ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-13-489421 and CV-14-496057
DATE: 20140602

BETWEEN:

COURT FILE NO.: CV-13-489421

Royal Bank of Canada
Plaintiff

– and –

Sharmila Dhupar and 8196796 Canada Inc.
Defendants

Natalie Marconi, for the Plaintiff

Norman Groot, for the Defendants

AND BETWEEN:

COURT FILE NO.: CV-14-496057

Royal Bank of Canada
Plaintiff

– and –

Linda Watson and 8156697 Canada Inc.
Defendants

Natalie Marconi, for the Plaintiff
Norman Groot, for the Defendants

HEARD: May 28, 2014

E.M. Morgan J.

[1] Can a bank loan and guarantee be unconscionable, and unenforceable, even if the borrower and guarantor understood what they freely signed?

I. The original pleadings

[2] The Plaintiff brings two summary judgment motions in respect of two different loans and guarantees. Although represented by the same counsel, the Defendants in CV-13-48942 (the “Dhupar action”) are unrelated to the Defendants in CV-14-496057 (the ‘Watson action”); nevertheless, their cases are factually so similar that it is convenient to deal with them as if they were all part of the same action.

[3] The corporate Defendant in the Dhupar action, 8196796 Canada Inc. (“Dhupar Co.”), took out a loan from the Plaintiff on June 6, 2012 for $246,840.00 in order to acquire a franchise business. On that date, the personal Defendant, Sharmila Dhupar, signed a guarantee for the Dhupar Co. loan in the amount of $61,710.00.

[4] The corporate Defendant in the Watson action, 8156697 Canada Inc. (“Watson Co.”), took out a loan from the Plaintiff on April 5, 2012 for $248,778.00 in order to acquire a franchise business. On that date, the personal Defendant, Linda Watson, signed a guarantee for the Watson Co. loan in the amount of $62,194.00. Watson Co. and Ms. Watson also have a joint Visa account with the Plaintiff and a joint operating account with the Plaintiff; the Visa account has an outstanding balance owing to the Plaintiff in the amount of $6,335.76 and the operating account has an overdraft owing to the Plaintiff in the amount of $847.11. In addition, Ms. Watson owes $3,093.86 on her personal Visa account.

[5] Both sets of borrowers concede that the funds were advanced by the Plaintiff and that the amounts sought in their respective actions are accurate. Likewise, both sets of borrowers concede that they have not repaid their respective loans or paid the Plaintiff anything on the personal guarantees.

[6] The Plaintiff has brought the within actions to enforce the loans and guarantees. Statements of Defence were issued in both actions asserting virtually identical defenses. Both of those pleadings allege that the borrowers and guarantors did not understand what they were signing, that the documents were not explained to them by representatives of the Plaintiff, and that the respective guarantors did not have independent legal advice. Both Statements of Defence also assert that the Plaintiff induced the Defendants into signing the loans and guarantees.

[7] Both sets of Defendants have now recanted the central positions taken in their pleadings. In the cross-examinations leading up to this motion, Ms. Dhupar and Ms. Watson each conceded that, in fact, they signed the loan and guarantee documents voluntarily, that a bank manager did speak with them to explain the documents to them, and that they knew and understood what they were signing. Nothing in the original pleadings explains how the Plaintiff allegedly induced the Defendants into taking the loan.

[8] It turns out that the Statements of Defence were little more than tactics designed to delay judgment. The central premise of each was conceded to be false by the parties on whose behalf these pleadings were filed.

[9] On the state of the pleadings as issued, there is no defense to the claims. The sums are for liquidated amounts, and the Plaintiff has proved the respective debts through affidavits submitted by representatives of the bank who have appended the relevant loan and guarantee documents.

II. Motion scheduling court

[10] The Dhupar case came before motion scheduling court on November 8, 2013, and was assigned the date of March 31, 2014 for the Plaintiff’s motion for judgment on the liquidated debt. On February 28, 2014, the matter was again brought to motion scheduling court, where counsel for the Defendants sought an adjournment of the summary judgment date and requested that the Dhupar case be heard together with the Watson case. Himel J. granted an adjournment to May 28, 2014 for a two hour hearing, and ordered that both summary judgment motions be heard together.

