COURT FILE NO.: 1337/2010
DATE: 2013/05/28
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
BANK OF MONTREAL
Tony Van Klink, for the Plaintiff
Plaintiff
- and -
CHERYL ZAFFINO and PASCAL ZAFFINO AKA PAT ZAFFINO
John Leslie, for the Defendants
Defendants
HEARD: May 8, 2013
RADY J.:
REASONS FOR JUDGMENT
Introduction
[1] The plaintiff moves for summary judgment on its claim under guarantees signed by the defendant, Pascal Zaffino in its favour for the obligations of two companies to which the Bank loaned $2.7 million.
[2] In oral argument, Mr. Leslie advised that Mr. Zaffino seeks summary judgment dismissing the Bank’s claim against him. However, the written materials seek a dismissal of the motion on the basis that a genuine issue requiring a trial exists.
[3] After the action was commenced, Ms. Zaffino made an assignment in bankruptcy. As a result, the motion is brought against Mr. Zaffino only.
[4] After this motion was delivered, Mr. Zaffino served an amended statement of defence alleging that a property owned by one of the companies was sold improvidently by the Bank’s receiver. Other defences had been raised including non est factum, misrepresentation and seeking an accounting. The defendant’s responding material to this motion addresses only the improvident sale issue and Mr. Leslie’s oral submissions focused solely on that contention. It is reasonable and logical to conclude that the other defences are not being advanced.
[5] The parties agree that there are no contentious issues of fact or of credibility. Shortly put, the parties agree about what happened.
[6] Mr. Van Klink submits that the motion raises an issue of law and that is whether there has been an improvident sale. See Royal Bank of Canada v. 2021947 Ontario Limited, 2007 CanLII 56496 (Ont. S.C.J.); aff’d 2008 ONCA 628.
[7] Mr. Leslie submits that the court should conclude that there was an improvident sale and therefore dismiss the action. In the alternative, he says that there is a genuine issue requiring a trial.
The Facts
[8] Because the facts are not disputed, they are reproduced here by borrowing liberally from the Bank’s factum. The defendants are husband and wife and the principals of Tool-Tec Welding Inc. and Reidnick Holdings Inc. (the companies).
[9] Over the years, the Bank made loans totalling approximately $2.7 million to the companies. Each of the companies guaranteed the loans made by the Bank to the other.
[10] As security for the loans, the Bank was provided with a general security agreement over Tool-Tec’s present and after acquired property and assets; and two collateral mortgages over real property municipally known as 5136 Ure Street, Oldcastle, Ontario owned by Reidnick from which Tool-Tec carried on business as a supplier of welding services and a manufacturer of future patterns and stack risers. The property was Reidnick’s only asset.
[11] Mr. Zaffino executed four guarantees for a total of $1,070,000 for the liabilities of Tool-Tec to the Bank (June 1, 2004 for $500,000; August 15, 2006 for $250,000; May 5, 2008 for $250,000; and December 17, 2008 for $70,000.) Mr. Zaffino also guaranteed Reidnick’s liabilities to the Bank under a guarantee dated August 4, 2005 in the principal amount of $682,500. These were continuing guarantees for all of the companies’ liabilities to the Bank.
[12] On November 10, 2009, the Bank demanded payment from the companies, and the defendants as guarantors, of certain of the loans made by the Bank to Tool-Tec. The demand for payment expired on November 20, 2009 but the Bank did not immediately enforce its security. Instead, the Bank continued to make the loans available to the companies while the companies and the defendants tried to develop a plan to restructure and repay the companies’ loans. Unfortunately, the defendants were unable to do so and on March 18, 2010 the Bank demanded payment of the remainder of the companies’ loans.
[13] On March 22, 2010, the Bank entered into a forbearance agreement with the companies and the defendants under which the Bank agreed to continue to forbear from the enforcement of its security for a limited period of time. In the agreement, Mr. Zaffino acknowledged the validity of the guarantees which he had signed for the liabilities of Tool-Tec and that he did not dispute his liability to make payment to the Bank pursuant to those guarantees.
[14] The Bank continued to forbear from the enforcement of its security until early May, 2010 but on May 7, 2010 the Bank appointed Deloitte & Touche Inc. as receiver and manager of the companies.
[15] Following its appointment as receiver, Deloitte realized upon the collateral that was subject to the Bank’s security, consisting of accounts receivable, inventory, work in process, finished goods, equipment and chattels, and patents.
[16] Deloitte completed certain of Tool-Tec’s contracts and work in progress where the additional amount to be recovered from completing the work exceeded the cost of completion. Deloitte was able to collect $494,193 from the accounts receivable, sale of inventory and completion of certain contracts and work in progress. There were approximately $39,000 of accounts receivable which could not be collected because of a combination of factors including quality issues with the products supplied by Tool-Tec, lack of documentation or purchaser credit worthiness.
