ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-11-105394-00
DATE: 20120620

BETWEEN:

ROYAL BANK OF CANADA Plaintiff – and – SAMSON MANAGEMENT AND SOLUTIONS LTD., JASON BRASSEUR and CHERYL CUSACK Defendant

M. Greenglass, for the Plaintiff

H.R. Bennett, for the Defendant Cheryl Cusack
No One Appearing with or for Sampson Management and Solutions Ltd. and Jason Brasseur

HEARD: June 12, 2012

Justice b.a. glass

REASONS FOR JUDGMENT ON CROSS-MOTIONS FOR SUMMARY JUDGMENT ON A GUARANTEE

[ 1 ] The defendants Samson Management and Solutions Ltd. [Samson] and Jason Brasseur have not filed any material in this action or for the motion by the Royal Bank of Canada [Royal] for summary judgment. Judgment has been awarded against them.

[ 2 ] These motions therefore became one in which the Royal Bank of Canada pursued summary judgment on a guarantee from Cheryl Cusack, and one in which Ms. Cusack advanced her own motion for summary judgment discharging the guarantee as one that is unenforceable.

[ 3 ] Ms. Cusack is the spouse of the defendant, Jason Brasseur, who is the principal of the defendant Samson Management and Solutions Ltd.

[ 4 ] In 2005, Ms. Cusack signed a continuing guarantee for indebtedness of Samson to the extent of $150,000. The guarantee covered present and future liabilities of Samson. The guarantee was not tied to any specific loan between Royal and Samson. Independent legal advice was provided to Ms. Cusack. A certificate of independent legal advice is part of the materials filed.

[ 5 ] In 2006, a fresh guarantee in the sum of $250,000 was given by Ms. Cusack to Royal regarding Samson. Again, this covered present and future liabilities of Samson. It was a continuing guarantee and was not tied to any specific loan between Royal and Samson. Again, independent legal advice was given to Ms. Cusack. A certificate of independent legal advice for this guarantee is also filed.

[ 6 ] Royal acknowledges that the loan agreement that existed at the time of the 2005 guarantee was terminated and a new agreement was created in 2006.

[ 7 ] At the time of the first guarantee in 2005, the loan agreement between Royal and Samson was in the amount of $150,000.

[ 8 ] In 2006, the operating line of credit loan agreement increased to $250,000. The guarantee from Ms. Cusack for $250,000 was created.

[ 9 ] In 2008, Samson increased the loan agreement to $500,000; however, there was no request by Royal to have a new guarantee from Ms. Cusack. The loan documents specifically stated that the new agreement cancelled and superseded the 2006 agreement.

[ 10 ] The 2008 loan agreement required a $250,000 guarantee from Ms. Cusack; however, a new guarantee was not requested.

[ 11 ] The 2008 loan agreement changed the loan terms setting a term that funds advanced could be up to 75% of accounts receivable for Samson.

[ 12 ] The 2008 loan agreement imposed upon Samson compulsory reporting conditions.

[ 13 ] In 2009, Samson increased the loan agreement with Royal to $750,000. No request was made for a new guarantee from Ms. Cusack.

[ 14 ] Royal never had any contact with Ms. Cusack at any time. The guarantees in question were provided to Mr. Brasseur who gave them to Ms. Cusack along with the form for independent legal advice. She saw Mr. Geoff Dashwood, a solicitor, for independent legal advice before signing the guarantee in question.

[ 15 ] Mr. Paul Keppen from Royal acknowledged in cross-examination of his affidavit that when the loan agreement of $250,000 was created, the loan agreement for $150,000 was terminated. Also, when the loan agreement of $500,000 was created, the loan agreement for $250,000 was terminated. Again, when the loan agreement of $750,000 was created, the loan agreement for $500,000 was terminated. In other words, a new loan agreement superseded the old one and cancelled the old one.

[ 16 ] Mr. Keppen acknowledged that it may have been more prudent to have had new guarantees from Ms. Cusack when the loan agreements for $500,000 and $750,000 were created. The usual practice of Royal was to obtain a new guarantee when terminating one loan agreement and creating a new one.

[ 17 ] Ms. Cusack’s materials state that she never saw any loan agreement between Royal and Samson and that she provided guarantees to assist her husband to obtain a business loan. In effect, the guarantees were given to accommodate the loan arrangements between Royal and Samson.

Issues

[ 18 ] Is the guarantee enforceable?

[ 19 ] Has there been a change of risk for Ms. Cusack as the loan agreements changed?

[ 20 ] Was there a duty on Royal to advise Ms. Cusack of a change in the loan liability of Samson and therefore a change in her potential risk position?

[ 21 ] Is the guarantee simply a continuing guarantee for $250,000 with only a change in the total indebtedness of Samson?

[ 22 ] What responsibility does Ms. Cusack have to make inquiries about the Samson indebtedness?

Analysis

[ 23 ] Rule 20 of the Rules of Civil Procedure provides that if there is no genuine issue requiring a trial, summary judgment shall be granted. Also, if the parties agree to have the claims determined by summary judgment and should the court be satisfied that the appropriate procedure is to grant summary judgment, then such procedure might be done.

[ 24 ] In this action, both sides have acknowledged that there is no genuine issue requiring a trial. There have been affidavits upon which there has been cross-examination with the transcripts before the court. They have stated that only if the court is not satisfied with the use of Rule 20, then a trial ought to be heard in Toronto.

