ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 6851/11
DATE: 2012-04-12

BETWEEN:

THE TORNTO-DOMINION BANK Plaintiff
– and –
FORMSTRUCTURES INC. and JOEL MICHAEL SWARTZ Defendants

James A. Butson, Counsel for the Plaintiff

Bruce E. Bussin, Counsel for the Defendants

HEARD: April 4, 2012

REASONS FOR JUDGMENT

MURRAY J.

[ 1 ] This is a motion brought by the plaintiff Bank for summary judgment on a loan advanced to the defendant Formstructures Inc. The defendant Joel Michael Swartz is sued as guarantor.

The Position of the Plaintiff

[ 2 ] The defendant, Formstructures Inc., executed a small business banking credit arrangement dated January 4, 2005, whereby the plaintiff provided the Company with a line of credit in the amount of $50,000. The credit arrangement provided that the company was to make monthly payments of accrued interest. Pursuant to the terms of the loan agreement, interest accrued on any amounts outstanding under the credit agreement at the plaintiff's prime rate of interest in effect from time to time plus 3% per annum. The loan is repayable on demand.

[ 3 ] The defendant, Joel Michael Swartz, executed a guarantee of the indebtedness of the Company. Swartz is the president of the corporate defendant.

[ 4 ] As a result of the default in its indebtedness with the plaintiff, on October 14, 2011, the plaintiff sent a formal demand for payment. On November 18, 2011, the plaintiff’s solicitors sent demand letters and a notice of intention to enforce security with respect to the indebtedness. Default continued and a statement of claim was issued on December 6, 2011. Default continues.

[ 5 ] The plaintiff bank seeks judgment against both defendants.

The Position of the Defendants

[ 6 ] The defendants assert that the Bank created a new loan contrary to the provisions of the credit agreement and terminated the initial loan in May of 2011. The defendants assert that a different rate of interest has been demanded than was agreed in the original credit arrangement.

[ 7 ] The defendant guarantor relies on the language of the guarantee that the liability of the guarantor is "continuing, absolute and unconditional". Swartz argues that because the guarantee contains that language, liability is not dependent on the occurrence of a demand and that the two-year limitation period starts to run on the date the guarantee was made, that is in January of 2005 and therefore the claim against the guarantor is statute-barred. The defendant Swartz relies on Hare v Hare, 2006 41650 (ON CA) , 83 O.R. (3d) 766, a decision of the Court of Appeal.

The Evidence

[ 8 ] The uncontradicted evidence of Allan Wong, an affiant for the plaintiff Bank, is that there was no new loan transaction. The original loan was a business line of credit revolving by way of overdraft. The loan operated as a normal line of credit with transactions being debited and credited to the business account. This included interest in service fees which were debited against the account on a monthly basis and paid accordingly. The account operated in a normal fashion until the end of 2010 at which time the defendants were only making nominal deposits to the account to cover the interest. By early 2011, this activity had ceased and the deposits being made were insufficient to cover the interest and service fees. Mr. Wong’s evidence is that, for internal accounting purposes, the loan was converted to a demand loan and the matter assigned to Account Recovery for collection. There was no new loan and no new terms. There was no newly executed loan documentation. The assignment of a new loan number was only done for internal bank purposes to ensure that no new debits would be permitted on the account other than the accruing interest in service charges. There was no change in the contractual interest rate, that is, prime plus 3% per annum. A demand letter sent by counsel for the Bank mistakenly referred to the interest rate as prime plus 1% per annum. The loan has not been paid.

[ 9 ] Mr. Wong also deposed that the loan was not in default for more than two years prior to the commencement of the lawsuit. The loan was a business line of credit revolving by way of overdraft. Payments of interest in service charges were being made throughout the operation of the loan. Overdraft interest was debited every month.

Analysis

[ 10 ] A demand letter sent by the Bank’s solicitors, which inadvertently referred to the wrong interest rate, was not an attempt to change the terms and conditions of the loan agreement. It was an innocent error. The amount demanded was calculated in accordance with the loan agreement at prime plus 3%. As a matter of law, such a unilateral demand could not change the terms and conditions of the loan agreement. It is not disputed that the loan, with interest calculated in accordance, with the loan agreement remains unpaid.

