COURT FILE NO: CV-09-384106
DATE: 20130206
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Can-Win Leasing (Toronto) Limited
Plaintiff
- and -
Rafael Moncayo
Defendant
Licio E. Cengarle,
for the Plaintiff
Rafael Moncayo on his own behalf
HEARD: January 7, 2013
GOLDSTEIN J.:
INTRODUCTION
[1] Can-Win Truck Sales Inc. (“Can-Win Truck”) was in the business of buying and selling used trucks. Clifford Irwin and the Defendant, Rafael Moncayo, were each officers, directors, and 50% shareholders of Can-Win Truck. Mr. Irwin and Mr. Moncayo also had a truck leasing business, R & R Leasing Inc. (“R&R”).
[2] In June 2006 Can-Win Truck obtained a line of credit (“the LOC”) from the Royal Bank of Canada (“the Bank”) in the amount of $750,000.00. Mr. Moncayo and Mr. Irwin both gave personal guarantees to the Bank.
[3] In 2007 and 2008 market conditions deteriorated and Can-Win Truck experienced financial difficulties. In March 2008 Mr. Irwin took sole control over the bank accounts of Can-Win Truck. From that point forward Mr. Irwin made all significant decisions on behalf of the company. In June 2008 he locked Mr. Moncayo out of the premises of Can-Win Truck after Mr. Moncayo moved some inventory.
[4] Mr. Irwin is the sole shareholder and directing mind of the Plaintiff Can-Win Leasing Inc. (“Can-Win Leasing”). In August 2008 Mr. Irwin caused Can-Win Leasing to pay down the LOC by $500,000.00 without consulting or informing Mr. Moncayo. The Bank made no demand for payment, although Mr. Irwin says that the Bank was pressuring him.
[5] In March 2009 the Bank assigned the guarantee to Can-Win Leasing in exchange for payment of a further $178,007.62. The $178,007.62 represented the outstanding amount of the LOC up to that point. The total amount of the debt owing on the LOC as of September 2008 was $693,370.21. Can-Win Leasing then made a demand for $250,000.00 for Mr. Moncayo on his guarantee.
[6] In other words, Can-Win Leasing stepped into the shoes of the bank in order to try and collect on Mr. Moncayo’s guarantee. Mr. Moncayo did not pay. Can-Win Leasing then launched this action.
[7] Mr. Irwin’s unilateral decision to cause Can-Win Leasing to pay the debt of Can-Win Truck without notice to or consultation with Mr. Moncayo in the absence of a demand from the Bank disentitles Can-Win Leasing from collecting on the guarantee. The action is dismissed.
THE EVIDENCE
Clifford Irwin
[8] In 2006 Mr. Irwin and Mr. Moncayo obtained the LOC from the Bank in order to purchase inventory for Can-Win Truck. Can-Win Truck bought and sold used trucks. There had been a previous LOC in which he and Mr. Moncayo had provided guarantees. That security was continued under the new LOC.
[9] Can-Win Truck had been very successful initially but ran into difficulties as a result of a downturn in the market for used trucks in 2007. As of May 31 2007 Can-Win Truck owed the Bank $778,216.00. There had been a loss of $117,091.00 for the six months ending on May 31 2007.[^1] In November 2007 Can-Win owed the Bank $754,294.[^2]
[10] In January 2008 Mr. Irwin told Mr. Moncayo that he wanted to shut down the business. Mr. Moncayo was upset and they agreed to retain a consultant to see if there was a way for Mr. Moncayo to take over the business. Mr. Moncayo simply did not have the money. Mr. Irwin wanted the company closed. He did not want to continue financing the loss.
[11] Mr. Irwin further testified that he was getting a lot of pressure from the Bank. He was worried that the Bank would foreclose on his property on Kipling Avenue. As a result, he arranged for his company Can-Win Leasing to pay down the LOC by $500,000.00 in August 2011. The Bank agreed to transfer Mr. Moncayo’s guarantee to him in exchange for paying a further $178,000.00 to pay off the rest of the LOC. In March 2009 the bank assigned the guarantee to Can-Win Leasing. He subsequently sent a demand for $250,000.00 to Moncayo, which was not paid. Can-Win Leasing is out of pocket $650,000.00.
