ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
COURT FILE NO.: CV-13-10062-00CL
And COURT FILE NO.: CV-13-484741
DATE: 20130912
BETWEEN:
WELLS FARGO BANK, N.A.
Plaintiff
- and -
BEST THERATRONICS LTD.
Defendant
AND BETWEEN:
BEST MEDICAL INTERNATIONAL, INC. and HUESTIS MACHINE
CORPORATION
Applicants
- and -
WELLS FARGO BANK, N.A.
Respondent
A. I. Schein, for the Plaintiff/Respondent
Eli S. Lederman and David Quayat, for the Defendant/Applicants
HEARD: August 15, 2013
L. A. PATTILLO J.:
Introduction
[1] The plaintiff, Wells Fargo Bank, N.A. (“Wells Fargo”), brings this motion for summary judgment (the “Motion”) in its action against the defendant Best Theratronics Ltd. (“Best Theratronics”) (the “Action”). Wells Fargo seeks judgment for monies owing to it as the assignee of certain accounts receivable owing by Best Theratronics to Best Medical International Inc. (“BMI”) and Huestis Machine Corp. (“Huestis”) (collectively the “Debtors”).
[2] On July 12, 2013, the Debtors commenced an application against Wells Fargo for a declaration that it failed to act in a commercially reasonable manner by attempting to collect the accounts receivable from Best Theratronics and an order restraining the Bank from collecting such accounts receivable (the “Application”).
[3] By order of Mr. Justice H.J. Wilton-Siegel dated July 24, 2013, both the Action and the Application were consolidated and the Motion and the Application were directed to be heard together.
Background
[4] The background facts giving rise to the Action and the Application are not in dispute.
[5] Wells Fargo is a United States bank with its main office in South Dakota. It is the successor by merger to Wachovia Bank National Association (“Wachovia”) which merger became effective as of March 20, 2010.
[6] Best Theratronics is a federally incorporated company with its head office in Ottawa. BMI is a corporation organized under the laws of the Commonwealth of Virginia. Huestis is a corporation organized under the state of Rode Island.
[7] In 2004 and 2006 respectively, Wachovia lent money to BMI and Huestis. To secure the credit facilities, the Debtors each entered into security agreements with Wachovia which, among other things, granted security for the loans over the Debtors’ personal property, including accounts receivable. The security agreements are governed by the laws of the Commonwealth of Virginia.
[8] In 2009, the loans went into default. On July 31, 2009, the Debtors, along with other related companies and Mr. Krishnan Suthanthiran (“Suthanthiran”), the personal guarantor of the credit facilities, entered into a Waiver and Amendment Agreement with Wachovia which, among other things, extended the maturity date of the loans to January 1, 2010. On January 1, 2010, in the absence of repayment, the loans went into default.
[9] In February 2012, Wells Fargo obtained a judgment from the Circuit Court for Fairfax County, Virginia against Gunston Hall Realty, Inc. (“Gunston”) and Best Industries, Inc. (“Best Industries”), two of the companies, party to the Waiver and Amendment Agreement and Suthanthiran (the “Virginia Judgment”). The Virginia Judgment was in the amount of USD $12.1 million for outstanding indebtedness and USD $800,086 for attorneys’ fees and costs. The portion of the Virginia Judgment dealing with the outstanding indebtedness includes the indebtedness owing to Wells Fargo by BMI and Huestis.
[10] As of April 5, 2013, Wells Fargo was owed USD $1,802,549.43 by BMI and USD $4,686,676.19 by Huestis plus legal fees and expenses.
[11] On September 13, 2010, Best Theratronics entered into management agreements with each of BMI and Huestis. The agreements provided, among other things, that Best Theratronics would pay a monthly management fee to BMI of $150,000 and to Huestis of $100,000.
[12] On July 16 and 26, 2012, Wells Fargo, through its counsel, gave notice to Best Theratronics that it was exercising its rights under its security and had taken an assignment of the accounts receivable of BMI and Huestis respectively. Wells Fargo directed that Best Theratronics direct all future payments under the management agreements to it.
[13] From the beginning of August 2012 to August 2013, Best Theratronics was required to remit $250,000 a month or a total of $3,000,000 to Wells Fargo. Best Theratronics has failed to provide any monies to Wells Fargo.