[11] Counsel for the Defendants brought the matter to motion scheduling court yet again on May 16, 2014. At that appearance, he submitted that there was new information that had arisen during the course of the exchange of motion materials and cross-examinations, and that this new situation required another adjournment as a matter of some urgency. Himel J. endorsed the record as follows:

The counsel for RBC opposes the adjournment and argues that the new information is in fact not new. I am not prepared to adjourn this motion. It will proceed on May 28 as scheduled. The adjournment request is refused.

[12] At the hearing before me, counsel for the Defendants continued to press the urgency of the new situation. He said a number of times that he had “put Justice Himel on notice” that he would be seeking to amend the pleadings. Frankly, I am unsure of why such “notice” was relevant; he had made his adjournment request to Himel J. and she had ruled against him. However, he seemed to suggest that having put the scheduling judge “on notice” gave him the opportunity to bring additional motions and file new material before the judge hearing the summary judgment motions.

III. The amended pleadings

[13] To make matters slightly more complicated, counsel for the Defendants apparently attempted to bring a motion before a Master to amend the two defenses at some point during the past week or two, but was unable to do so. He therefore sought at the outset of his submissions before me to hand up a motion record to amend the pleadings, adding new defenses to each of the Statements of Defence. Counsel for the Plaintiff objected, arguing that the motions to amend were not properly before the court.

[14] I agree that the motions to amend the pleadings were not brought by the Defendants in an authorized manner. However, in an effort to be procedurally flexible and to provide the Defendants with as full and fair a hearing as possible, I permitted their counsel to hand up his materials and to argue the summary judgment motions on the basis of the newly proposed pleadings and the new defenses contained therein. I also provided counsel for the Plaintiff an opportunity to respond to those new defenses in her reply. As it turned out, both counsel had come to the hearing prepared for this eventuality, and they both filed briefs of authorities that addressed the new defenses.

[15] The revised pleadings contain new defenses of misrepresentation and unconscionability. As counsel for the Defendants explains it, the Defendants do not allege that the Plaintiff actually perpetrated a fraud, but rather they allege that the Plaintiff was in possession of fraudulent information provided by third parties, and that the Plaintiff used this information as an “inducement” to get the Defendants to take out the loans and to sign the guarantees.

IV. The new defenses

[16] The Defendants submit that the new defenses arise due to the newly acquired information that the Plaintiff was involved with fraudulent actors – namely, Nasir Khan and Enabling Strategies Inc., the franchisor from whom the Defendants each purchased their businesses, and Ronald (Bill) McKinlay, a financial consultant who had helped them arrange the financing of their respective businesses. The Defendants contend that the affidavits filed by Najib Baqi, the Plaintiff’s manager for the Watson loan, and Lloyd Nelson, the Plaintiff’s manager for the Dhupar loan, revealed that, unknown to the Defendants, someone had provided the Plaintiff with fraudulent Bank of Montreal (“BMO”) statements indicating that each of the Defendants had more money in BMO accounts than they actually had.

[17] The Defendants’ position is that the loans should not have been approved, and that but for the fraudulent BMO statements they would not have been approved. The Defendants further contend that the Plaintiff breached a duty it owed to them as borrowers and guarantors to review with them all of the financial information which it had in its files and on which it relied in making the loans.

[18] The respective bank managers have deposed that they did indeed review with each of the Defendants their financial information. Mr. Baqi and Mr. Nelson each state that they both spoke on the telephone and met with the Defendants, and that they reviewed the loans, guarantees, and Defendants’ creditworthiness with them. In support of this evidence, they have produced notes of their conversations with the Defendants.

[19] Counsel for the Defendants submits that the Plaintiff is in the business of lending money to borrowers, and that it used false information about the Defendants to induce them to sign the loans and guarantees. Counsel for the Plaintiff replies that this makes no sense, and that the Plaintiff is in the business of lending money to borrowers who can pay it back with interest, not to borrowers who have insufficient assets to pay it back.

[20] I agree with counsel for the Plaintiff that, like any bank, the Plaintiff gains nothing from “inducing” a person to borrow money if that person is likely to default. For the sake of the Plaintiff’s own business, it vets the financial circumstances of its customers to ensure that they are likely to repay their loans. There is neither credibility nor common sense in the contention that the two bank managers intentionally used false BMO statements to induce the Defendants into taking the loans. Banks do not go out of their way to ensure that they lose money.