[12] In cross-examination Mr. Irwin agreed that the original agreement was that Mr. Moncayo would run the company and take a salary, and leave his equity in the company. He agreed that the LOC was obtained to buy inventory. The market went bad which was neither his fault nor Mr. Moncayo’s fault. He agreed that they had set up R&R in 2001 to lease out trucks that were held in Can-Win Truck’s inventory. R&R was successful, although of 19 leases held as of March 31 2008 nine were repossessions where the trucks were total losses. Mr. Irwin did agree that he and Mr. Moncayo had each put in a small amount of money (either $10,000.00 or $3,000.00, he could not recall) to start with. He also agreed that in 2008 R&R had receivables of $353,000.00, owed $126,000.00, and had equity of close to $200,000.00. He agreed that one of the conditions of the LOC was that R&R provide financial statements to the Bank.[^3] Mr. Irwin also agreed that he had never provided an accounting for R&R to Mr. Moncayo. He testified that Mr. Moncayo has never asked for an accounting. Mr. Irwin stated that if Mr. Moncayo would settle this action he would be more than happy to provide an accounting.
[13] Mr. Irwin further agreed in cross-examination that as of March 2008 he assumed responsibility for all the bank accounts of Can-Win. He said that he did not assume responsibility for R&R. In June 2008 he locked Mr. Moncayo out of the building after discovering that Mr. Moncayo had moved the inventory.
[14] Mr. Irwin also testified in cross-examination that in April-May 2008 the Bank was putting pressure on him, and that it would be bad for his credit going forward if they made a demand for repayment. He said it would be better for him if he paid rather than being forced.
Rafael Moncayo
[15] Mr. Moncayo testified that when things went bad Mr. Irwin decided to take things upon himself. Mr. Irwin took over the bank accounts in March 2008. Mr. Irwin made all decisions. Mr. Irwin asked for money from Mr. Moncayo to keep things going but he had no funds, except the savings he had in R&R. R&R vanished. There was a motion for summary judgment brought in 2011 by Can-Win Leasing.[^4] Mr. Moncayo asked for an accounting for R&R at that time but has never received one.
[16] Mr. Moncayo testified that in 2008 Can-Win Truck was not dead and that R&R was not in trouble at all. He asked to take over R&R and offered in June 2008 to fix the problem by selling the trucks belonging to Can-Win Truck. He offered to pledge the R&R receivables towards Can-Win Truck and not make money with the condition that he could keep R&R. At that point there was close to $50,000.00 in the R&R bank account. Mr. Irwin rejected the offer and said it was an insult to his intelligence.
[17] Mr. Moncayo at that point had no further dealings with Can-Win Truck or R&R. He did not know that Can-Win Leasing was going to pay off the LOC.
ANALYSIS
[18] In Re Korex Don Valley ULC, 2009 20345 (ON SC), [2009] O.J. No. 1721, 52 C.B.R. (5th) 238, 2009 CarsellOnt 2229 (Sup.Ct.) Wilton-Siegel J. found that a voluntary payment by a party of another party’s debts cannot be recovered by a right of indemnification in the absence of a demand from the creditor. Uniliver had entered into an agreement with Korex for the supply of laundry detergent. Various suppliers to Korex had submitted invoices. Those invoices were unpaid. Unilever purported to guarantee payment of the invoices to Korex suppliers, and sought indemnification. Wilton-Siegel J. found that Unilever had not established that it had validly guaranteed the invoices. In the absence of a valid guarantee, could Unilever be indemnified? Wilton-Siegel J. then set out the applicable law:
41 The applicable legal principles are set out in Owen v. Tate, [1976] 1 Q.B. 402 (C.A.) and were endorsed by the Alberta Court of Appeal in Canada (Attorney General) v. Becker, (1998), 1998 ABCA 283, 223 A.R. 59. In Owen v. Tate, Scarman L.J. starts by noting that voluntary payment by a party of another party's debts cannot be recovered by a right of indemnification.
