Bank of Montreal v. Charest et al. [Indexed as: Bank of Montreal v. Charest]
60 O.R. (3d) 562
[2002] O.J. No. 2327
Court File No. 252/01
Ontario Superior Court of Justice
Divisional Court
Then, Epstein and Sanderson JJ.
June 12, 2002
Guarantee and suretyship -- Discharge of guarantor -- Duties of creditors -- Creditor realizing on security and then suing guarantor for deficiency -- Guarantor not discharged by creditor's failure to give notice to guarantor under Personal Property Security Act -- Creditor having contractual rights to sue guarantor for deficiency independent of rights under Personal Property Security Act -- Personal Property Security Act, R.S.O. 1990, c. P.10, s. 63(4). [page563]
Personal property security -- Guarantee and suretyship -- Creditor realizing on security and then suing guarantor for deficiency -- Guarantor not discharged by creditor's failure to give notice to guarantor under Personal Property Security Act -- Creditor having contractual rights to sue guarantor for deficiency independent of rights under Personal Property Security Act -- Personal Property Security Act, R.S.O. 1990, c. P.10, s. 63(4).
The plaintiff bank provided credit facilities to Dynamic Steel Sales ("Dynamic") pursuant to two general security agreements and also chattel mortgages in respect of specified assets. By a guarantee in writing, the defendant SC guaranteed and, by letter, the defendant BC agreed to guarantee, Dynamic's debts to a limit of $250,000. After the bank demanded payment from Dynamic, it filed an assignment in bankruptcy. The bank then gave notice to Dynamic pursuant to s. 63(4) of the Personal Property Security Act ("PPSA") that it intended to dispose of assets. The bank, however, did not give notice to the defendants. The assets were sold, and there was a deficiency in repayment of the debt. The bank then sued the defendants for the deficiency. On a motion for summary judgment, the defendants moved to have the action dismissed. Cullity J. dismissed the motion and, leave being granted, the defendants appealed to the Divisional Court.
Held, the appeal should be dismissed.
Cullity J. was correct in holding that the bank had a right to sue Dynamic for the deficiency either under the wording of the general security agreements or at common law. On the state of the authorities, it was open for him to hold that a secured creditor has a prima facie right to sue for a deficiency. He was also correct in holding that the bank had a contractual right to sue the defendant guarantors. The wording of the guarantee made the defendants liable for the balance of any remaining liability after realization on the security, and the failure to give notice under the PPSA did not disentitle the bank from suing on the guarantee. While the defendants were entitled to notice under the PPSA, the bank's failure to give notice did not prevent it from enforcing the guarantee when, as in this case, (a) it had a right as the creditor to sue the principal debtor for the deficiency; (b) the terms of the guarantee make the guarantor liable for the balance owed by the debtor to the creditor at the time the creditor enforces the guarantee; and (c) the guarantee did not contain a contractual right for the guarantor to receive notice. Further, there was much to commend Cullity J.'s observation that the issue should be considered to depend on the interpretation of the PPSA. Section 64(3) now clearly provides that the debtor is liable for any deficiency unless otherwise agreed in the security agreement or otherwise provided under the PPSA or any other Act. Section 67(2) provides that if a person fails to comply with duties under the PPSA, including the duty to give notice, the person to whom the duty is owed is entitled to compensation for proven loss or damage. To base a secured creditor's right to sue for a deficiency, not upon s. 64(3) but upon a contractual provision that may be inconsistent with a provision in the PPSA, is to ignore that s. 59(5) provides, amongst other things, that, to the extent that ss. 63-66 confer rights on debtors and duties on secured creditors, those rights and duties shall not be waived or varied except as provided in the PPSA.
APPEAL of an order of Cullity J. (2000), 2001 28030 (ON SC), 52 O.R. (3d) 497 (S.C.J.) dismissing a motion for summary judgment.