[17] Prior to Deloitte’s appointment as receiver, Deloitte assisted Tool-Tec in canvassing the market for potential purchasers of Tool-Tec’s business as a going concern. No such prospective purchasers were identified.
[18] Following its appointment as receiver, Deloitte contacted more than 60 companies, including competitors, suppliers, auctioneers and other potential interested parties to gauge their interest in purchasing the companies’ assets. Of those contacted, 15 auction companies and five other companies signed non-disclosure agreements to get access to additional information regarding the companies and their assets.
[19] A total of ten offers were received by Deloitte for the purchase of Tool-Tec’s equipment and fixed assets. Nine of the ten offers were en bloc offers from auction companies. The remaining offer was from a party wishing to purchase a few specific pieces of equipment only. Of the nine offers received from auction companies, five offers were for the outright purchase of the Tool-Tec equipment and assets, ranging from a low of $335,000 to a high of $745,000. Six of the offers received from the auction companies included net minimum guarantees under an auction scenario ranging from a low of $320,000 to a high of $705,000.
[20] The highest offer received by Deloitte for the Tool-Tec equipment and assets was an offer made by Corporate Assets Inc. for the outright purchase of the equipment and assets for a purchase price of $745,000. The next highest offer was for $552,600.
[21] Given the significant difference between the Corporate Assets offer and the next highest offer for the outright purchase of the assets and the risks associated with an auction process, the receiver concluded that accepting the Corporate Assets offer to purchase the assets outright (rather than taking a lower net minimum guarantee amount in the hope of getting a higher amount at auction) was the best and most prudent course of action. Prior to accepting this offer, Deloitte reviewed all offers which had been received with Mr. Zaffino who agreed with Deloitte that the best course of action was to accept the Corporate Assets offer for the outright purchase of the equipment and fixed assets for $745,000.
[22] Tool-Tec had a patent and an interest in a provisional patent. Deloitte solicited offers for the patents from prospective purchasers but no offers were received. There seemed to be no interest in the patents because of the cost associated with commercializing the technology to which the patents related. As a result, Deloitte conveyed its interest in the patents to Mr. Zaffino for $3,000.
[23] The property consists of 1.39 acres located in an industrial subdivision in the Town of Tecumseh on the outskirts of Windsor. The property was improved with an industrial building approximately 24,000 square feet in size, including office space. Deloitte obtained an appraisal of the property from F.R. Jordan & Associates, which appraised the value of the property at $870,000 as of May 18, 2010.
[24] Deloitte listed the property for sale on the multiple listing service in early July 2010. Prior to listing the property for sale, three offers were received by Deloitte for the purchase of the property. Those offers were as follows:
BidItUp, a U.S. based auction company, on May 21, 2010 submitted an offer to Deloitte to purchase the Tool-Tec equipment, fixed assets and the property at an aggregate purchase price of $731,000. (It is worth remembering that the equipment alone was sold for almost $750,000, underscoring the unreasonableness of this offer);
on June 10, 2010, the second mortgagee submitted an offer for the property for $400,000; and
on June 28, 2010, an individual by the name of John Stewart in a short e-mail offered $675,000 for the property and certain of Tool-Tec’s equipment having a value of $164,000.
[25] Deloitte listed the property for sale on the multiple listing service with CB Richard Ellis Limited on July 7, 2010 at a list price of $950,000. No offers were received after the property was listed for sale and therefore, on or about October 6, 2010, the list price of the property was reduced to $850,000. The listing agreement between Deloitte and CBRE expired on November 30, 2010 without any offers having been received.
[26] Shortly after the listing agreement with CBRE expired, Deloitte was contacted by the second mortgagee who expressed interest in buying out the Bank’s position and taking an assignment of the Bank’s security. From early December 2010 to late January 2011, discussions were ongoing with the second mortgagee regarding the payout of the Bank by the second mortgagee. Mr. Zaffino’s lawyer was involved in those discussions.
[27] By late January 2011, it became clear that a deal with the second mortgagee was not likely going to materialize and that it would be necessary for Deloitte to again list the property for sale. On February 9, 2011, Deloitte listed the property for sale with Royal Lepage Binder Real Estate at a reduced list price of $775,000.
[28] No offers were received for the property until late May 2011. On May 30, 2011, Vince Mainella submitted an offer for the property at a purchase price of $495,000. The Mainella Offer was the first offer received for the property after the property had been first listed for sale on July 7, 2010.
[29] Deloitte countered the Mainella Offer at $625,000. That counter offer was accepted by Mr. Mainella on June 9, 2011 and the sale was completed on July 12, 2011.