[ 25 ] I am persuaded that the facts and the supporting materials for the parties is so complete that all issues are clearly before the court to be determined with these motions for summary judgment. There is no genuine issue requiring a trial.

[ 26 ] Throughout the time that the $250,000 guarantee has existed, Ms. Cusack has had a risk of being responsible for $250,000. The increase in the debt of Sampson as well as some changes in the reporting and performance ratios for Samson did change her risk.

[ 27 ] There is an argument that the guarantor does not have an obligation to show actual risk change but rather she only need demonstrate the potential for risk change. In this case, Ms. Cusack submits that as the company loan arrangement doubled to $500,000 in 2008 and then tripled to $750,000 in 2009 with more stringent reporting and performance ratio requirements, there was a greater potential for her to have to pay.

[ 28 ] The guarantee involved was not specified to be tied to a specific item such as a loan or a mortgage. It was given as a guarantee of indebtedness of Samson for present and future liabilities to Royal.

[ 29 ] For example, a decision of Echlin J. in Royal Bank of Canada v. Adecon Transport Inc., [2004] O.J. No. 6249 involved guarantees and particular loans. Justice Echlin distinguished the facts from those found in Royal Bank of Canada v. Bruce Industrial, 1998 3050 (ON CA) , [1998] O.J. No. 2665 (Ont. C.A.) wherein a revolving loan was changed to a fixed loan which materially altered an existing loan agreement. The case before Echlin J. in Adecon (supra) provided additional loan facilities which could be considered to be future liabilities as set out in the guarantee. In other words, the case before Echlin J. was dealing with a development contemplated by the parties in the guarantee. As a result, he concluded that there was not a material change to the guarantee agreement. Therefore, he found that the guarantees involved continued to be enforceable.

[ 30 ] With respect to Ms. Cusack, one might distinguish the facts from those in the Adecon Transport case (supra) because the 2008 loan agreement cancelled and superseded the 2006 loan agreement.

[ 31 ] In Manulife Bank of Canada v. Conlin, 1996 182 (SCC) , 1996 CarswellOnt 3941, the Supreme Court of Canada pointed out that a material change of the terms of the contract between a creditor and the principal debtor without the consent of the guarantor will relieve a guarantor from liability. In Manulife, the guarantor was an accommodation surety who was not compensated at all. The Court took note of The Law of Guarantee (2 nd ed. 1996) by Professor K.P. McGuinness at p. 612-3 where the author pointed out that if one is to look at whether a party has agreed to assume a burden and waive rights available, there is not an assumption that the party intended to do so without clear language in the document. This was a consideration of the contra proferentum rule of construction.

[ 32 ] In Manulife Bank (supra), at paragraph 14, the court took note of the fact that the guarantor was an accommodation surety.

[ 33 ] At paragraph 19 of Manulife (supra), the Supreme Court also took into account that a principal debtor clause will convert a guarantor into a full-fledged principal debtor. Should that development occur, then failing to notify the guarantor of new terms in a contract will release the person from the obligations because the individual will not be a party to the new terms.

[ 34 ] With the 2006 guarantee signed by Ms. Cusack, paragraph 8 makes provision for her to become a principal debtor should Royal not be able to recover any sum of money on the guarantee. The natural inference with Ms. Cusack is that she could be a principal debtor and she had not been given any notice of material changes.

[ 35 ] I conclude that Ms. Cusack did not waive her rights in equity or in common law as a principal debtor or as a guarantor. She was not given notice of the changes made in 2008. The changes made were material changes to her position in that the loan doubled with more restrictions upon Samson so that she was potentially at greater risk of Samson defaulting and leading to her having to pay money to Royal.

[ 36 ] Professor McGuinness in his text The Law of Guarantee (supra) at p.536 emphasized that a guarantor does not have an obligation to prove actual or certain prejudice but rather she only needs to show a potential for prejudice with a material change to the principal contract.

[ 37 ] In following the analysis of Professor McGuinness as at p. 536 paragraph 10.20, if the change in the 2008 loan agreement between Royal and Samson has the potential for prejudice, then Royal has an obligation to obtain the consent of Ms. Cusack to the variation.

[ 38 ] There is no dispute that no attempt was made to obtain a new guarantee from Ms. Cusack in 2008 nor to obtain her agreement to the material changes.

[ 39 ] The loan agreement in 2009 increased the loan indebtedness potential for Samson to $750,000. Again, no consent was obtained from Ms. Cusack nor was a fresh guarantee obtained. At this time, the Samson debt was three times what it was when Ms. Cusack provided the $250,000 guarantee. The terms of the loan agreement continued to be more restrictive and onerous upon Samson. That development raised the potential for Ms. Cusack’s prejudice.

Conclusion

[ 40 ] The guarantee of Ms. Cusack is unenforceable. There were material changes without her being given notice or consenting to them. There was an obligation on Royal to apprise Ms. Cusack of changes to the loan liability so that she would be aware of a change to her risk or prejudice. Ms. Cusack did not have to be continuously asking Royal if there was any change to the loan facilities between Royal and Samson.

[ 41 ] Summary judgment in favour of Ms. Cusack is granted.

[ 42 ] The summary judgment motion by Royal regarding Ms. Cusack is dismissed.

[ 43 ] Summary judgment has been granted to Royal regarding Samson and Jason Brasseur.

[ 44 ] As between Royal and Ms. Cusack, submissions on costs may be made in writing within 14 days to the extent of 5 pages by each side.

Justice B.A. Glass

Released: June 20, 2012