Court File and Parties
COURT FILE NO.: CV-12-334SR (Brantford)
DATE: 2013-08-09
SUPERIOR COURT OF JUSTICE – ONTARIO
RE: Turfpro Investments Inc., Plaintiff
and
Vern Heinrichs and Victor Heinrichs, Defendants
BEFORE: The Honourable Mr. Justice D.J. Gordon
COUNSEL: P. Amey for the Plaintiff/Moving Party I.A. Duncan and M.A. van Bodegom for the Defendants/Responding Parties
HEARD: July 11, 2013
ENDORSEMENT
[1] The plaintiff seeks summary judgment against the defendants as guarantors on a loan agreement.
Background
[2] In 2006, Turfpro Investments Inc. (“Turfpro”) provided a $500,000 loan to Rose of Sharon (Ontario) Retirement Community (“Rose of Sharon”) in connection with the development and construction of a retirement home at 170 Vaughan Road, Toronto – Vern Heinrichs (“Vern”) and Victor Heinrichs (“Victor”) were parties to the loan agreement as guarantors.
[3] William Campbell (“William”) is the president of Turfpro. After Rose of Sharon was placed in receivership, William caused Turfpro to demand payment from Vern and Victor. This action was commenced shortly thereafter.
Rose of Sharon
[4] For some years, Rose of Sharon was planning to embark on the construction of a retirement home, primarily for the Korean community.
[5] Ultimately, a twelve storey building was erected. There are ninety units along with a long term care facility. The units were put on the market as a life lease, somewhat comparable to a condominium.
[6] Rose of Sharon solicited investors for the project and obtained a construction mortgage from Peoples Trust Company (“Peoples”).
[7] John Yoon (“John”) was the chief executive officer of Rose of Sharon at the relevant time period. He was involved in most aspects of the project, including financing and the loan referred to in this lawsuit.
The Parties
[8] William was active in the business of growing and selling nursery sod. Following his retirement, and sale of the business assets, in 2001, William became involved in lending money on various projects through Turfpro.
[9] Vern and Victor are brothers.
[10] Victor is an architect and was retained in that capacity by Rose of Sharon for the construction project. He was also involved in soliciting investors, being described by John as the “facilitator” of the project.
[11] Victor and William became acquainted from their involvement in prior unrelated projects.
[12] Vern, like William, invests money in projects. He is an officer and director of Vace Investments Inc. (“Vace”). Vace provided loans to individuals for their deposits on units in the retirement home. In total, Vace had $1,660,748 in deposit funds invested in this project.
Other Loans by Turfpro
[13] Turfpro provided other loans to Rose of Sharon that are not the subject matter of this lawsuit, namely:
(a) a second mortgage in August 2002 for $590,000 and by assignment of the first mortgage in January 2006 for $100,000, said to relate to the land acquisition; and
(b) between December 2009 and September 2010, a further $650,000.
The Loan
[14] Rose of Sharon needed to pre-sell units in the proposed building to qualify for a construction mortgage.
[15] In the Spring of 2006, Victor and Vern approached William for additional financing. As Vern said, in para. 12 of his affidavit, sworn January 31, 2013:
Victor and I agreed to approach Campbell on Rose’s behalf regarding additional financing for the project because Vace had more than $1.6 million dollars in unit deposit loans invested in the Project that would be in jeopardy if the Project was not completed due to a lack of financing.
[16] William was asked to invest $500,000. He understood the monies would be used as deposits on units. Victor described the process as a loan from Turfpro to Rose of Sharon, the money then to be loaned over to Vace, who would then make deposits on units.
[17] William agreed to the loan but required Victor and Vern be guarantors.
[18] Initially, an agreement or memorandum of understanding was prepared and signed on behalf of Turfpro and Rose of Sharon and by Vern and Victor. The document set out essential terms. It is not dated but was likely signed in April 2006.
[19] A formal loan agreement was prepared by the solicitor for William and Turfpro. It is dated May 4, 2006 and was executed by the same parties. The relevant terms of the agreement are as follows:
Turfpro shall make available the Standby Funds commencing May 15, 2006, for the use by Rose in connection with the Project. Interest at the rate of 2% per annum calculated and compounded half-yearly from and including the 15th day of May, 2006, shall be paid as a Standby Fee by Rose on any portion of the Standby Funds not drawn down by Rose up to and including the 1st day of September, 2007, when the Standby Funds or any part remaining unadvanced shall no longer be held on standby by Turfpro for the use of Rose.