Cases referred to Bank of Montreal v. Featherstone (1989), 1989 4218 (ON CA), 68 O.R. (2d) 541, 33 O.A.C. 377, 58 D.L.R. (4th) 567, 74 C.B.R. (N.S.) 150, 9 P.P.S.A.C. 139 (C.A.); Canadian Imperial Bank of Commerce v. Moshi (1992), 3 P.P.S.A.C. (2d) 86, 55 O.A.C. 230 (C.A.) [Leave to appeal to S.C.C. refused (1992), 145 W.R. 391n, 59 O.A.C. 319n], revg (1989), 9 P.P.S.A.C. 275 (Ont. H.C.J.); [page564] Harvey Hubbell Canada Inc. v. Thornhurst Corp. (1993), 1993 8755 (ON CA), 13 O.R. (3d) 451n (C.A.), revg (1990) 69 O.R. (2d) 53, 9 P.P.S.A.C. 77 (H.C.J.); Royal Bank of Canada v. J. Segreto Construction Ltd. (1988), 1988 4718 (ON CA), 63 O.R. (2d) 502, 25 O.A.C. 297, 47 D.L.R. (4th) 761, 67 C.B.R. (N.S.) 168, 38 B.L.R. 134, 8 P.P.S.A.C. 43 (C.A.), affg (1986), 32 B.L.R. 169, 59 C.B.R. (N.S.) 190, 6 P.P.S.A.C. 37 (Ont. Dist. Ct.) Statutes referred to Personal Property Security Act, R.S.O. 1990, c. P.10, ss. 59(5), 63-66, 63(4), 64(3), 67(2) Authorities referred to McLaren, R.M., Secured Transactions in Personal Property in Canada (Toronto: Carswell, 1979) Ziegel, J.S."Deficiency Claims and the OPPSA" (1989), 3 B.F.L.R. 196
Stephen Schwartz, for respondent/plaintiff. Itzik Basman, for appellants/defendants.
[1] BY THE COURT: -- This is an appeal by the defendants Steven Charest and Barbara Charest (the "Charests" or the "guarantors") pursuant to leave granted by MacFarland J. dated May 11, 2001 from the order of Cullity J. dated December 19, 2000 dismissing their motion for summary dismissal of the plaintiff's/Bank's action against them. In its action, the Bank is seeking to enforce a guarantee of the debts and liabilities of Dynamic Steel Sales ("Dynamic") provided by Steven Charest and an agreement to execute a similar guarantee provided by Barbara Charest.
[2] The issue before Cullity J., simply stated, was whether the Bank is precluded from recovering from the guarantors any deficiency remaining after disposition of Dynamic's assets when it had not given them notice pursuant to s. 63(4) of the Personal Property Security Act, R.S.O. 1990, c. P.10, as amended (the "PPSA") prior to disposing of those assets.
Background
[3] The Bank provided credit facilities to Dynamic. Dynamic provided security to the Bank over its present and future, tangible and intangible assets -- including equipment, inventory and accounts receivable -- pursuant to two general security agreements dated June 25, 1992 and June 26, 1996. Dynamic also furnished chattel mortgages to the Bank in respect of specified assets. Steven Charest guaranteed and Barbara Charest, by letter dated June 25, 1996, agreed to guarantee Dynamic's debt to a limit of $250,000. [page565]
[4] After the Bank demanded payment from Dynamic, Dynamic filed an assignment in bankruptcy. The Bank then issued a notice to Dynamic pursuant to s. 63(4) of the PPSA notifying Dynamic that it intended to dispose of the underlying property and assets unless the security was redeemed.
[5] The Bank did not direct the notice to the Charests and they did not receive the notice.
Issue #1 -- Did the Bank have a Right to Sue (a) Dynamic and (b) the Guarantors for the Deficiency?
(a) Did the Bank have the right to sue Dynamic?
[6] Cullity J. found that the Bank had the right to sue Dynamic for the deficiency on two bases: (i) the wording of the contract; and (ii) at common law.
(i) Under the contract
[7] At paras. 28 and 29 of his reasons, Cullity J. analyzed the wording of the relevant contracts, the general security agreements. He concluded that the language of each general security agreement was broad enough to give the Bank the right to sue Dynamic for the deficiency.