The Action
[14] The Action was commenced by Wells Fargo on August 12, 2012. In its Statement of Claim, Wells Fargo pleads its merger with Wachovia; the original credit facilities between Wachovia and the Debtors; the grant of security by the Debtors to Wachovia in, among other things, the Debtors’ account receivables; the Debtors default, the monthly management fees owing by Best Theratronics to the Debtors; Wells Fargo’s notice of the assignment of receivables and demand for payment to Best Theratronics of the management fees owing to the Debtors; and the failure of Best Theratronics to pay any monies to Wells Fargo. Wells Fargo pleads and relies upon its rights pursuant to the Uniform Commercial Code of Virginia (the “UCC”).
[15] In its Statement of Defence, Best Theratronics admits the loans to the Debtors by Wachovia, the security agreements in respect thereof, the defaults, and the management agreements between it and the Debtors. It pleads that Wells Fargo holds other security in respect of the Debtors’ indebtedness including real property the value of which far exceeds the amount owing by the Debtors. By seeking to intercept payments from Best Theratronics to the Debtors, Wells Fargo is seeking to deprive BMI and Huestis of funds that are essential to their continuing operations thereby creating a significant risk that the Debtors will cease to be a going concern. Best Theratronics pleads that Wells Fargo’s action in taking an assignment of the accounts receivable owing under the management agreements and demanding payment by it is unreasonable and contrary to the provisions of the UCC.
The Application
[16] In their grounds in support of the Application, the Debtors essentially repeat the defence pleaded by Best Theratronics in the Action.
Summary Judgment
[17] Rule 20.04(2)(a) of the Rules of Civil Procedure provides that the court shall grant summary judgment if satisfied that there is no genuine issue requiring a trial with respect to a claim or defence.
[18] In deciding whether to grant summary judgment, the court must determine whether a full appreciation of the evidence and issues in the action can be achieved on the record before the court or whether it can only be achieved by way of a trial: Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764; 108 O.R.(3d) 1 (C.A.). In adopting the ‘full appreciation’ test, the Court of Appeal noted that the established principles regarding evidentiary obligations on a summary judgment motion continue to apply. Each side is obligated to put its best foot forward concerning the material issues to be tried: Combined Air at para. 56.
[19] Wells Fargo submits that neither Best Theratronics nor the Debtors on its behalf have raised an issue which requires a trial, either in the Action or the Application. It submits that the commercially reasonableness requirement in the UCC does not apply to its decision to enforce its security by collecting Best Theratronics accounts receivable.
[20] Wells Fargo further submits that the Debtors are estopped from asserting the issue of commercial reasonableness under the UCC in the Application in light of previous litigation between them in Virginia.
[21] Wells Fargo initially took the position that Best Theratronics did not have standing under the UCC to assert that it was not proceeding in a commercially reasonable manner in the collection of the accounts receivable. The commencement of the Application and the consolidation order of Wilton-Siegel J. have enabled the issue to be advanced by Best Theratronics.
[22] In support of the Motion and in response to the issue that it was not acting in a commercially unreasonable manner, as required by the UCC, Wells Fargo delivered the affidavit of Kenneth M. Misken, a bankruptcy and insolvency lawyer practicing in Virginia, sworn May 21, 2013.
[23] In his affidavit, Mr. Misken states that the underlying purpose of the UCC is to ‘simplify, clarify and modernize the law governing commercial transactions’. He states that Article 8.9A – ss. 101 to 709 of the UCC govern the creation, perfection and enforcement of security interests and refers to several of those sections dealing with the rights of a secured creditor after a debtor defaults. He also refers to jurisprudence in Virginia and other jurisdictions in the United States.
[24] Mr. Misken sets out his conclusion at paragraph 22 of his affidavit.
- Based on the Virginia Commercial Code – Secured Transactions and the jurisprudence in Virginia and other jurisdictions in the United States, a secured creditor with a security interest in the debtor’s accounts receivable has the right to collect from an account debtor subject to settling and compromising the claim in a commercially reasonable manner and to account to the debtor for any deficiency or surplus. A secured creditor does not have to show that its logic or decision for pursuing collection from the account debtor is commercially reasonable since the Uniform Commercial Code – Secured Transactions authorizes the secured creditor to pursue collection of its collateral cumulatively and simultaneously. Notwithstanding the foregoing, an account debtor does not have standing to assert that a secured creditor is not proceeding in a commercially reasonable manner.