All advances made by Turfpro to Rose from the Standby Funds shall accrue interest at the rate of 1% per month calculated and payable monthly, interest on any advance to be calculated from the date of advance of the funds by Turfpro to Rose to the end of that month. The balance of principal and interest owing hereunder shall become fully due and payable on the 1st day of October, 2007.
Rose shall provide 4 weeks written notice to Turfpro of any advances to by made to by Turfpro to Rose from the Standby Funds.
Rose and the Guarantors acknowledge that until all advances made by Turfpro to Rose from the Standby Funds together with interest accrued thereon have been paid in full, Rose shall not be entitled to obtain a discharge from Turfpro of either of the mortgages presently held by Turfpro on the security of 165-171 Vaughan Road.
Rose hereby grants to Turfpro an irrevocable option to purchase unit number UP7 (which includes a parking space and a storage room in the basement) at a purchase price of $471,381.00 at any time during the currency of this Agreement and for a further period of 60 days after all principal and interest owing under this Agreement by Rose to Turfpro has been paid in full or until 30 days after issuance of an occupancy permit for unit number UP7, whichever comes last. At such time as Turfpro exercises it’s option, 30% of the purchase price shall be paid. The balance of the purchase price for unit number UP7 shall become fully due and payable upon the closing of the purchase thereof which shall take place 30 days after Turfpro exercises it’s option to purchase.
The Guarantors hereby personally guarantee the repayment by Rose of all instalments of principal and interest payable hereunder as they fall due and will observe the covenants, terms and conditions herein, and that in the event of default by Rose, the Guarantors will, upon demand, pay any amounts in default.
Each of the parties hereto covenants and agrees that it and its successors and assigns shall upon request of the other party sign such further agreements, assurances, papers and documents, attend such meetings, exercise such votes and influences, and generally do and perform or cause to be done and performed such further and other acts and things as may be necessary or desirable from time to time in order to give full effect to this Agreement and every part hereof.
[20] Turfpro advanced the $500,000 to Rose of Sharon in three instalments between May and September 2006. At this point, excavation for the building had not yet commenced.
Construction Mortgage
[21] Rose of Sharon obtained a construction mortgage from Peoples’ in May 2007 for $17,300,162. Turfpro postponed its two mortages.
The Construction Project
[22] Excavation commenced in late 2006.
[23] In October 2007, when the loan was due, construction was still in the early stages.
[24] Victor, as project architect, issued a certificate of substantial performance on September 17, 2010. Outstanding deficiencies were said to be approximately $650,000.
Financial Difficulties
[25] John and Victor indicate that Rose of Sharon had cash flow problems throughout the project.
[26] Construction liens were registered on title in August 2010, including a lien by the general contractor, Mikal-Calladan Construction Inc. for $4,166,659.
[27] On September 27, 2011, Peoples obtained a court order appointing Deloitte and Touche Inc. as receiver and manager of the assets, undertakings and properties of Rose of Sharon pursuant to the Bankruptcy and Insolvency Act. The order operates as a stay of any proceedings against Rose of Sharon and with respect to the property.
Demand for Payment
[28] No payments for principal or interest were ever made by Rose of Sharon to Turfpro.
[29] Turfpro, through its solicitor, delivered a demand for payment from Vern and Victor on April 13, 2012, and on July 6, 2012.
[30] As of April 1, 2012, principal and interest owing on the loan was said to be $994,728.92 with a per diem thereafter of $327.03. The amount is not in dispute.
[31] In para. 23 of his affidavit, sworn November 21, 2012, William says that in response to the demand letter:
... I received a telephone call from the defendant, Victor Heinrichs, to the effect the defendants were hard at work in putting together a new funding group to finance Rose, which would involve paying out the plaintiff.
[32] Victor does not respond to this statement in his affidavit, sworn January 31, 2013.
[33] Cross-examination of Victor by Mr. Amey took place on June 6, 2013. At page 52 of the transcript, the following exchange was recorded:
269 Q. Now, after you received that demand letter from Turfpro’s lawyer, did you have any telephone conversation with either Mr. Campbell or his lawyer?
A. I talked to Bill once, no twice.
270 Q. All right, Do you recall the gist of your conversations with Bill?
A. Well, we were negotiating with a group that wanted to purchase the whole building.
271 Q. And, at this stage, a year before that in September, 2011, receiver had been appointed for the building, Deloitte?
A. That’s right.
272 Q. All right, and so in this conversation with Bill, were you advising him of the status of attempts to find a buyer of the building?
A. That’s right.
[34] The second conversation occurred after the lawsuit commenced and is acknowledged to have been a without prejudice discussion.