[8] Paragraph 10 of each agreement provides that upon "any default under the security agreement, the Bank may declare any or all of the obligations to be immediately due and payable and may proceed to realize the security hereby constituted and to enforce its rights" by a variety of methods including the appointment of a receiver and the leasing or selling of the secured assets. It also stipulates that no remedy for the realization of the security "or for the enforcement of the rights of the Bank shall be exclusive of or dependent on any other such remedy, but any one or more of such remedies may from time to time be exercised independently or in combination" (italics added).
[9] Paragraph 11 of each general security agreement includes the following:
Any and all payments made in respect of the Obligations from time to time and moneys realised from any securities held therefor (including moneys realised on any enforcement of this Security Agreement) may be applied to such part or part of the Obligations as a the Bank may see fit, and the Bank shall at all times and from time to time have a right to change any appropriation as the Bank may see fit.
[10] On the wording of the general security agreements, it was open for Cullity J. to hold that the Bank has a contractual right to sue Dynamic for the deficiency. [page566]
(ii) At common law
[11] At para. 22 of his reasons, Cullity J. observed that the Court of Appeal in Bank of Montreal v. Featherstone (1989), 1989 4218 (ON CA), 68 O.R. (2d) 541, 58 D.L.R. (4th) 567 (C.A.) has left open the issue as to whether "the implication [of a right to claim a deficiency] must be found in the intentions of the parties revealed by the terms of the agreements without reference to any presumption of common law or equity". He quoted the following portion of the reasons of the Court of Appeal in Featherstone, supra, at p. 544 O.R.:
In the light of this conclusion, it is not necessary to pursue the issue further as to whether the right to claim the deficiency in the present case could be based on common law principles. In this respect it may be noted that at common law it was only in the case of a conditional sale contract that the creditor, in the absence of an agreement to the contrary, was not entitled to recover the deficiency based upon the repossession and resale of the property sold; see Delta Acceptance Corp. v. Redman, 1966 130 (ON CA), [1966] 2 O.R. 37 at pp. 46-47, 55 D.L.R. (2d) 481 at pp. 490-91 (C.A.).
[12] Based on that passage, Cullity J. said at para. 23: "As the last sentence indicates, in loan transactions with collateral security, a creditor has, prima facie, a right to sue the debtor for a deficiency."
[13] At para. 25, he postulated that no express reference to the prima facie right of a secured creditor to claim the deficiency is contained in the "otherwise comprehensive security agreements" at bar. In support of this conclusion, he cited the reason given by Professor Ziegel in a case comment on Royal Bank of Canada v. J. Segreto Construction Ltd. (1986), 1988 4718 (ON CA), 63 O.R. (2d) 502 at (1989), 3 B.F.L.R. 196 at p. 199: "It is fundamental to the concept of a secured loan that the security is only collateral to the debt and that the primary obligation remains intact until the debt has been fully discharged."
[14] The same case comment contains the following:
It is true that the common law did not permit a conditional seller to sue for a deficiency where there was no deficiency clause, but this rule was peculiar to conditional sales and did not apply to secured loan agreements such as the present agreement. . . . At common law a conditional sale agreement was viewed as an executory agreement of sale, whence it followed that repossession and resale of the goods terminated the agreement and the buyer's liability to pay the price, unless the agreement provided otherwise.
[15] In Segreto, supra, Finlayson J.A. said at p. 505 O.R.:
It is to be noted that there is no provision for a suit for any deficiency whether or not there has been compliance with the notice provisions of s. 59(5). The statutory notice provisions state only that the debtor may be liable for any deficiency (s. 59(5)(e)), thus appearing to suggest that the security holder must bargain for the right to sue for a deficiency. In contrast, s. 60 places a clear obligation on the secured party to account for a surplus. [page567]
[16] In the same case comment, Ziegel noted that since Segreto was decided, the PPSA has been amended and clarified.
[17] [Section] 64(3) of the PPSA now provides as follows:
64(3) [U]nless otherwise agreed in the security agreement, or unless otherwise provided under this or any other Act, the debtor is liable for any deficiency.
