COURT FILE NO.: 11-212-SR (Stratford)
DATE: 2014/07/18
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Growmark Inc.
Plaintiff
– and –
Bruce Clark and Elizabeth Clark carrying on business in partnership under the firm name and style of Hamland Farms
Defendants
John M. Skinner, Q.C., for the plaintiff
Donald R. Good, for the defendants
HEARD: April 3, 2014 at Stratford, Ont.
M. A. GArson J.
INTRODUCTION
[1] Hog farming in Shanty Bay, Ontario can be a tough business. The year 2005 proved to be particularly so for Bruce and Elizabeth Clark who had been farming their lands for over 30 years and were sadly familiar with the fluctuations that accompany those on the front lines of the hog business.
[2] As a result of a bank-initiated requirement to refinance, the Clarks had no choice but to turn to the Farm Debt Mediation Act to negotiate a settlement on outstanding debts or risk losing the family farm.
[3] The Clarks had purchased extensive feed over the years from Inland Cooperative Inc. (now Growmark Inc.) and accumulated considerable debt with Inland.
[4] The net result of the mediation was minutes of settlement between the Clarks and Inland which provided for repayment of a reduced debt ($175,000) over 5 years at a 5% rate of interest.
[5] The parties do not dispute the principle outstanding on the debt ($60,000) and argue solely about the accumulated interest and whether relief from this interest is available under section 98 of the Courts of Justice Act.[^1]
[6] For the following reasons, I am NOT satisfied that the circumstances in this case are appropriate to attract the equitable intervention of the court to relieve the Clarks from the accumulated interest.
BACKGROUND
[7] The Clarks operate a hog farm with a small cash crop on 75 acres of land in Shanty Bay, Ontario.
[8] Inland sells hog feed and supplied the Clarks with considerable amounts of feed over the years. A significant debt had accumulated over time between the parties.
[9] In late 2004, CIBC gave the Clarks six months to refinance their operations. Feeling financially overwhelmed, they felt they had no option but to participate in mediation under the Farm Debt Mediation Act.
[10] Inland was one of the creditors at the mediation. Minutes of settlement, dated July 12, 2005, provided for:
a. repayment of $175,000 over 5 years with $75,000 due on receipt of settlement and the balance ($100,000) payable over the next 5 years;
b. interest at an annual rate of 5% with a minimum of $10,000 due on or before December 31 of each year.
[11] The minutes were signed by the Clarks and representatives of Inland.
[12] Four payments of $10,000 were made between 2005-2008, leaving a balance of $60,000.
[13] Approximately five weeks prior to the signing of these minutes, Inland entered into an agreement to transfer assets, including receivables, to FS Partners on May 3, 2005.
[14] On February 27, 2009, Inland entered into a “clean-up” agreement to transfer any remaining assets, including receivables, to Growmark.
[15] Prior to the due date for the 2009 payment, the Clarks became aware that Inland had ceased carrying on business and were directed by Kim Braun to make a final payment to Growmark.
[16] Bruce Clark then asked Kim for proof of the assignment of his receivable. This was followed up by a letter from Bruce’s counsel dated December 9, 2009, asking for proof of this assignment.
[17] In response to this letter, an e-mail, dated December 14, 2009, was sent by Bill Gunn, manager, special projects, stating that the Clarks’ account was NOT transferred in the May 3, 2005 agreement, but was in fact transferred by the “clean-up” agreement.
POSITIONS OF THE PARTIES
[18] The Clarks argue that they always intended to make the final payment and were simply awaiting confirmation from Growmark that the receivable owing to Inland had been properly and lawfully assigned to them.
[19] They acknowledge the $60,000 owing and ask the court to grant them equitable relief from the accumulated interest from February 27, 2009 until today in accordance with section 98 of the CJA. They argue that the cause of their default is the failure of Growmark to provide notice of the assignment.
[20] Growmark argues that section 98 of the CJA does not apply as the accrual of contractually agreed upon interest is neither a “penalty” nor “forfeiture” within the meaning of section 98 of the CJA. Growmark suggests that since the agreement does not provide for anything forfeited in the event of a default or for an increase in the interest rate upon default, section 98 does not apply.