42 Scarman L.J. defines a volunteer for this purpose at p. 408 as a party who assumes an obligation as guarantor for which there is no antecedent request, no consideration and no consensual basis. While it is not express, the context indicates that any request, consideration or consensual arrangement must come from, or involve, the primary obligor (Korex) rather than the guaranteed party.
43 Scarman L.J. then observes that a person compelled by law to make a payment for which another is primarily liable is entitled to indemnification, notwithstanding the lack of any request or consent. This rule is summarized in the following passage in Goff and Jones, The Law of Restitution (1966), p. 207 that is cited in Owen v. Tate, which sets out four requirements:
To succeed in his claim, however, the plaintiff must satisfy certain conditions. He must show (1) that he has been compelled by law to make the payment; (2) that he did not officiously expose himself to the liability to make the payment; (3) that his payment discharged a liability of the defendant; and (4) that both he and the defendant were subject to a common demand by a third party, for which, as between the plaintiff and the defendant, the latter was primarily responsible. [emphasis added]
44 The operation of these rules in the context of a voluntary assumption of a guarantee was summarized at pp. 411-412 as follows:
In my judgment, the true principle of the matter can be stated very shortly, without reference to volunteers or to the compulsions of the law, and I state it as follows. If without an antecedent request a person assumes an obligation or makes a payment for the benefit of another, the law will, as a general rule, refuse him a right of indemnity. But if he can show that in the particular circumstances of the case there was some necessity for the obligation to be assumed, then the law will grant him a right of reimbursement if in all the circumstances it is just and reasonable to do so. [emphasis added]
45 The effect of these decisions would appear to be that a volunteer may be entitled to receive indemnification by way of restitution if there is "some necessity for the obligation to be assumed" or, in respect of a guarantee per Hunt J.A. in Becker, if "the guarantee was 'reasonably necessary' in the interests of the person for whom the payment was ultimately made".
[19] Security for the LOC was set out in the agreement between Can-Win Truck and the Bank dated June 21, 2006. The security included guarantees of up to $900,000.00 each by Mr. Irwin and Mr. Moncayo, and a collateral mortgage in the amount of $975,000.00 on Mr. Irwin’s Kipling Avenue property.[^5]
[20] Mr. Moncayo’s guarantee stated:
(12) No suit based on this guarantee shall be instituted until demand for payment has been made…
(14) This guarantee and agreement shall extend to and enure to the benefit of the Bank and its successors and assigns, and every reference herein to the undersigned or to each of them or to any of them, is a reference to and shall be construed as including the undersigned and the heirs, executors, administrators, successors and assigns of the undersigned….[^6]
[21] Mr. Cengarle argues on behalf of Can-Win Leasing that this case is a simple matter of contract. Mr. Moncayo guaranteed the debt. Can-Win Leasing paid the debt. The Bank assigned the guarantee to Can-Win Leasing. Can-Win is therefore entitled to recover on the guarantee. He says that it does not matter that the bank did not make a demand on Can-Win Truck, because Can-Win Leasing stands in the shoes of the bank and made a demand on Mr. Moncayo.
[22] I disagree. No authority was cited for the proposition that a successor could step into the shoes of the Bank and make a demand where the Bank had not done so. In applying the principles approved in Korex, supra, I make the following findings:
• The Bank did not force Mr. Irwin to cause Can-Win Leasing to make the payment. There was no formal demand issued by the Bank. There is no evidence that the Bank stated that it would foreclose on Mr. Irwin’s Kipling property. Mr. Irwin only testified that he was worried about it. In other words, there was no compulsion at law, and no common demand from a third party.