Lawsuit
[35] Turfpro commenced this action by statement of claim issued on August 16, 2012. The statement of defence is dated September 26, 2012.
[36] The motion for summary judgment was first returnable on December 7, 2012. It was adjourned to July 11, 2013, to allow for responding affidavits, cross-examinations and related matters.
Unit UP7
[37] The loan agreement, at para. 5, provided Turfpro with an option to purchase unit UP7 for $471,381. The prior agreement, or memorandum of understanding, refers to the list price for this unit as $589,226 and the option to purchase being at a 20 per cent discount.
[38] In August 2011, the general contractor, Unimac, improperly took possession of this unit. On behalf of Rose of Sharon, John offered Turfpro to replace UP7 with 808 and 1102. Turfpro accepted.
[39] On his examination, on June 5, 2013, John reported the value of UP7 and that of 808 and 1102 to be “almost the same”.
[40] In response to his undertaking, on July 5, 2013, William reported the list price of 808 and 1102 to be $236,000 and $327,740 for a total of $563,740.
[41] In response to his undertaking, on July 9, 2013, Victor reported the list price of UP7 to be $663,338, and the list price of 808 and 1102 to be $188,908 and $361,128 for a total of $550,036.
[42] Turfpro has not exercised the option to purchase.
Other Units
[43] As security for other loans, Rose of Sharon pledged other units to Turfpro, namely:
(a) unit UM10 with respect to the loan for $150,000 in December 2009; and
(b) units UP4 and LM1 with respect to the loan for $500,000 in February 2010.
[44] William and Turfpro also had purchase agreements, referred to as “right to occupy” agreements for units UM4, UP6 and UP8.
[45] These other units are not related to the loan in question in this lawsuit
Auditor
[46] Robert Gore was the accountant for Rose of Sharon. He required information from creditors in connection with the annual audit of the company.
[47] Two of the auditor’s letters were produced in this lawsuit, dated March 9, 2009 and February 8, 2010. Although the letters are on Rose of Sharon stationary, and signed by John on its behalf, it is agreed the auditor was the author.
[48] In the correspondence dated March 9, 2009 to Turfpro, William is asked:
In connection with our audit, our auditors, Robert Gore & Associates Chartered Accountants, Toronto, Canada, request your confirmation of the following information with respect to our loan payable to you as at December 31, 2008:
Interest rate of 1% per month.
Balance of principal outstanding in the amount of $500,000.
Balance of principal due on demand however there is no intent by Turfpro Investments Inc. to demand payment prior to completion of the construction project.
Date to which interest last paid: ______________ .
Secured by guarantees of Victor and Vern Heinrichs.
Please confirm the details with respect to our third mortgage owing to you as at December 31, 2008:
Interest rate of 12% annually, payable in monthly payments of $5,900.
Balance of principal outstanding in the amount of $590,000.
Principal due on demand however there is no intent by Turfpro Investments Inc. to demand payment prior to completion of the construction project.
Date to which interest last pad: ________________
Secured by property under development.
We also made note there are purchase agreements in place for three units as follows:
Bill Campbell, UM4, purchase price of $250,000.
Turfpro Investments Inc., UP6, purchase price of $332,000.
Turfpro Investments Inc., UP8, purchase price of $529,280.
To date, no deposits have been received with respect to these purchases. Could you please indicate if it is your intention to hold these units as partial payment of the debt?
[49] William responded by handwritten notes on the auditor’s correspondence as follows:
re: interest last paid: “May 4, 2006” (which appears to be the date of the first advance and meaning no interest had been paid)
re: purchase agreements: added “Turfpro Investments – UP7 – purchase price of $598,226 – 20% discount – right to purchase – see note – pg. 2”
re: holding units as partial payment of debt: “I do not wish to hold these units. I understand UM4 had $100,000 allocated as a deposit.”
[50] The February 8, 2010 correspondence requested similar information for the audit as at December 31, 2009. William again referred to having a right to purchase UP7 along with purchase agreements on other units.
Issues
[51] Vern and Victor do not challenge the validity of the guarantee per se. Rather, they raise other defences as hereafter set forth.
[52] Similarly, Vern and Victor do not dispute the amount said by Turfpro to be owing on the loan agreement. That amount, therefore, is accepted as being correct.
[53] Given the above, the documentation presented establishes the presumptive liability of Vern and Victor on their guarantees to Turfpro.
[54] The ultimate determination on liability in this case rests with the issues raised in defence, namely:
i) did Turfpro and Rose of Sharon amend the terms of the Loan Agreement without the consent of Vern and Victor and do such amendments, if they occurred, result in Vern and Victor being released as guarantors?
ii) did Turfpro accept units in the project in satisfaction of the loan?
iii) if not already satisfied, is the loan presently due? and
iv) does the doctrine of laches apply to the facts?