[21] Growmark argues that the defence is simply an attempt to impede and delay the legal process and asks for an order finding $98,666.04 owing as of April 3, 2014 and interest thereafter at the contractual rate of 5%.
Preliminary Matters
[22] At the opening of trial, the Clarks brought a motion, pursuant to Rule 26 of the Rules of Civil Procedure, to amend their statement of defence to include the following paragraphs:
(a) The Defendants plead and rely upon section 98 of the Courts of Justice Act and request the Court to grant the Defendants relief from forfeiture and reinstate the Settlement Agreement dated July 5, 2005.
(b) The Defendants request this Court declare the interest accrued between 2010 and 2014 be waived or declared null and void on the basis the Plaintiff failed to provide a proper assignment until 2014.
(c) The Defendants state that, notwithstanding the failure by the Plaintiff to provide a proper assignment was the fault of the Plaintiff, if the Court grants relief from forfeiture and reinstates the Settlement Agreement, the Defendants will agree to waive their costs of this action.
[23] The parties agreed that I should defer my decision until hearing all of the evidence.
[24] The test for whether an amendment shall be granted is whether prejudice will result that cannot be compensated for by costs.
[25] I am satisfied that the proposed amendments are prima facie meritorious and worthy of consideration at trial and contain sufficient particulars.[^2]
[26] Accordingly, I allow the motion to amend the statement of defence to include the paragraphs referred to above.
ISSUES
[27] The following issues need to be addressed:
i. Does section 53 of the Conveyancing and Law of Property Act prevent Growmark from proceeding with this action?
ii. What was the effective date of the assignment of the Clark receivables?
iii. Does section 98 of the CJA operate to allow for equitable relief from interest accumulated under the minutes of settlement?
(i) Application of the CLPA
[28] This argument was supported by scant evidence and even less case law. It has no application to the facts before me. It must fail.
[29] Section 53(1) of the Conveyancing and Law of Property Act states:
Assignments of debts and choses in action
- (1) Any absolute assignment made on or after the 31st day of December, 1897, by writing under the hand of the assignor, not purporting to be by way of charge only of any debt or other legal chose in action of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in actions is effectual in law, subject to all equities that would have been entitled to priority over the right of the assignee if this action had not been enacted, to pass and transfer the legal right to such debt or chose in action from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same without the concurrence of the assignor, R.S.O. 1990, c. C.34, s. 53(1).
[30] I read this section to require notice of the debt by the original creditor and that any subsequent assignee stands in the place of the original creditor.
[31] The Clarks argue that written notice by the debtor is required before the assignee (Growmark) can bring the course of action. I disagree.
[32] The express notice requirements do not relate to the assignment itself but rather to the original debt. Once the debtor has such notice, a third party that acquires the debt stands in the place of the original creditor with respect to any lawful claim.[^3]
[33] The evidence before me is clear that the Clarks were well aware of the original debt owed by them.
(ii) The Effective Date of the Assignment
[34] The bulk of the evidence adduced at trial focused on the “effective” date of the transfer of the Clarks debt. Although I am somewhat empathetic to the plight of the Clarks in attempting to acquire this information, it does not constitute a sufficient basis to render the terms of the minutes of settlement unenforceable.
[35] Having said that, I am satisfied that for the purposes of this proceeding, the effective date of the transfer of their debt is February 27, 2009. The Clarks conceded as much in their opening statement.
The Evidence:
- Kim Braun
[36] Kim Braun, credit manager with Growmark since March 2005, testified that she was part of the farm debt mediation in 2005 with the Clarks and that the original amount owing was $200,000. The parties agreed to go forward on a settlement amount of $175,000. She confirmed that the agreement was signed by Inland and that Inland later became one of the partners of a group called FS Partners prior to the signing of the minutes.
[37] Kim stated that all of the accounts receivable of the various partners were transferred to FS yet each partner maintained their individual existence. Her role was to supervise the accounts receivable for Inland. She believes the Clarks’ debt was held by FS and then transferred to Growmark.
[38] She confirmed that three of the four yearly payments were within the agreed upon time and that only the 2007 payment was late. No interest was charged for this late payment.