• I am suspicious of Mr. Irwin’s testimony that the bank was putting pressure on him to pay off the LOC. He testified that he was receiving this pressure in April and May of 2008, but Can-Win Leasing paid down the LOC by $500,000.00 in August 2008, three months later. Moreover, in January 2008 the LOC was maxed out at $750,000.00 but by May 2008 the LOC had been paid down by $40,000.00 and by $50,000.00 in June 2008.[^7] There had been regular payments on the LOC made by Can-Win Truck, so there must have been at least some cash flow. There is certainly evidence that Can-Win Truck was losing money, but Mr. Irwin did not produce any documents to support his assertion that the bank was putting pressure on him.
[23] I note, parenthetically, that in Corrick J.’s earlier decision in this matter Her Honour stated that in his affidavit Mr. Irwin deposed that the Bank had made a demand for payment. Before me, Mr. Irwin testified that the Bank did not make a demand for payment. Mr. Moncayo, who is unrepresented, was obviously unaware that he could confront Mr. Irwin with the contradiction between his present testimony and his earlier affidavit. Mr. Irwin was not given the opportunity to respond to the inconsistency. Under those circumstances, I cannot base an adverse finding of credibility on this inconsistency and I decline to do so, although I am aware of it.
[24] Thus, the law will refuse an indemnity to Can-Win Leasing unless it can be shown that in the particular circumstances of this case there was some necessity for the obligation to be assumed.
[25] Was it necessary for Mr. Irwin to cause Can-Win Leasing to assume the obligation? In my view, the answer to this question turns on two questions: first, was Can-Win Truck really unsalvageable? And second, was it necessary for Can-Win Truck?
[26] I prefer the evidence of Mr. Moncayo to the evidence of Mr. Irwin on the issue of whether Can-Win Truck could survive. There are three reasons for this finding:
• Mr. Irwin testified that in January 2008 he wanted to shut down the business. He admitted that as of March 2008 he essentially took over both Can-Win Truck and R&R to the exclusion of Mr. Moncayo. In March 2008 he wrote a note to Mr. Moncayo in which he indicated that he set it up at the Bank so that his signature was required on all cheques. He wrote:
“That is the only way I can control the Bank until we get the company back on its feet”.[^8]
Despite his testimony, Mr. Irwin’s written note indicates that he took steps not to close down the business, but to get it back on its feet.
• Although there is, as I have noted, evidence that Can-Win Truck was losing money, there is no evidence that Mr. Irwin’s knowledge and experience of business and financial affairs or the truck sales and leasing industry is any greater than Mr. Moncayo’s or that he was in a better position to make an evaluation of the viability of Can-Win Truck.
• Mr. Irwin admitted in cross-examination that there was about $200,000 of equity in R&R. He also stated in cross-examination that he had refused, and would continue to refuse, to give Mr. Moncayo an accounting of equity in R&R until Mr. Moncayo had settled this action. That comment does not indicate a good faith effort to deal with Can-Win Truck’s financial affairs. Mr. Moncayo was an equal partner in R&R and entitled to an accounting as of right.
• Mr. Irwin stated that he did not assume sole responsibility for R&R when he took over sole control of the bank account of Can-Win Truck. This evidence is contradicted by his assertion in cross-examination that he would provide an accounting to Mr. Moncayo if Mr. Moncayo settled this action.
[27] Accordingly, I find that Can-Win Truck was salvageable.
[28] I also find that it was not reasonably necessary for the survival of Can-Win Truck for the payment to have been made. Mr. Irwin’s assertions are contradicted by his own actions and by the documents that he produced. It may have been reasonably necessary for Mr. Irwin to make the payment, but that is not the same thing. Mr. Irwin was concerned that the bank might foreclose on his Kipling property, but there was no evidence that the Bank ever informed him that it would do so, or that it ever took steps to do so. As I have already noted I am suspicious that the Bank was putting pressure on him as he testified. There is, for example, no evidence that Can-Win Truck missed any payments on the line of credit; indeed, the bank statements indicate that the line of credit was slowly being paid down. Mr. Irwin also testified that it would be better for his credit going forward if he paid rather than having the Bank make a demand and forcing him to pay. After locking out Mr. Moncayo in June 2008 he decided to take unilateral action to take control of the financial affairs of Can-Win Truck and pay down Can-Win Truck’s debt. All of these actions were done primarily to benefit Mr. Irwin. Mr. Irwin was entitled to take those steps he felt necessary to preserve his business affairs, but in my view “reasonably necessary in the circumstances” does not include a circumstance where the steps are directed exclusively for the benefit of the person taking on the obligation. It would not be just and reasonable to enforce the guarantee against Mr. Moncayo, particularly since Mr. Moncayo was never given the opportunity to negotiate with the Bank to re-schedule the debt, or seek alternative financing, or simply work off the obligations.