[30] The Bank received $1,633,360 from the realization of the companies’ collateral by Deloitte as receiver. As of September 15, 2012 and after applying those proceeds, the balance owing on the companies’ loans, and payable by Mr. Zaffino under the guarantees, was $230,899.34 with interest accruing from September 15, 2012 at the per diem rate of $21.12.
The Parties’ Positions
[31] The plaintiff submits that Deloitte acted providently, taking reasonable precautions to obtain the market value for the property and that there is no evidence led by the defendant to the contrary.
[32] The defendant makes the following points:
• The Jordan appraisal provides an estimate of the reasonable exposure time for the property of nine to twelve months, based on average marketing time for similar properties.
• the reasonable exposure time was ignored by Deloitte;
• the property was listed in July 2010 for $950,000 but only after three months of exposure and no offers, the price was reduced to $850,000. The property was kept on the market for five months only, at which time Deloitte took the property off the market for approximately two months. The property was relisted at a reduced price of $775,000, without any explanation. Following only four months of exposure, an offer was made to purchase the property for $495,000.
• although the property had been appraised at $879,000, Deloitte counter offered for significantly less at $625,000, which exposed Mr. Zaffino on his guarantees.
• the price obtained did not reflect the maximization of the potential amount that could have been recovered through the sale of the property and was significantly less than what the appraisal reflected.
The Law
Rule 20
[33] Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764 is the leading case on the court’s powers under Rule 20 as amended in 2010. The Court of Appeal noted that there are three types of cases amenable to summary judgment. They are as follows:
• cases where the parties agree that it is appropriate to determine an action by way of a motion for summary judgment;
• cases where the claims or defences are shown to be without merit and stand “no chance of success”; and
• cases where the trial process is not required in the interests of justice because a full appreciation of the evidence and issues that is required to make dispositive findings can be achieved by way of summary judgment.
[34] Other case law predating the 2010 amendments remain good law, including the expectation that the court will have before it all of the evidence that would be presented at trial and that the responding party must be prepared to lead trump or risk losing.
A Mortgagee’s Obligations on a Power of Sale
[35] A substantial and well-developed body of case law exists delineating a mortgagee’s obligations when it exercises a power of sale.
[36] Oak Orchard Developments Ltd. v. Iseman, [1987] O.J. No. 361 (H.C.); aff’d [1989] O.J. No. 2394 (C.A.) contains a helpful review of the authorities and summary of the mortgagee’s duties.
[37] Mr. Justice Saunders enumerated those duties as follows:
A mortgagee selling under a power of sale is under a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. This does not mean that the mortgagee must, in fact, obtain the true value;
The duty of the mortgagee is only to take reasonable precautions. Perfection is not required. Some latitude is allowed to a mortgagee;
In deciding whether a mortgagee has fallen short of his duty, the facts must be looked at broadly and he will not be adjudged to be in default of his duties unless he is plainly on the wrong side of the line;
The mortgagee is entitled to exercise an accrued power of sale for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting, a higher price could be obtained;
The mortgagee can accept the best price he can obtain in an adverse market provided that none of the adverse factors are due to fault on his part;
Even if the duty to take reasonable precautions is breached, the mortgagor must show that a higher price would have been obtained but for the breach in order to be compensated in damages.
[38] The Court of Appeal has recently confirmed that the test for whether a sale was improvident remains that enunciated in Oak Orchard Development Ltd. See Centurion Farms Ltd. v. City Financial Canada Inc., 2013 ONCA 79, which noted that “the proper test is whether a mortgagee has taken reasonable precautions to obtain the true market value of the properly as of the date of the sale.”
[39] A defendant who relies on a defence of improvident sale must place evidence before the court demonstrating that a triable issue as to whether the sale was improvident. It is not sufficient to criticize the receiver’s marketing efforts (see Royal Bank of Canada v. 2021847 Ontario Limited, supra), or to simply advance a theory (see Arts v. Samu, 2004 CanLII 34584 (C.A.)).
[40] In CIBC Mortgage Corp. v. Greenwood Development Corp. [2001] O.J. No. 3310 (S.C.J.), the court dismissed a motion for summary judgment on a guarantee observing that “the evidence of the extremely short period of exposure to the market, coupled with the [defendant’s appraisal evidence] as to the low selling price supports [the] contention of negligent or improvident sale thereby giving rise to a genuine issue of fact for determination at trial.”