[21] Moreover, Plaintiff’s counsel points out that there could have been no misrepresentation with respect to the Defendants’ finances. Whether the bank had been given accurate or inaccurate information about their BMO accounts, the Defendants themselves certainly knew the state of their own accounts. Either the Plaintiff did discuss the BMO statements with the Defendants as the two managers depose, in which case the Defendants were fully aware of all of the Plaintiff’s information and there was no misrepresentation by the Plaintiff, or the Plaintiff did not discuss the BMO statements with the Defendants as counsel for the Defendants contends, in which case there was no representation at all about those statements.

[22] Either way, it is illogical to say that the Defendants relied on the Plaintiff to inform them of their own bank accounts. It is for the borrowers to advise the bank accurately and honestly of the assets they have available to support their loans, and not for the bank to advise the borrowers of their own assets.

[23] Whether or not Mr. Baqi discussed the BMO statements with Ms. Wilson and Mr. Nelson discussed them with Ms. Dhupar – and I am inclined to think that they did, since there is no financial or any other reason for them not to – the Defendants cannot say that they relied on any representations in this regard by the Plaintiff. The Defendants themselves knew how much money they each had in the bank.

V. Independent legal advice

[24] Counsel for the Defendants relies heavily on the recent decision of Perell J. in Royal Bank v 2240094 Ontario Inc., 2013 ONSC 2947. He particularly emphasizes the fact that there, as here, the guarantors did not obtain independent legal advice (“ILA”) before signing for their guarantees. That reliance, however, is misplaced.

[25] In the first place, the 2240094 case entailed a lender who arranged for his teenage sons to guarantee his loans. The youthful guarantors could not only be expected to be under their father’s influence, but had no business experience whatsoever. Under those circumstances, independent legal advice may well be important in order to ensure that the guarantors understand what they are getting themselves into. The independence that the guarantors require is an independence from the borrower whose loan they are supporting.

[26] The within cases are entirely different. They involve corporate borrowers supported by experienced personal guarantors who are the sole principals of their respective corporations. In signing guarantees in support of loans to Dhupar Co. and Watson Co., Ms. Dhupar and Ms. Watson effectively signed for themselves.

[27] The Court of Appeal made it clear in Zweig Associates Inc. v Mok, 2005 CarswellOnt 86, at para 2, that, “[l]ack of independent legal advice is not a freestanding defence.” In Zweig, at para 2, as here, there was “no evidence that in the absence of independent legal advice the appellants did not understand [the terms of the loan].” Under these circumstances, the observation made by Perell J. in 2240094, at para 16, that “independent legal advice is not a prerequisite for a bank to make a claim against a guarantor; however, the presence of independent legal advice is useful to a bank”, is entirely apt.

[28] If Ms. Dhupar and Ms. Watson had obtained ILA it would not have helped them. They testified that they already understood the loans and guarantees, and that they knew the liabilities they were assuming.

[29] An independent lawyer would have reviewed with Ms. Dhupar and Ms. Watson the legal terms and liabilities that they already understood. A lawyer would not have asked them how much money they have in the bank and would not have assessed their finances and creditworthiness, which is what the Defendants contend that the Plaintiff failed to do. In other words, ILA for the Defendants would have been “useful”, as it was described in 2240094, but only in the sense that it would have helped the Plaintiff ward off specious defenses.

VI. Unconscionability

[30] Although the seminal unconscionability case, Lloyd’s Bank v Bundy, [1974] 3 All ER 757 (CA), was pronounced in the context of a bank’s action against a borrower and guarantor, it must be kept in mind that, “[g]enerally speaking, the relationship between a financial institution lender and its customer borrower is a purely commercial relationship of creditor and debtor”: Pierce v Canada Trustco (2005) 2005 15706 (ON CA), 254 DLR (4th) 79 (Ont CA), at para 27. As the Court of Appeal expressly stated in Baldwin v Daubney (2006) 2006 32901 (ON CA), 83 OR (3d) 308, at para 15:

A fiduciary duty arises where a relationship between the parties, such as trustee and beneficiary, is established in order to give one party the responsibility to look out for the best interests of the other. The relationship between a lender and a borrower is not of that kind. Rather, it is a typical commercial relationship in which the interests of the parties are not the same and each party seeks to secure its own interest and can reasonably believe only that the other party is doing the same.