[ 11 ] The guarantee signed by Mr. Swartz is clear on its face. The guarantee is an unlimited guarantee of the obligations of Formstructures Inc. The guarantee spells out the obligations of the guarantor as follows:

In consideration of the Toronto-Dominion Bank dealing with or continuing to deal with the customer, you guarantee payment on demand, of all present and future debts and liabilities of the customer to the bank (“obligations”). Obligations includes, without limitation, debts and liabilities, both direct and indirect (whether incurred alone or jointly with others, whether absolute or contingent, whether matured or not matured, and whether for principal, interest or fees) of the customer to the bank under any and all credit facilities, overdrafts, ... and includes all costs and expenses, including legal fees and expenses, incurred by the bank in connection with its dealings with the customer. You agree to be bound by each of the terms and conditions set out below.

[ 12 ] Under the heading "The Nature of Your Liability", the guarantee signed by Swartz stated:

Your liability under this guarantee is continuing, absolute and unconditional. It will not be limited, reduced, or otherwise affected by any one or more of the following events:

• the unenforceability of the obligations, or any of them, any security, or any of their rights against the customer or any other person

• any renewal of any loan, mortgage or credit facility forming part of the obligations or any change in the terms or amount or existence of the obligations

• the customer’s account being closed or the bank ceasing to deal with the customer

[ 13 ] Under the heading "The Nature of Your Liability" there is recited a number of events which would not affect the liability of the guarantor. I have only reproduced three of the multiple events recited in the contract between the guarantor and the bank. In essence, the language of the guarantee agreement makes it clear that the guarantor's obligations would not be affected by a number of events, all of which need not be recited here. The language specifying that the liability of the guarantor under the guarantee is “continuing, absolute and unconditional” is not inconsistent with nor does it detract from or modify the obligation of the guarantor to guarantee payment on demand of all present and future debts and liabilities of Formstructures Inc.

[ 14 ] As noted above, the agreement between the guarantor and the Bank states: “In consideration of the Toronto-Dominion Bank dealing with or continuing to deal with the customer, you guarantee payment on demand….”

[ 15 ] Liability pursuant to the guarantee is only triggered when a demand is made. Hare v Hare has no application in this case. The Ontario Court of Appeal in Bank of Nova Scotia v. Williamson, 2009 ONCA 754 , [2009] O.J. No. 4507 , 97 O.R. (3d) 561 clarified the law. The Court of Appeal affirmed that where the obligation of a third party guarantor is to pay on demand, then demand is a condition precedent to that obligation.

[ 16 ] Furthermore, the Limitations Act, 2002 was amended on November 27, 2008 to add ss. 5(3) and (4), which deal specifically with the requirement for the commencement of the limitation period for demand obligations. Those sections provide as follows:

Demand Obligations

5.(3) For the purposes of subclause (1)(a)(i), the day on which injury, loss or damage occurs in relation to a demand obligation is the first day on which there is a failure to perform the obligation, once a demand for the performance is made.

(4) Subsection (3) applies in respect of every demand obligation created on or after January 1, 2004.

[ 17 ] The Court of Appeal in Bank of Nova Scotia v. Williamson stated that the amendment to the Limitations Act, 2002 “demonstrates the intent of the legislature that for all demand obligations, a demand is a condition precedent for the commencement of the limitation period.”

[ 18 ] The claim in this case was made within the limitation period.

[ 19 ] Having reviewed the evidence, and applying the test established by the O.C.A. in Combined Air Mechanical Services Inc. v. Flesch , 2011 ONCA 764 , 108 O.R. (3d) 1, I am satisfied that there is no genuine issue requiring a trial and that summary judgment should be granted in this case.

Conclusion

[ 20 ] The plaintiff Bank is entitled to judgment in the amount of $50,860.42 which is the indebtedness calculated as of April 29, 2011. The plaintiff is entitled to post judgment interest in accordance with the loan agreement at prime plus 3%.

Costs

[ 21 ] The plaintiff is entitled to its cost on a substantial indemnity basis. If the parties are unable to agree on costs, I may be spoken to on a date to be arranged through the trial coordinator in Milton. If counsel prefer, they also may arrange a telephone conference for purposes of speaking to costs. Such telephone conference should also be arranged through the trial coordinator in Milton.

MURRAY J.

Released: April 12, 2012

COURT FILE NO.: 6851/11
DATE: 2012-04-12

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: THE TORNTO-DOMINION BANK Plaintiff – and – FORMSTRUCTURES INC. and JOEL MICHAEL SWARTZ Defendants

REASONS FOR JUDGMENT
MURRAY J.

Released: April 12, 2012