[25] In opposition to the Motion and in support of the Application, Best Theratronics and the Debtors submit that the issues to be resolved in the Action and the Application are whether the commercial reasonableness standard provided for by the UCC applies to Wells Fargo’s conduct and if so, whether Wells Fargo has acted in a commercially reasonable manner. The issue of whether the commercial reasonableness standard applies raises the meaning of foreign law which is a question of fact that cannot be determined on the factual record before the court. They further submit the issue of law raised is a novel issue which should only be decided on a full factual record generated at a trial.
[26] In response to Mr. Misken’s opinion, Best Theratronics and the Debtors submit that it is made without foundation and is expressed in the absence of any legal authority. They also submit there are “significant (and disqualifying) credibility issues” surrounding Mr. Misken which the court needs to assess at trial.
Discussion
[27] The security agreements entered into by the Debtors provide, among other things, that if a default occurs, Wells Fargo shall have all the rights and remedies of a secured party under the UCC. They further provide that the “remedies herein provided are cumulative and are not exclusive of any remedies provided by law, in equity, or in other Loan Documents.”
[28] The UCC provides a secured creditor with broad rights of enforcement upon default, including collection of accounts receivable. As noted by Mr. Misken, Article 8.9A-s. 601(a) of the UCC provides that after a debtor defaults, a secured creditor has the rights provided to it by the UCC – Secured Transactions section and the rights provided by the parties’ agreements. Article 8.9A- s.601(a) sets out a secured party’s rights including in subsection (1) “… judgment, foreclose, or otherwise enforce the claim … [or] security interest by any available judicial procedure[.]” Article 8.9A- s.601(c) provides that the rights provided in Article 8.9A-s. 601(a) “are cumulative and may be exercised simultaneously.”
[29] Article 8.9A- s.607 of the UCC deals with collection and enforcement and subsection (a) provides that if a debtor defaults, a secured creditor may notify an account debtor to make payment directly to the secured creditor. An account debtor is defined in Article 8.9A-s.102(a)(3) as “a person obligated on account, chattel paper, or general intangible.” Article 8.9A- s.406(a) provides that once an account debtor receives notice, the account debtor may discharge its obligation only by paying the secured creditor the amount that it owes the debtor. After notice, the account debtor cannot discharge its obligation by paying the debtor.
[30] The requirement to act in a commercially reasonable manner is contained in Article 8.9A- s.607(b) (2)(A)(c) which provides:
Article 8.9A-607 Collection and enforcement by secured party
(b)(2)(A)(c) Commercially reasonable collection and enforcement. A secured party shall proceed in a commercially reasonable manner if the secured party:
(1) undertakes to collect from or enforce an obligation of an account debtor or other person obligated on collateral; and
(2) is entitled to charge back uncollected collateral or otherwise to full or limited recourse against the debtor or a secondary obligor.
[31] The Debtors and Best Theratronics take issue with Mr. Misken’s opinion, submitting it is made without foundation given that it provides that the requirement of a secured party to act in a commercially reasonable manner is limited only to the secured party’s disposition of collateral. They further submit that such an interpretation is contrary to the plain wording of the UCC. I do not read his opinion as being that limited or as being in conflict with the UCC. Mr. Misken clearly states that the requirement of a secured creditor to act in a commercially reasonable manner relates to the settling and compromising of claims and accounting to the debtor for any deficiency or surplus. Further, such obligation arises only at the time the secured creditor sends notice to the account debtor. It does not apply to the secured creditor’s decision to collect the account receivable. That opinion is consistent with the clear wording of Article 8.9A -s. 607(b)(2)(A)(c) (1) of the UCC above.
[32] Mr. Misken confirms his opinion during his cross-examination, where, at pp. 25-26, he agrees with Best Theratronics’ counsel’s suggestion that the obligation to act in a commercially reasonable manner under the UCC arises once the secured creditor (Wells Fargo) sends notice to the account debtor (Best Theratronics).
[33] Because the obligation to act in a commercially reasonable manner arises only after Wells Fargo sent the notice to Best Theratronics, the Debtors position that Wells Fargo’s decision to proceed against Best Theratronics’ accounts receivable as opposed to other collateral was commercially unreasonably does not arise under the UCC and therefore does not raise a triable issue. Nor in my view can it be said to be a novel issue of law.
[34] The Debtors point to Mr. Misken’s acknowledgment in his affidavit that he did not find any published opinions that hold a secured creditor’s decision to pursue an account debtor must be commercially reasonable when the secured creditor has other collateral at its potential disposal. Given the provisions of the UCC and the cases Mr. Misken refers to in his affidavit, the absence of authority directly dealing with the issue raised by Best Theratronics and the Debtors is neither surprising nor in my view does it diminish the strength of his opinion.