[31] In Lloyd’s Bank, it was the vulnerability of the elderly father who guaranteed a loan for his son that triggered the doctrine of unsconscionability, while in 2240094 it was the vulnerability of the young sons who guaranteed a loan for their father; and in both cases the guarantors took no benefit from the underlying loan. Absent these factors – which, as indicated above, do not occur where a corporate principal guarantees a loan for her own corporation – there are no factors that would trigger any special, extra-commercial relationship between the parties.

[32] Ms. Dhupar and Ms. Watson, through Dhupar Co. and Watson Co., have had the benefit of the loans advanced by the Plaintiff. They may have taken the bank’s money when they shouldn’t have, or for a business investment that turned sour. But there was nothing extraordinary in their dealings with the bank.

[33] As Lord Denning put it in Lloyd’s Bank, at 763, “[n]o bargain will be upset which is the result of the ordinary interplay of forces.” There was neither a substantive defect in the loans and guarantees in issue, which were on ordinary commercial terms, nor was there a lack of voluntariness or understanding on the borrowers/guarantors’ part. Accordingly, the crucial ingredients for a claim of unconscionability were absent: See Stephen A. Smith, Contract Theory (Oxford University Press, 2004), at 9.2.1; and Michael J. Trebilcock, “An Economic Approach to the Doctrine of Unconscionability”, in B.J. Reiter & J. Swan, eds., Studies in Contract Law (Toronto: Butterworths, 1980) at 379.

[34] If the Defendants’ evidence were to be believed in its entirety, it would lead to no stronger a conclusion than that the Defendants were led astray by an unscrupulous franchisor and financial consultant, who also intervened to mislead the Plaintiff. Even assuming that is the case, the situation would be similar to that in Isaacs v Royal Bank, 2011 ONCA 88, where the Court of Appeal held, at para 6, that “[t]he Bank’s conduct, at its highest, was careless. But the appellant’s conduct was more than careless.”

[35] If the Plaintiff failed in its due diligence by not adequately assessing the BMO statements allegedly provided by Messrs. Khan and/or McKinlay, it failed in a duty it owed to itself. Here, as in Baldwin, supra, at para 15, “the claim that the lender has a duty of care to advise is a claim to recognize a new duty of care.” It is precisely that type of far-reaching duty of a bank toward its customers that was considered, and rejected, by the Court of Appeal.

VII. Summary judgment

[36] In a final effort to avoid liability on the loans and guarantees that they freely signed, the Defendants contend that the Plaintiff knew of the pattern of wrongdoing engaged in by Mr. Khan and Mr. McKinlay, and failed to warn the Defendants of the dangers of doing business with them. In support of this claim, the Defendants point to the fact that the Plaintiff has been engaged in separate litigation with those two individuals pertaining to an unrelated franchise purchaser.

[37] Counsel for the Plaintiff points out that the Plaintiff’s Statement of Claim against Khan and McKinlay, which has been produced in the Motion Record, was issued a year after the loan agreements at issue here were entered into. Whatever its merits, the timing alone of this unrelated claim establishes that it is not the smoking gun that the Defendants claim it to be. It certainly is not evidence that the Plaintiff had suspicions about Khan and McKinlay that could have been conveyed to the Defendants at the time that they agreed to their respective loans.

[38] Furthermore, counsel for the Plaintiff points out that the Defendants themselves have been engaged in litigation with Khan and McKinlay since November 2013. In that action, they claim that they were fraudulently induced into investing in their franchise businesses.

[39] It is unclear to me how far the Defendants’ action against Khan and McKinlay has progressed. What is clear to me is that the Defendants’ allegations of fraud did not just arise a week or two ago with the serving of the bank managers’ affidavits in the motions before me. Indeed, counsel for the Plaintiff states that the BMO statements that the Defendants allege are fraudulent were themselves referenced in the affidavit of documents in the within actions, which were served several months ago.

[40] In other words, Himel J. assessed the situation accurately in motion scheduling court when she quoted Plaintiff’s counsel to the effect that nothing new had emerged to prompt a further adjournment. The facts that support the new Statements of Defence are not, in fact, new. There is no reason the new defenses could not have been pleaded earlier.

[41] The same can be said in response to Defendants’ counsel’s submission that various witnesses related to the allegations in the new pleadings need to be heard before these actions can be adjudicated. There is no reason why any relevant witnesses could not have been summoned to testify on this pending motion. For Defendants’ counsel to say that the evidence of Mr. McKinlay and others is needed before judgment can be reached, is to do precisely what the courts have for some time said may not be done – i.e. “to sit back and rely on the possibility that more favourable facts may develop at trial.” Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 7979 (ON SC), 28 OR (3d) 423, at para. 29 (Gen Div).