[39] When challenged with the e-mail of Bill Gunn showing that, in his view, the debts were not transferred in 2005, she testified that she ”disagrees” with Bill. She conceded that Bill was involved in accounts receivable, had a higher ranking in the company than she did and that she later went on to report to him
- John Leddy
[40] John Leddy, counsel, testified that he prepared the documents for the set-up of FS partners and for the transfer of assets to the partnership.
[41] The Partnership Contribution Agreement, between Inland and FS Partners, dated May 3, 2005 provided for the purchase and sale of “Purchased Assets” in Article 3.1.
[42] Purchased assets were defined to include:
The Accounts Receivable held by Inland Cooperative Inc. (a member partner).
[43] Accounts Receivable were defined to mean:
accounts receivable, bills receivable, trade accounts, book debts, and insurance claims of the Member Partner recorded as receivable in its books and records and any other amounts due or deemed to be due to the Member Partner, including any refunds and rebates receivable.
[44] John was unaware of any exclusion to the accounts receivable being transferred.
[45] The Asset Purchase Agreement between Inland, a subsidiary of Inland, and Growmark, dated February 27, 2009, earlier referred to as the “clean-up” agreement, provided for the remaining assets of Inland to be transferred to Growmark.
[46] Similar to the first agreement, this agreement in Article 2.1 provided for the sale of Purchased Assets from Inland to Growmark and defined Purchased Assets to include accounts receivable. Accounts Receivable was also defined to include accounts receivable and other amounts owed to Inland.
[47] John referred to this as a “clean-up” agreement because Inland was going to cease to exist and the agreement covered any outstanding accounts receivable.
[48] Lastly, John spoke to the Asset Purchase Agreement between FS Partners and Growmark, dated May 1, 2009, which allowed the various member partners of FS to dissolve and transfer remaining assets to Growmark.
[49] Similar to the earlier agreements, Article 2.1 provided for the sale of Purchased Assets from FS to Growmark and defined Purchased Assets to include the accounts receivable. Accounts Receivable was also defined to include all accounts receivable.
[50] John testified that if the Clark accounts receivable owing to Inland were not transferred by the two earlier agreements, “this does it”. He was aware of no discussion excluding specific receivables.
[51] In cross-examination, John acknowledged that Inland should NOT have been a party to the minutes of settlement with the Clarks and that there was a lot of confusion and people made mistakes around this time. He also agreed that it would have been reasonable for the Clarks to assume that they had a contract with Inland.
[52] John further agreed that in a September 28, 2011 sworn affidavit in support of a motion for summary judgment, he did NOT refer to the “clean-up” agreement of 2009.
[53] John also agreed that Inland remained a legal entity after May 3, 2005 and was still an individual partner of FS and as such, was capable of binding FS in any agreement.
[54] Documents filed by the parties confirm that John’s views on these three documents were shared with counsel for the Clarks by way of letter dated October 12, 2010 outlining the existence of all three agreements and enclosing relevant portions of the agreements.
- Bill Gunn
[55] Bill Gunn testified for the Clarks. He is both a Chartered Accountant (since 1971) and a professional egrologist. He joined FS in March, 2006 as CFO. In 2009 when Growmark acquired FS, he became the manager of special projects and left the company the following year.
[56] He testified about a December 14, 2009 e-mail he sent to Doug Jack, counsel for Inland with respect to the transfer of assets to Growmark. The e-mail was in response to clarification from Kim Braun and states in part:
For clarification purposes, I can confirm that the amounts owing by Bruce Clark and his family were not transferred to FS partners, the partnership, that included Inland Co-operative Inc… The account in question had remained an asset of Inland Co-operative Inc. until it was purchased by Growmark Inc.
[57] In a further e-mail later that same day to Doug Jack, Bill states in part:
When the partnership was originally formed in 2005, most of the accounts receivable were transferred by Inland to the partnership as part of its start-up contribution. However, the Clark account is not one of the accounts that was transferred-it remained on the Inland books until Inland sold the accounts receivable to GROWMARK Inc. [Emphasis added.]