[18] At para. 27 of his reasons, Cullity J. said that he was troubled by passages in Segreto, supra"that seem to contemplate that prima facie, a secured creditor has no right to sue for a deficiency at common law". Although he did not specify the passages to which he was referring, it is likely that he was referring in part to the passage at p. 509 O.R. of Segreto as follows:
In my opinion the Appellant cannot succeed. It has shown no contractual right to sue for the deficiency and it appears that no such right exists at common law. It cannot rely on the PPSA as evidencing [an] implied right to recover the deficiency because it is not in compliance with the notice provisions of that statute.
[19] After reiterating at para. 27 that the continued existence of the otherwise well established distinction between conditional sales contracts and loans with collateral security was confirmed (by the Court of Appeal) in Featherstone, and after noting that Featherstone was decided after Segreto and is "the only subsequent case in which the point has been considered", Cullity J. concluded that he should "adhere to the traditional analysis" (i.e. that a secured creditor, prima facie, has the right at common law to sue for a deficiency) as opposed to the view expressed in Segreto (i.e., that it appears that no such right exists at common law).
[20] On the state of the authorities at present, it was open to Cullity J. to follow the lead of the Court of Appeal in Featherstone, supra, to make a distinction between conditional sales contracts and secured loans, and to hold that the Bank, a secured creditor, also has a prima facie common law right to sue for a deficiency.
(b) Did the Bank have the right to sue the guarantors?
The wording of the guarantee
[21] The guarantee signed by Steven Charest guarantees payment to the Bank limited to $250,000 as follows:
. . . of all present and future debts and liabilities direct or indirect or otherwise, now or at any time and from time to time hereafter due or owing to the Bank from or by the Customer or by any successor corporation of the Customer and whether incurred by the Customer alone or jointly with any other corporation, person or persons, or otherwise howsoever . . .
IT IS FURTHER AGREED that the Bank, without consent of the undersigned and without exonerating in whole or in part the undersigned, or any of [page568] them (if more than one), may grant time, renewals, extensions, indulgences, releases and discharges to, may take securities from and give the same and any or all existing securities up to, may abstain from taking securities from, or from perfecting securities of, may accept compositions from, and may otherwise change the terms of any of the debts and liabilities hereby guaranteed and otherwise deal with the Customer and all other persons (including the undersigned, or any one of them, and any other guarantor) and securities, as the Bank may see fit, and that all dividends, compositions, and moneys received by the Bank from the Customer from any other persons or estates capable of being applied by the Bank in reduction of the debts and liabilities hereby guaranteed, shall be regarded for all purposes as payments in gross, and the Bank shall be entitled to prove against the estate of the Customer upon any insolvency or winding-up in respect of the whole of said debts and liabilities, and the undersigned shall have no right to be subrogated to the Bank in respect of any such proof until the Bank shall have received from such estate payment in full of its claim with interest.
AND IT IS FURTHER AGREED that this shall be a continuing guarantee, and shall cover and secure any ultimate balance- owing to the Bank including all costs, charges and expenses which the Bank may incur in enforcing or obtaining payment of the sums of money due to the Bank from the Customer either alone or in conjunction with any other corporation, person or persons or otherwise howsoever, or attempting to do so. The Bank shall not be obliged to seek any recourse against the Customer or other persons or the securities it may hold before being entitled to payment from the undersigned of all and every debts and liabilities hereby guaranteed.
THE UNDERSIGNED and each of them (if more than one) acknowledges that this Guarantee has been delivered free of any conditions and that no representations have been made to the undersigned or any of them (if more than one) affecting the liability of the undersigned or any of them (if more than one) under this Guarantee save as may be specifically embodied herein and agrees that this Guarantee is in addition to and not in substitution for any other Guarantees held or which may hereafter be held by the said Bank. The present Guarantee shall remain in full force and effect until all debts and obligations hereby secured have been irrevocably and indefensibly paid and released.