[41] In Bank of Montreal v. M.I. Leasing Inc., [2010] O.J. No. 4083 in dismissing a motion for summary judgment, the court reviewed the evidence and came to the following conclusions:
The evidence establishes there was a rapidly declining market. There is no expert evidence from either side as to the potential prudence of a sale at a higher number than that actually received. Indeed, there is no direct evidence from real estate professionals on either side with respect to the sale process. The appraisals that were tendered do indicate a much higher value on succeeding dates than the ultimate amount realized when the property was finally sold. The evidence also establishes that at least one offer was not accepted by the plaintiff and instead, was signed back but not successfully. The evidence also indicates that the plaintiff sold equipment believed by Mr. Rosati to be significant and that may well have had an important impact on the reliable value of the land and building. In the face of that evidence, I cannot say that the issue of the bank’s conduct in selling the land and whether it did or did not act prudently from time to time does not require a trial.
By the bank’s own concession, in hindsight, it should have sold sooner than it did. The defendants assert that this is an admission of fault. Whether it was or was not I cannot decide on this record. I therefore conclude that the plaintiff’s motion cannot succeed in relation to the guarantees of the indebtedness of MIL. Instead, the issue of whether the plaintiffs’ sale of the land was improvident must proceed to trial.
Analysis
[42] In my view, there is no genuine issue requiring a trial. I have come to this conclusion for the following reasons:
• the mortgagee is not to be held to a standard of perfection. It was in a difficult position because there was little interest in the property and it might expose itself to criticism if it held onto the property for too long while the mortgage debt mounted;
• an appraisal of the property was obtained in order to gauge its market value and to guide a decision respecting a reasonable listing price;
• the appraisal stated that its purpose was “to estimate the market value of the fee simple interest of the subject property as of May 18, 2010”;
• the appraisal recommended a reasonable exposure time of nine to twelve months. In particular, it was noted that “[a] search was made regarding the average marketing time of I.C. & I. Properties which sold through the Multiple Listing Service of the Windsor-Essex County Real Estate Board. Of the eight sales which were examined, six sold through MLS. The market times ranged from 5 days to 574 days, with an average exposure time of 300 days. Based on this data, the appraiser suggests a reasonable exposure time for the subject of 9 to 12 months could be expected.”
• the property was first marketed as part of a plan to sell the companies’ assets en bloc;
• no acceptable offers were obtained. The unreasonableness of the three earlier offers that were received is illustrated by the BidItUp offer for all of the assets for $731,000. As already noted, the equipment alone later sold for almost $750,000;
• as a result, the property was listed for sale through the multiple listing service with an asking price in excess of the appraised value, no doubt reflecting a strategic decision and a recognition that an offer below that asked would be more likely than not;
• the MLS listing expired in November 2010 with no offers having been made and shortly thereafter, discussions with the second mortgagee occurred. As a result, the listing agreement was not renewed at the time. Mr. Zaffino was obviously aware of this development because his counsel participated in those discussions;
• after two months, no deal was reached with the second mortgagee and the property was again listed for sale with a reduced asking price;
• it is reasonable to conclude that the new sale price reflected the fact that no offers had been received under the prior listing agreement. Indeed, that is the uncontradicted evidence of Ms. Santoro, a senior manager with Deloitte.
• in late May 2011, the first offer to purchase was made for $495,000. This was the first offer that was received since the property was first listed on July 7, 2010, an interval of almost eleven months;
• the property was exposed for sale on the MLS for nine months in total, not inconsistent with what the appraiser thought reasonable. It had been marketed earlier, as well, as part of the attempt to sell the business as a going concern;
• Deloitte did not accept that offer but countered at $625,000;
• during this entire time, the amount owing under the guarantees continued to accrue, the detriment to the guarantor obvious;
• Mr. Zaffino was at liberty as guarantor to pay out the Bank, take an assignment of its rights and market the property for as long as he saw fit. He did not do so;
• while Mr. Zaffino has offered criticism of the receiver’s decision, he has adduced absolutely no evidence to show that the property could have and should have been sold for a price higher than that ultimately obtained.
• there is no evidence that the sale price that was obtained in an arm’s length transaction was not the property’s true value at the time;
• the two cases relied upon by the defendant are not helpful. The Greenwood Development case raised credibility issues and it is significant that the property had been listed for only one month when sold. There were credibility issues and allegations of fraud in the M.I. Leasing case making summary judgment inappropriate.
[43] For these reasons, I am satisfied that no genuine issue requiring a trial exists and the Bank is therefore entitled to judgment. If the parties cannot agree, I will receive brief
written submissions on costs, first from the Bank within ten days and on behalf of Mr. Zaffino within seven days thereafter.
“Justice H. A. Rady”
Justice H. A. Rady
Released: May 28, 2013
COURT FILE NO.: 1337/2010
DATE: 2013/05/28
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
BANK OF MONTREAL
Plaintiff
- and -
CHERYL ZAFFINO and PASCAL ZAFFINO AKA PAT ZAFFINO
Defendants
REASONS FOR JUDGMENT
RADY J.
Released: May 28, 2013