ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 12-35182
DATE: 2013-03-27
B E T W E E N:
Royal Bank of Canada
Nicole Brown Dunbar, for the Plaintiff
Plaintiff
- and -
Ultimate Holographic Reproductions Inc., Salvatore C. Vivona and Leonhard Schuko
Alfred Schorr, for the Defendant Salvatore Vivona
Leonhard Schuko, Self-Represented
Defendants
WHITTEN J.
JUDGMENT
[1] The bank has moved, pursuant to Rule 20.04, for summary judgment. Default judgment has already been obtained against the corporation, Ultimate Holographic Reproductions Inc. (Ultimate). The personal defendants have coincidentally moved to have this matter transferred to Newmarket, that transfer is acquiesced in the event RBC is not successful in obtaining summary judgment.
[2] The potential liability of the personal defendants given the default of the corporate defendant is $62,500 plus interest accrued pre and post-judgment (if obtained), along with the substantial indemnity costs as per the original loan agreement and guarantees.
[3] The two personal defendants were the principal officers/owner of the defendant corporation. Both personal defendants in their pleadings admit the fact of a variable rate business term loan dated November 12th, 2007, between the corporation and RBC, the granting of a security interest by the corporation to RBC. Furthermore, both personal defendants admit the fact of their personal guarantees for this indebtedness. The personal defendants have counterclaimed against each other.
[4] The defendants have argued that because of alleged failures on the part of RBC to follow the dictates of the Canada Small Business Financing Act (CSBFA) and its regulations, their personal indebtedness is (a) voided or (b) at least limited to $62,500 and post-judgment interest.
Applicable Law
[5] The pertinent sections of Rule 20 are:
20.04(2), the Court shall grant summary judgment if,
(a) the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence;…
(2.1) In determining under clause (2)(a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties, and if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interests of justice for such powers to be exercised only at a trial.
- Weighing the evidence,
- Evaluating the credibility of a deponent,
- Drawing any reasonable inference.
A five member panel of the Court of Appeal in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, described a “full appreciation test” to decide whether or not a trial is required in the interests of justice. More specifically, the question to be asked by a motions judge is “Can a full appreciation of the evidence and issues that is required to make dispositive findings be achieved by way of summary judgment or can the full appreciation only be achieved by way of a trial?” (Paragraph 50 and paragraph 75)
[6] The panel noted that a case in which multiple findings of fact were required, on the basis of conflicting evidence of witnesses and a voluminous record, would in general be beyond the scope of the rule. (Paragraph 51)
[7] The presiding jurist is also cautioned that being familiar with the total body of evidence in the record is “not the same as fully appreciating the evidence and the issues in a way that permits a fair and just adjudication of the dispute. The full appreciation test requires motion judges to do more than simply assess if they are capable of reading and interpreting all of the evidence that has been put before them.” (Paragraph 53)
[8] It is oft said that each side in such a motion should “put its best foot forward” with respect to the existence or non-existence of material issues to be tried”. (Paragraph 56) That requirement may mean that judgment on the motion would be premature before the production is fully exercised. (Paragraph 57)
The [Canada Small Business Financing Act, S.C. 1998, c. 36](https://www.canlii.org/en/ca/laws/stat/sc-1998-c-36/latest/sc-1998-c-36.html)
[9] This federal statute exists as a stimulus to small businesses being launched. Basically, it provides for the possibility of the guarantee of a loan made by a lender, from the government itself. In this way, businesses that would ordinarily have difficulty in obtaining such financing in an open market, have a chance. It is acknowledged by all parties that the original loan to the corporation was within that context.
[10] The statute requires in, Section 4, that the loan be made by designated lenders to borrowers who meet certain eligibility criteria. At the time of this loan, the maximum loan that could be advanced was $250,000. Any payment out by the designated Minister would be from out of the consolidated revenue fund.
[11] The designated Minister, pursuant to Sections 5 through to Section 9 was liable to pay for any loss incurred by the lender for a loan advanced under the Act. The Minister’s liability in this regard was limited to an amount allowable for all such loans. In other words, the Minister’s liability was to an extent limited by the funds generally made available for such loans. The lender, in order to benefit from this type of “insurance” was required to pay an annual administration fee.
[12] According to Sections 10 through 12, the lender was also required to pay an individual registration fee for the particular loan, this initial registration fee could be charged back to the borrower. Section 10 provided that the lender could only charge the borrower (a) interest, (b) the registration fee (referred to), and (c) any other fee that the registrations pursuant to the Act allowed for.
[13] Section 14 provides that Regulations could be passed by the Governor in Council to provide amongst other things:
“(h) respecting the extent of the Minister’s liability in respect of a loan where certain provisions of the Act or regulations have not been complied with, including prescribing conditions that may be attached to that liability.
(i) respecting the making of loans, including loan approval, maximum loan terms, repayment requirement and security requirements including guarantees and suretyships.”
[14] At first blush, the statute does not create any specific rights for a borrower, above and beyond the documentation that exists between it and the lender. It is basically a description of how lenders will be “insured” with respect to the making of such loans.
[Canada Small Business Financing Regulations SOR/99-141](https://www.canlii.org/en/ca/laws/regu/sor-99-141/latest/sor-99-141.html)
[15] The regulations provide in part; Section 2, a loan must be registered in a form that provides certain information (Section 3) within three months of the loan being made.
[16] Section 8, the lender is to exercise “due diligence” (i.e. verifying the background and information provided by the proposed borrower) as a lender would with respect to a conventional loan.
[17] Section 14, requires that a lender obtain “a valid and enforceable first ranking security” as against the assets of the small business.