[35] It is telling, in my view, that the Debtors have filed no opinion of Virginia law to counter Mr. Misken. If the law as stated by Mr. Misken is incorrect, in doubt or novel, it is incumbent on Best Theratronics and the Debtors to provide expert evidence to that effect or suffer the consequences.
[36] Best Theratronics and the Debtors further submit that a credibility issue arises in respect of Mr. Misken which requires a trial to resolve. Mr. Misken’s former firm acted for Wachovia and he did some work for it, although not involving the Debtors or their related entities. He joined his current firm in October 2011. While his current firm acts for Wells Fargo, he has not done any work for it.
[37] In my view, neither Mr. Misken’s association with his former firm nor the fact that his current firm acts for Wells Fargo raise a credibility issue requiring a trial. Mr. Misken is a professional providing an objective opinion concerning the law of Virginia. Further, and included as part of his affidavit, Mr. Misken’s signed acknowledgement of expert’s duty as required by the Rules. In such circumstances, the absence of a contrary legal opinion from the Debtors lays waste to the alleged credibility issue and the suggestion that Mr. Misken’s opinion somehow improperly favours Wells Fargo. In my view, there is no credibility issue in respect of Mr. Misken that requires a trial.
[38] Having regard to Mr. Misken’s evidence, which I accept and the wording of the applicable provisions of the UCC, it is my view that the issue raised by Best Theratronics and the Debtors concerning whether Wells Fargo’s decision to collect Best Theratronics accounts receivable as opposed to other collateral available was commercially reasonable under the UCC does not give rise to a genuine issue requiring a trial. Mr. Misken’s evidence, which is unchallenged, establishes that the UCC requirement to act commercially reasonably applies to the collection and enforcement of the debt. In relation to the collection of the Debtors’ accounts receivable, this relates to the settling and compromising of the claim. It does not relate to Wells Fargo’s logic or its decision to pursue the collection of the accounts receivable over other collateral. Further, Mr. Misken’s evidence is supported, in my view, by the terms of the credit agreements between Wells Fargo and the Debtors and the provisions of the UCC.
[39] Further, and given that there are no facts in dispute between the parties and Best Theratronics and the Debtors have essentially raised one issue of law which can be resolved on the evidence before me, I am satisfied that the Action can be resolved on the record before me and a trial is not necessary.
Issue Estoppel
[40] Wells Fargo submits that issue estoppel applies to the Debtors’ claims in the Application relating to commercial reasonableness in light of prior decisions in the courts of Virginia involving it and the Debtors.
[41] In November 2011, the Debtors along with Gunston, Best Industries and Suthanthiran commenced an action against Wells Fargo in the United States District Court in Virginia arising out of Wells Fargo’s actions in attempting to obtain repayment of the loans (the “Virginia Action”). The plaintiffs sought relief against Wells Fargo on six grounds, including racial discrimination, retaliation, tortious interference with contract expectancy and tortious interference with prospective business advantage based on Wells Fargo’s refusal to renew and extend commercial lines of credit and loans to them, its decision to initiate default collection procedures and its decision to collect the accounts receivable rather than foreclose on a property.
[42] Wells Fargo brought a summary judgment motion in the United States District Court to dismiss the plaintiffs’ claims which was allowed. See: Best Medical International, Inc. et al. v. Wells Fargo Bank, N.A., No. 1:11-CV-1277, 2013 WL 132041 (E.D. Va. March 29, 2013). In particular, the court dismissed the plaintiffs’ claims relating to Wells Fargo’s intention to collect accounts receivable as opposed to realizing on other collateral. Noting Wells Fargo’s rights not only pursuant to the loan agreements but also under Virginia law and specifically the UCC, the court held that the plaintiffs had failed to demonstrate a genuine issue of fact with respect to the claims. In paragraph 16 of the decision, the court highlighted the fact that the plaintiffs conceded that Wells Fargo had the right to collect accounts receivable but “instead chose to challenge the logic for collecting the accounts before foreclosing on the Plaintiffs’ real estate collateral.”
[43] Issue estoppel precludes relitigation of specific issues or material facts forming part of such issues. In order for issue estoppel to apply, three preconditions must be met: 1) The same question must have been decided; 2) The judicial decision which is said to create the estoppel must be final; and 3) The same parties or their privies must be parties to both proceedings. See: Danylik v. Ainsworth Technologies Inc., 2001 SCC 44, [2001] 2 S.C.R. 460 (S.C.C.) at paras. 24 and 25.