Analysis
i) Summary Judgment
[55] Rule 20, Rules of Civil Procedure, permit a motion for summary judgment. The relevant provisions are as follows:
2.01 (1) To plaintiff – A plaintiff may, after the defendant has delivered a statement of defence or served a notice of motion, move with supporting affidavit material or other evidence for summary judgment on all or part of the claim in the statement of claim.
20.02 (1) An affidavit for use on a motion for summary judgment may be made on information and belief as provided in subrule 39.01 (4), but, on the hearing of the motion, the court may, if appropriate, draw an adverse inference from the failure of a party to provide the evidence of any person having personal knowledge of contested facts.
(2) In response to affidavit material or other evidence supporting a motion for summary judgment, a responding party may not rest solely on the allegations or denials in the party’s pleadings, but must set out, in affidavit material or other evidence, specific facts showing that there is a genuine issue requiring a trial.
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; or
(b) the parties agree to have all or part of the claim determined by a summary judgment and the court is satisfied that it is appropriate to grant summary judgment.
(2.1) Powers – 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 interest 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 from the evidence.
[56] In considering a Rule 20 motion, I must apply the “full appreciation test” as directed by the Court of Appeal in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, at paras. 50 – 55. Specifically,
... the motion judge must ask the following question: can the full appreciation of the evidence and issues that is required to make dispositive findings be achieved by way of summary judgment, or can this full appreciation only be achieved by way of trial? (para. 5)
[57] Combined Air continues the requirement for the parties to put their best foot forward rather than sit back and rely on the possibility of more favourable evidence at trial (para. 56). See, also Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423 (Gen. Div.); and Pizza Pizza Ltd. v. Gillespie (1990), 1990 CanLII 4023 (ON SC), 75 O.R. (2d) 225 (Gen. Div.).
[58] In bringing this motion, Mr. Amey, says the test is met given the documentary record, extensive affidavits and cross-examinations along with the voluntary examination of John. He submits the principal facts are not in dispute and that the defendants attempt to draw inferences from documents without presenting evidence in support.
[59] In Mr. Duncan’s submission, a trial is required to assess credibility having regard to what he says is the conflict between the documentation and the plaintiff’s evidence from the cross-examination of William. He argues it is critical for the trial judge to scrutinize the evidence in this regard. Further, Mr. Duncan indicates additional documents are needed, the receiver not having provided all material, and that other witnesses, such as the auditor and representatives of the receiver, need to be examined as to their involvement throughout the lengthy time period.
[60] On my review of the evidentiary record, this is essentially a documents case. The parties have provided proper documentary disclosure. Additional documents, if any, could have been obtained by motion for non-party records. There is no evidence tendered to suggest other relevant documents are crucial for this motion or trial.
[61] Credibility, at best, is a minor issue. Indeed, I am not persuaded there is any such issue having regard to the documentary record and the extensive cross-examination of deponents on their affidavits. Further, the parties, or their representatives were intimately involved in the construction project. William and Vern were investors, Victor was the architect. All were aware of most events, particularly as to financial matters, delay in construction and cash flow problems. There is no real conflict in their evidence. The clear expectation of Victor was for new financing, or sale, to pay out Turfpro.
[62] Quite frankly, I cannot envisage other evidence of a critical nature being tendered at a trial. This is an appropriate case for summary judgment.
ii) Material Alteration of Terms
[63] The loan agreement is clear and concise regarding its terms. There is no ambiguity. Was there a material alteration? As Mr. Duncan submits, this is the primary issue in this case.
[64] A guarantor will be released from his covenant where the creditor and debtor agree to a material alteration without his consent: see Manulife Bank of Canada v. Conlin, 1996 CanLII 182 (SCC), [1996] 3 S.C.R. 415 (S.C.C.) at paras. 2 and 3. A guarantor is not bound to his agreement when substantial alteration occurs or the changes are not beneficial to him if there is potential for prejudice: see Holland Canada Mortgage Co. v. Hutchings, 1936 CanLII 20 (SCC), [1936] S.C.R. 165 (S.C.C.) at p. 7.
[65] A creditor’s gratuitous forbearance, however, will not operate as a discharge of the guarantor: see Wright v. Western Canada Accident & Guarantee Insurance Co. (1914), 1914 CanLII 680 (BC CA), 6 W.W.R. 1409 (B.C.C.A.), at para. 2. An extension of time only discharges the guarantor if there is a binding agreement between the creditor and debtor to so extend: see Jet Power Credit Union Ltd. v. Grant (1974), 1974 CanLII 885 (ON CA), 2 O.R. (2d) 657 (Ont. C.A.). Further, if the alteration to the agreement is unsubstantial or is beneficial to the guarantor, the guarantor will not be released. See Wright, at para. 10, and Manulilfe Bank, at para. 2.