[18] Section 19, allows a lender, in addition to the security referred to in Section 14, the discretion of taking one or more unsecured personal guarantees, that are limited to 25 percent of the face amount of the loan, any interest on any judgment granted against that guarantor, and taxed costs incidental to any legal proceedings.
[19] If a lender does take more than one guarantee (as is the case at hand), the guarantees must state that the aggregate liability of the guarantor(s) does not exceed the aggregate referred to above, (i.e. 25% + interest + costs).
[20] Sections 23 through to Section 28.1) relate to how a claim could still be made to the designated Minister for the lenders losses relating to such loans, even if there had been non-compliance by the lenders.
[21] Under the heading “Procedure of Default”, Section 37, a process is set out as to how the lender relates to the borrower; for example, notice of the default, and the making of a demand for repayment, the taking of steps to ensure a maximum recovery. The recovery process could include realizing on any insurance policy in which the borrower is a beneficiary, settling with the borrower or guarantor, and taking legal proceedings, save and except if the borrower is a partnership or sole proprietorship, the lender is limited to a judgment no greater than 25 percent of the original amount of the loan, interest and costs (similar to what was referred to in Section 19).
[22] These default procedures, described in Section 37, are conditions precedent to the lender submitting a claim for the “insurance” from the designated Minister. In other words, if the lender does not chase up the borrower/guarantor, it cannot benefit under the statute.
[23] Not surprisingly, if a lender is paid for its loss, the Minister has a subrogated interest, in that he or she can step into the shoes of the lender, as it were, and recover any of the monies paid out, from money realized from the borrower.
[24] All in all, the regime under the statute and the regulations is for the benefit of the lender institution who makes loans to qualifying small businesses. It does not create a Charter of rights for the borrowers. If the lender does not fulfill its obligations under the statute; for example, to obtain a first ranking security in the assets of the business, it just means that the lender would disentitle itself from making a claim for compensation from the Minister.
Analysis
[25] It is stated that the loan guarantees do not reference neither the Canada Small Business Financing Act, nor the regulations. However, the surrounding correspondence does so reference.
[26] RBC apparently made certain typographical errors in the name of the defendant corporation, and by the time a corrected registration was made pursuant to the Personal Property Security Act, it did not have an enforceable first ranking security. It is argued that the guarantee is not limited as it should be to the provisions of Section 19 of the Regulations in that it goes beyond the original 25 percent of the face amount and it provides for both pre and post-judgment interest. The problem with that assertion is that the regulations use permissive language; for example, the lender “may”. In other words, if the lender, as it did in this case, proceeds with one of its stock guarantees which does not replicate the language of the regulation, and in fact secured the guarantee (in this case the security being an assignment by the guarantor to the bank of any monies owed to the guarantor by the corporation), the only consequence of the lender doing that is that it disentitles itself to a claim under the statute against the designated Minister, as would also be the case with the lender not having a first enforceable ranking security.
[27] The statute does not override the contractual relations between lender and borrower, it simply provides relief to the lender if certain preconditions or steps, pursuant to the regulations, are followed. The lender and borrower/guarantors can still go ahead and negotiate the terms of the loan and guarantee. It is just that if those contractual relations depart from the terms of the statute, the lender cannot submit a claim to the Minister for any loss.
[28] Once it is recognized that statute and regulations only determine the extent of the risk to the lender and not the contractual relationship between the parties, we are left with those documents that describe the loan and extent of the guarantee.
[29] These documents are subject to the usual rules of interpretation. The predominant rule is the “parole evidence rule” which mandates that testimony is not permitted as to the meaning or interpretation of a contract unless the wording is ambiguous and open to interpretation. These documents, the loan, the guarantee, and the security agreement were not so vulnerable. Each document repeats the mantra that the document is in itself complete, there are no exterior representations. The document is the whole agreement.
[30] None of the guarantors can argue that they did not receive independent legal advice. They were the principals of the corporation (namely officers and directors), they knew they were receiving money for the corporation. Both were sophisticated borrowers. Schuko, who has a PhD and was a long-term employee of NASA, was significantly knowledgeable. (ref. DiTomaso J. in Toronto-Dominion Bank v. 1503345 Ontario Ltd. (2006) 16373 (ON SC)
[31] As it is, there is no suggestion by counsel for Vivona (suggestions adopted by Schuko) that there is any ambiguity in the documents, the defence of the personal defendants’ centers on an alleged non-compliance with the statute by the bank. That RBC somehow misstated the “rights of the borrowers”. Regrettably there is no evidence to support these assertions. Furthermore, as indicated any non-compliance only goes to the issue of whether or not the bank can make a claim against the designated Minister for any losses.
Conclusion
[32] There is no genuine issue for trial to postpone or to order a trial is really a matter of postponing the inevitable judgment based on the loans, the guarantees and security documents.
[33] Therefore the motion by RBC for summary judgment is granted. Accordingly, the motion to transfer this matter to Newmarket becomes moot.
[34] If counsel and Mr. Schuko cannot agree as to the level and quantum of costs, submissions of up to four pages above and beyond the bill of costs are to be exchanged, and along with any reply, are to be filed with the court within 60 days of the receipt of this judgment.
Whitten J.
Released: March 27, 2013
COURT FILE NO.: 12-35182
DATE: 2013-03-27
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Royal Bank of Canada
Plaintiff
- and –
Ultimate Holographic Reproductions Inc., Salvatore C. Vivona and Leonhard Schuko
Defendants
REASONS FOR JUDGMENT
Whitten J.
:mg
Released: March 27, 2013