[22] Cullity J. found that [the] wording of the guarantee makes the Charests liable for the balance of any remaining liability of Dynamic after the realization on the security, as it secures "any ultimate balance owing to the Bank". In addition, it stipulates that the Bank can proceed against the guarantors even without seeking recourse against Dynamic.
[23] We agree.
Issue #2 -- Did the Failure to Give Notice Under the PPSA Disentitle the Bank from Suing the Charests on the Guarantee?
[24] On this issue, Cullity J. asked himself:
(a) whether the Bank was required to give the guarantors notice pursuant to s. 63(4)(b); and
(b) if so, what are the consequences of failing to do so. [page569]
(a) Was the bank required to give notice?
[25] Cullity J. concluded that the words of s. 63(4)(b) read literally require notice to be given to the guarantors as they are obligors within the meaning of s. 63(4) of the PPSA.
(b) What are the consequences of failing to give notice under s. 63(4) of the PPSA?
[26] Counsel for the Charests submitted on the motion that: (1) failure to give notice to the guarantors altogether disentitled the Bank from enforcing the guarantee and the agreement to guarantee; (2) before a secured party can rely on a provision in the PPSA to recover a deficiency, it must comply with the provisions of the Act, including the notice provisions.
[27] When Cullity J. said at para. 12 that that submission was given "some support" in Segreto, supra, he was referring to the following passage in Segreto, at p. 508 O.R.:
But if the security holder is relying on the P.P.S.A. and nothing else, surely he must comply generally with its provisions dealing with default and sale, and in particular with [para. 63(5)(f)] which deals with deficiencies . . .
[28] Cullity J. said at para. 9:
I have found nothing in the legislation that would suggest that it was intended that a failure to give notice will, ipso facto, discharge a guarantor from liability [and] . . . if notice is required, I would have thought that the answer to the second question, [i.e., what are the consequences of failing to give notice?] is provided in subsection 67(2) which confers a right to compensation for any reasonably foreseeable loss or damage caused by a breach of the obligation is imposed by Part V.
[29] Section 67(2) of the PPSA provides as follows:
67(2) Compensation for loss or damages -- Where a person fails to discharge any duties or obligations imposed upon the person by Part V, section 17 or subsection 34(3) or 35(4), the person to whom the duty or obligation is owed has a right to recover compensation for any loss or damage suffered because of the failure and which was reasonably foreseeable, and, where the collateral is consumer goods, the debtor has a right to recover in any event an amount equal to the greater of $500 or the actual loss or damages.
[30] However, he concluded that on the present state of the authorities, he could not literally [apply] the wording of the PPSA.
[31] At para. 19, Cullity J. noted that Featherstone, supra, and Canadian Imperial Bank of Commerce v. Moshi (1992), 3 P.P.S.A.C. (2d) 86 (C.A.) "appear" to permit a creditor to ignore statutory requirements by relying on rights that exist contractually independent of the statute, a "surprising" result given the wording of s. 59(5) of the PPSA which provides as follows: [page570]
59(5) Non-waiver of rights and duties -- Despite Subsection (1), the provisions of section 17, and sections 63 to 66, to the extent that they give rights to the debtor and impose duties upon the secured party, shall not be waived or varied except as provided by this Act.
[32] He set out the test to be applied at para. 20 of his reasons:
I believe it is implicit in Featherstone and Moshi that failure by a creditor to give the statutory notice of an intended realization of a security will not prevent the creditor from enforcing the guarantee if (a) the creditor has a contractual right to sue the principal debtor for the deficiency; (b) the terms of the guarantee purport to make the guarantor liable for the balance of any liabilities owed by the debtor to the creditor at the time the creditor seeks to enforce the guarantee; and (c) the relevant documentation between the parties does not give the guarantor a contractual right to receive notice.
[33] As the Bank has both a common law and a contractual right to sue Dynamic for the deficiency, as the terms of the guarantee make the Charests liable to the Bank and as the relevant documentation does not give the Charests a contractual right to receive notice, the motions judge concluded that the Bank can enforce both the guarantee and the agreement to guarantee in question notwithstanding the Bank's failure to give notice.