[44] Cause of action estoppel is different from but related to issue estoppel in that it also operates to preclude relitigation. Cause of action estoppel applies to not only points on which the court in a prior action has pronounced but also to every point which properly belonged to the subject matter of the litigation. See: Reddy v. Oshawa Flying Club, [1992] O.J. No. 1337 (O.C.J (Gen Div.)) at paras. 7 & 8.
[45] I agree with the Debtors that issue estoppel does not apply in this case. The issue of whether Wells Fargo’s decision to collect accounts receivable was commercially reasonable as required by the UCC was not before the US District Court in the Virginia Action. In my view, however, cause of action estoppel does apply to the Debtors claims as asserted in the Application.
[46] It is clear from the court’s decision in Best Medical International that the plaintiffs (including the Debtors) challenged Wells Fargo’s decision to collect accounts receivable instead of foreclosing on the plaintiffs’ real estate collateral. Notwithstanding that the plaintiffs’ claim in respect of such challenge was based on an alleged discrimination and retaliation, the plaintiffs could also have alleged that Wells Fargo’s actions in collecting accounts receivable were not commercially reasonable as required by the UCC. Acting in a discriminatory or retaliatory manner is arguably commercially unreasonable. Further, given that the issue involves a question of the interpretation of Virginia law, it is one, in my view, that should have been raised by the Debtors in the Virginia Action. The issue is applicable to the collection of all accounts receivable, not just those of Best Theratronics.
[47] Further, both Wells Fargo and the Debtors were parties to the Virginia Action and the decision of the court in Best Medical International is final. Accordingly, cause of action estoppel applies to the claims asserted by the Debtors in the Application and it cannot proceed.
[48] Cause of action estoppel also operates to eliminate Best Theratronics defence in the Action. In the absence of the Debtors being able to assert their claims in the Application, Best Theratronics has no standing to raise the commercially reasonable defence in the Action. Mr. Misken’s evidence is clear that an account debtor has no standing under the UCC to assert commercially unreasonable collection. As that is the only defence raised, there is no genuine issue requiring a trial.
Conclusion
[49] For the reasons herein, I am satisfied there is no genuine issue raised by either Best Theratronics or the Debtors which requires a trial in the Action or the hearing of the Application.
[50] The Motion is accordingly allowed. Judgment is granted to Wells Fargo against Best Theratronics in the amount of $3,000,000 together with an order requiring Best Theratronics to pay to Wells Fargo all future amounts that become due and owing by Best Theratronics to the Debtors after August 2013 until the Debtors indebtedness to Wells Fargo has been repaid. Judgment is also granted in Wells Fargo’s favour dismissing the Application.
[51] Wells Fargo is entitled to its costs of the Motion, the Action and the Application on a partial indemnity basis.
[52] Wells Fargo has submitted a Costs Outline claiming partial indemnity costs of $61,404.20 inclusive of disbursements and HST. While the amount claimed appears high, particularly when compared to the Costs Outline of Best Theratronics and the Debtors, given the amount in issue, the issues raised by both Best Theratronics and the Debtors in the Application and the steps required to respond to them by counsel for Wells Fargo, I do not consider it to be wildly out of line. The hourly rates claimed are too high, however, for partial indemnity costs.
[53] I assess Wells Fargo’s costs of the Motion, Action and Application at $52,000 inclusive of disbursements and HST, payable by Best Theratronics and the Debtors on a joint and several basis forthwith. In my view, that amount is fair and reasonable in all the circumstances and should have been within the contemplation of Best Theratronics and the Debtors given the nature and extent of the proceedings.
L. A. Pattillo J.
Released: September 12, 2013
COURT FILE NO.: CV-13-10062-00CL
And COURT FILE NO.: CV-13-484741
(Consolidated in Court File No.: CV-13-10062-00CL)
DATE: 20130912
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
BETWEEN:
WELLS FARGO BANK, N.A.
Plaintiff
- and -
BEST THERATRONICS LTD.
Defendant
AND BETWEEN:
BEST MEDICAL INTERNATIONAL, INC. and HUESTIS MACHINE CORPORATION
Applicants
- and -
WELLS FARGO BANK, N.A.
Respondent
REASONS FOR JUDGMENT
L. A. PATTILLO J.
Released: September 12, 2013