutes the entire agreement between the Guarantor and the [appellant]”. Mr. Marchand acknowledges that the interpretation of the guarantee requires that all of its terms are to be read and considered as a whole.

E. Conclusion

[36] In the end result, as I have already observed, the conclusion of the motion judge has the effect of precluding the appellant, not only from being repaid the monies that were borrowed from her for the next twenty-two years, but also from receiving any interest payments to her on those same funds. Indeed, the time for repayment could go beyond that point since the BDC has the right to extend its financing. It means that the appellant must wait more than two decades, not only to be repaid the monies that she lent, but even to receive any return on those monies. That is a result that drives the interpretation of the security arrangements between the appellant and the guarantors to an absurd result. As noted by Cromwell J. in Bhasin v. Hrynew, 2014 SCC 71, [2014] 3 S.C.R. 494, at para. 45:

Further, as Lord Reid observed in Schuler A.G. v. Wickman Machine Tool Sales Ltd., [1974] A.C. 235 (H.L.), at p. 251, “[t]he more unreasonable the result the more unlikely it is that the parties can have intended it”.

[37] I would allow the appeal, set aside the order of the motion judge, and grant summary judgment against the guarantors, each as to one-third of the outstanding debt, in accordance with the terms of the guarantee. I would award the appellant her costs of the appeal fixed in the amount of $15,000, inclusive of disbursements and HST. I would also award the appellant the costs of the action and the summary judgment motion fixed in the amount of $20,000, inclusive of disbursements and HST.

Released: December 21, 2021 “J.C.M.” “I.V.B. Nordheimer J.A.” “I agree. J.C. MacPherson J.A.” “I agree. Janet Simmons J.A.”

[1] I note that, arguably, the guarantors would have been bound by these changes in any event since section 2.01 of the guarantee provides that the appellant could deal with the Borrower “without obtaining the consent of or giving notice to the Guarantor”.