[34] He commented at para. 31:
While, without the guidance they [Featherstone and Moshi] provide, I might well have failed to draw the necessary sharp distinction between rights arising under the PPSA and those arising by way of contract and common law -- and while I believe there would otherwise be considerable force in the view that the issue in this case should be considered to depend essentially on the interpretation of the PPSA -- I am bound by the decisions of the Court of Appeal and I am satisfied that this is sufficient to dispose of the first ground on which summary judgment was sought.
[35] Based on Featherstone, supra, and Moshi, supra, it was open for Cullity J. to hold that a secured creditor's failure to give statutory notice to a guarantor does not prevent that creditor from enforcing a guarantee if (a) the creditor has a right to sue the principal debtor for the deficiency; (b) the terms of the guarantee purport to make the guarantor liable for the balance owed by the debtor to the creditor at the time the creditor seeks to enforce the guarantee; and (c) the guarantee does not contain a contractual right to receive notice. It was open to Cullity J. to reach the conclusion that he did based on the following:
(1) the Bank, a secured creditor has a prima facie right to sue for the deficiency at common law and a contractual right as well, given the wording of the general security agreements;
(2) the terms of the guarantee make the guarantor liable for the balance owed; and[page571]
(3) the guarantee does not contain a contractual right to receive notice.
[36] In our view, there is much to recommend Cullity J.'s observation about the "considerable force" of the view that the issue here should be considered to depend on the interpretation of the PPSA. Section 64(3) now clearly provides that a debtor is liable for any deficiency unless otherwise agreed in the security agreement or otherwise provided under the PPSA or any Act. Section 67(2) provides that if a person fails to comply with duties under the Act (including the duty to give notice), the person to whom the duty is owed is entitled to compensation for proven loss or damage.
[37] Weiler J. (as she then was) in Harvey Hubbell Canada Inc. v. Thornhurst Corp. (1990), 69 O.R. (2d) 53, 9 P.P.S.A.C. 77 (H.C.J.) noted at p. 57 O.R. that Professor McLaren in Secured Transactions in Personal Property in Canada (Toronto: Carswell, 1979), has criticized the Segreto approach because it:
. . . least reflects the policy and objective of the Act of attending the highest possible realisable value in the most simple, efficient and flexible way, as being the best way to satisfy both the claims of the secured party and the debtor. When the notice is defective, the Act provides for damages including a statutory right to them in s. 63(b). In the past, these remedies were not available to debtors and the judiciary developed its anti-deficiency protection in the case law. This necessity is now removed by the right to damages of s. 63(2) [now s. 67(2)]. In this way the courts can best balance relief for the debtor without unduly prejudicing the creditor. It should be remembered that a denial of deficiency is tantamount to awarding damages to the debtor without his having to prove he suffered any real injury. He has that right in some cases under clause (b). The courts should not extend it.
[38] Professor Ziegel made a similar observation in 3 B.F.L.R., supra, at p. 202:
This approach [i.e., the denial of the right to sue for the deficiency] . . . failed . . . to reconcile the non- admissibility of the secured party's deficiency claim with the express damage provision in s. 63(2) [now s. 67(2)] of the Ontario Act.
This at least provides some evidence that Ontario drafters intended this clause to be the only remedy for non-compliance with the enforcement provisions in the OPPSA . . .
Granting that s. 59 confers important rights on the debtor, why are damages not an adequate remedy for non-compliance and why, as plaintiff's counsel urged, should the defendant receive a windfall out of all proportion to any potential loss suffered by him?
[39] Further, to base a secured creditor's right to sue for a deficiency, not upon s. 64(3) of the PPSA, but upon a contractual provision which may be inconsistent with a provision in the PPSA is to ignore that s. 59(5) provides, inter alia, that, to the extent that [page572] ss. 63-66 confer rights on debtors and duties on secured creditors, those rights and duties shall not be waived or varied except as provided in the PPSA.
Disposition
[40] The appeal is dismissed. Counsel may make written submissions as to costs.
Appeal dismissed.