[42] In Hyrniak v Mauldin, 2014 SCC 7, at para 57, the Supreme Court of Canada stated that, “[o]n a summary judgment motion, the evidence need not be equivalent to that at trial, but must be such that the judge is confident that she can fairly resolve the dispute.” I am certainly confident that the disputes over the loans and guarantees here can be fairly resolved on the record before me.

[43] Even allowing the Defendants’ pleadings to be amended as proposed, there is no viable defense to the Plaintiff’s claims. Nothing was misrepresented to the Defendants by the Plaintiff, no duty to the Defendants was breached by the Plaintiff, and the contracts are not unconscionable. The Defendants each signed the loans and guarantees of their own free will and understood what they were signing.

[44] The new pleadings put forward by the Defendants, much like the original ones, appear to be an effort to delay the inevitable judgment. That day of reckoning, however, has arrived.

VIII. Disposition

[45] The Plaintiff has calculated the current state of the Defendants’ loans, all of which are due and are hereby ordered to be paid to the Plaintiff, as follows:

Dhupar Co. – on its small business loan, $245,915.08 with interest from September 20, 2013 at Royal Bank of Canada (“RBC”) prime plus 3%;

Sharmila Dhupar – on her guarantee, $61,821.54 with interest at RBC prime plus 3%;

Watson Co. – on its small business loan, $261,357.92 with interest from January 7, 2013 at RBC prime plus 3%;

Linda Watson – on her guarantee, $62,817.42 with interest at RBC prime plus 3%;

Linda Watson – on her Visa account, $3093.86 with interest at 19.99% from January 7, 2014;

Watson Co. and Linda Watson – on their Visa account, $6,335 with interest at 19.99% from January 7, 2014; and

Watson Co. and Linda Watson – on their overdraft, $847.11.

[46] Since the guarantees by Ms. Dhupar and Ms. Watson are in support of the small business loans of Dhupar Co. and Watson Co., any amounts paid on the guarantees must be deducted from the amounts owing on the loans. In other words, the Plaintiff is entitled to judgment on both the loans and the guarantees, but it cannot fully collect both or it will have double recovery of the overlapping portion.

[47] The Plaintiff seeks costs of over $35,500 in the Dhupar action and over $26,500 in the Watson action. The Dhupar action started earlier and had a somewhat lengthier case history, which might explain some of the discrepancy. I also note that there is a small amount of docketed time for researching the legal issues of misrepresentation and unconscionability in the Plaintiff’s Dhupar costs outline that is not replicated in the Plaintiff’s Watson costs outline, but which was applicable to both.

[48] Costs are discretionary under section 131 of the Courts of Justice Act, RSO 1990, c. 43. There are a number of factors listed in Rule 57.01(1) of the Rules of Civil Procedure that may be taken into account in exercising this discretion, including “(0.b) the amount of costs that an unsuccessful party could reasonably expect to pay…”, as well as “(a) the amount claimed and the amount recovered in the proceeding”.

[49] The Defendants filed initial defenses that they then recanted, and brought the matter to motion scheduling court several extra times before finally handing up the revised defenses on which they based their argument. In so doing, they must have envisioned that the matter would start to get expensive. Weighed against that is the fact that the amount of costs must be proportionate to the judgments.

[50] I will exercise my discretion to order Ms. Dhupar and Dhupar Co. to pay the Plaintiff $25,000 in costs, and to order Ms. Watson and Watson Co. to pay the Plaintiff $20,000 in costs. Both of those amounts are inclusive of all disbursements and tax.

Morgan J.

Released: June 2, 2014

COURT FILE NOS.: CV-13-489421 and CV-14-496057
DATE: 20140602

ONTARIO
SUPERIOR COURT OF JUSTICE

BETWEEN:

Royal Bank of Canada
Plaintiff

– and –

Sharmila Dhupar and 8196796 Canada Inc.
Defendants

AND BETWEEN:

Royal Bank of Canada
Plaintiff

– and –

Linda Watson and 8156697 Canada Inc.
Defendants

REASONS FOR JUDGMENT

E.M. Morgan J.

Released: June 2, 2014