[29] I recognize that it may seem unfair to Mr. Irwin that Can-Win Leasing is solely responsible for an LOC incurred in a joint business, but that is primarily due to decisions that Mr. Irwin made himself for his own benefit. Those decisions commenced with his unilateral decision to lock out his partner, exclude his partner from decision-making not only in Can-Win Truck but also R&R, and then unilaterally pay down the LOC in order to protect his own property. Although Mr. Irwin testified that he locked Mr. Moncayo out as a result of him moving the inventory, he did not suggest any wrongdoing on the part of Mr. Moncayo. Even if, as Mr. Cengarle argues (and I have some doubt that he is correct) that Can-Win Leasing stepped into the shoes of the Bank and by issuing the demand triggered Mr. Moncayo’s obligation to pay, by his actions Mr. Irwin materially changed the risk to Mr. Moncayo without his knowledge or consent: Pax Management v. Canadian Imperial Bank of Commerce, 1992 27 (SCC), [1992] 2 S.C.R. 998; Bank of Montreal v. Wilder, 1986 3 (SCC), [1986] 2 S.C.R. 551, 32 D.L.R. (4th) 9.
[30] Mr. Cengarle correctly argues that that since there has been no counterclaim or attempt to add R&R as a third party that there is no right to set-off, although he candidly agreed that there might be some right to recovery in a separate action by Mr. Moncayo in relation to R&R. Nonetheless, R&R surely forms part of the mix as the Bank demanded financial statements from R&R as part of the LOC agreement. R&R and Can-Win Truck had the identical officers, directors, and shareholders. The businesses were complementary and involved the same inventory of trucks. I cannot ignore the evidence related to R&R. Surely any perceived unfairness to Mr. Irwin is tempered by the fact that there is, by his own testimony, approximately 200,000.00 in equity in R&R that he has refused to account for.
DISPOSITION
[31] The action is dismissed with costs to Mr. Moncayo. A self-represented person is entitled to his costs no less than a represented person. I will accept submissions in writing from Mr. Moncayo of no more than two pages as to his costs within 30 days of the release of this judgment. He may contact my assistant to arrange for the delivery of his submissions. He should send a copy of his submissions to counsel for Can-Win Leasing. I will accept submissions from counsel for Can-Win Leasing, also not to exceed two pages, within 15 days of receiving Mr. Moncayo’s submissions.
GOLDSTEIN, J.
Released: February 6, 2013
COURT FILE NO: CV-09-384106
DATE: 20130206
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Can-Win Leasing (Toronto) Limited
Plaintiff
- and -
Rafael Moncayo
Defendant
JUDGMENT
GOLDSTEIN J.
Released: February 6, 2013
[^1]: Exhibit 2, Tab 5. [^2]: Exhibit 2, Tab 6. [^3]: Exhibit 2, Tab 2. [^4]: In Can-Win Leasing (Toronto) Limited v. Moncayo, 2011 ONSC 1646, [2011] O.J. No. 1141 (Sup.Ct.) my colleague Madam Justice Corrick dismissed an application for summary judgment brought by Can-Win Leasing. [^5]: Exhibit 2, Tab 2. [^6]: Exhibit 2, Tab 4. [^7]: Exhibit 2, Tab 7. [^8]: Exhibit 5.