[66] Mr. Duncan relies on the auditor’s letters and William’s response to say the term loan was converted to a demand loan and that demand would not be made until the completion of the project.
[67] There is no formal document converting the loan to one due on demand. The auditor’s correspondence is some evidence but is not conclusive. It can be said that William neglected to correct the auditor’s language. I am not persuaded the loan was changed to a demand loan.
[68] In any event, the auditor’s letters and related matters were not critical to either the project or to this case. All of the parties were well aware the debt continued to exist and would be dealt with at some point.
[69] The purported forbearance, similarly, was contemplated by all parties and did not and could not prejudice Victor and Vern. It was merely an indulgence by Turfpro taking into consideration the reality of the slow pace of construction. As the project architect, Victor well understood the reasons for construction delay and the cash flow problems of Rose of Sharon. There was a clear benefit to Victor and Vern in that the project was at the early stage only in October 2007. Holding off on collection action allowed the project to proceed and units to be sold. The guarantors, otherwise, would have been exposed to complete liability at any earlier date.
[70] It cannot be said the project remains incomplete when Victor was the certifying architect on the certificate of substantial performance in September 2010. The reference to additional work is with respect to deficiencies, not completion. The amount required is not significant on a project of this size.
[71] The other alteration is said to be with the substitution of units 808 and 1102 for UP7. In my view, this is of no concern in that unit UP7 was not pledged as security. Rather, Turfpro merely had an option to purchase. The option, even for the replacement units, was not exercised. In this regard, there is a clear benefit to Victor and Vern as the units remain available for sale.
[72] As to any difference in value of the units, the evidence does not clearly establish increased risk. John said the values were almost the same. Victor and Vern refer to list prices. List prices are not evidence of value. Any difference, however, is of no consequence.
[73] Accordingly, I reject the purported defence of material alteration.
iii) Accord and Satisfaction
[74] When a creditor enters into an “accord and satisfaction” with the debtor, the debt is extinguished and the guarantors will be released: see D. & C. Builders Ltd. v. Rees, [1965] 3 All E.R. 837 (C.A.), at pp. 839-841 and Mercantile Law Amendment Act, R.S.O. 1990, c.M.10, s.16.
[75] I have already addressed unit UP7. The option to purchase was not exercised. There is no evidence to support the suggestion to the contrary. Upgrades to UP7 by Turfpro’s interior designer is of no consequence and cannot be considered as acceptance of the unit; in particular having regard to William’s clear rejection of the unit in his response to the auditor’s inquiry. Unimac obtained UP7.
[76] The other units are not related to this loan. Hence, any purchase agreements, completed or not, are not relevant.
[77] Hence, there is no evidentiary basis for this defence.
iv) Is the Loan Due?
[78] The loan agreement contains a due date of October 1, 2007.
[79] Even if there exists a forbearance agreement, concluding previously to the contrary, it cannot be said the demand is premature having regard to completion of the project.
[80] The certificate of substantial performance by Victor is evidence of completion. Outstanding matters only pertain to deficiencies.. Some units are occupied.
[81] Hence, I conclude the project is complete. This defence cannot succeed.
v) Laches
[82] Laches is an equitable defence requiring delay and prejudice be established: see Perry, Farley & Onyshuk v. Outerbridge Management Ltd. (2001), 2001 CanLII 5678 (ON CA), 54 O.R. (3d) 131 (Ont. C.A.), at para. 36. Mere delay is insufficient.
[83] The loan was due on October 1, 2007. Demand was initially made on April 13, 2012.
[84] Victor and Vern claim prejudice having regard to additional encumbrances and events prior to demand. I disagree.
[85] Delay was of benefit to Victor and Vern. The building was under construction and Rose of Sharon had no ability to repay the loan. Delay was reasonable, appropriate and necessary in the circumstances. No prejudice can be seen in this case. The defence fails.
Summary
[86] The defendants have no hope of success for the reasons above. A trial, therefore, is not required.
[87] The plaintiff’s motion is granted. Summary judgment shall issue in the amount claimed.
[88] If the parties are unable to agree on the issue of costs, or any other matter, brief written submissions are to be delivered to my chambers in Cayuga within 45 days.
D.J. Gordon J.
Released: August 9, 2013