The minutes of settlement were between Bruce Clark, Elizabeth Clark of Hamland Farms and Inland July 12, 2005. It was direct with Inland because it involved an account receivable that did not transfer to the FS PARTNERS partnership.
[58] Bill testified that his conclusion made the minutes of settlement appear proper. He stated that FS undertook to collect excluded accounts and then reimburse Inland on the basis that the FS partnership had not paid for these accounts and the Clark account was not included in the annual financial statements of FS.
[59] Bill agreed that the receivable was transferred in 2009 by the “clean-up” agreement.
[60] In cross-examination, when confronted with Article 3.6 of the 2005 agreement that provided for a purchase price adjustment for accounts receivable on the anniversary date, Bill acknowledged that he was not looking at the agreement from a legal point but rather from an accounting standpoint. He interpreted that amounts excluded were accounts to remain with Inland and that according to Bill, the auditors reached a similar conclusion.
[61] He also confirmed that he did not do the calculations and price adjustments relating to accounts receivable as contemplated in Article 3.6.
- Bruce Clark
[62] Bruce testified that when he signed the minutes of settlement he thought he was still dealing with Inland. When preparing the 2008 cheque for $10,000, he states that it was made out in both names (Inland and FS) because he was not comfortable making it out only to FS as he was asked to do.
[63] In 2008, he tried to get proof from Kim of the assignment of his receivable. He then instructed his counsel to write for clarification.
[64] It was his intention to make the final payment he simply wanted to be clear on who had ownership of his account. He did not want to make payment to an entity that no longer owned his account.
[65] If he had clear evidence that Growmark owned his account, he would have continued to make the scheduled payments to Growmark in 2009.
[66] He also spoke of his current financial struggles and the negative impact a farm liquidation would have on his net worth.
[67] In cross-examination, he confirmed that he had not set aside the $10,000 for the December 2009 payment because he would normally take this out of cash flow. He also agreed that he did not deliver the final amounts due to his lawyer in July 2010 because he was trying to figure out who to pay.
[68] He acknowledged that he was aware of the e-mails from Bill prior to the final payment becoming due and that his interpretation was that his account was probably transferred at a later date in 2009 but he needed to see the document. In his words, he is “too old to take someone’s word for it”.
[69] He was unclear on follow-up requests for assignment agreements after the 2009 e-mails from Bill but knew his lawyer was asking for these agreements.
[70] He agreed that Inland had already taken $25,000 off the original debt owing but felt that he should not owe interest on the debt because it was not his fault the matter was delayed.
[71] In re-examination, he made reference to a March 10, 2010 e-mail from his counsel to Kim that he is repeating his earlier request for a copy of the assignment of the agreement to FS.
The Analysis
[72] The chronology of events is very telling in this matter.
[73] On May 3, 2005, Inland transfers assets to FS including accounts receivable.
[74] Some six weeks later, Inland and not FS or Inland on behalf of FS, enters into minutes of settlement with the Clarks.
[75] On the evidence of John, this was a mistake due to a lot of confusion at the time. Yet John was not involved in the minutes of settlement or directly in the Clark account.
[76] A more plausible explanation is the one offered by Bill that the Clark receivable was not transferred in 2005. It makes sense in accordance with the parties who entered into the settlement. It is also the position communicated by Bill to counsel for the Clarks in 2009. It is consistent with the way the payments were deposited and treated by Bill (and according to Bill) and by the auditors up until 2009.
[77] I find the e-mails of Bill to be persuasive on the issue of the Clark account. Kim’s opinion that the Clark receivable was held by FS does not sway me in this regard. She did not consult with Bill before he sent the e-mails and acknowledged the seniority in rank of Bill to her.
[78] Although John believes his 2005 agreement covers the Clark account, he also agrees that it was reasonable for the Clarks to assume they had a contract with Inland for repayment of the debt. It is telling that he left out reference to the “clean-up” agreement in his affidavit for summary judgment. His response was that if he was wrong in 2005, then 2009 obviously transferred the Clark receivable.
[79] Given the e-mail responses from Bill to the Clarks through counsel, I am not sure that it matters what the 2005 agreement covered. What does matter is that in 2005 a written agreement between the Clarks and Inland was executed. This agreement was assignable by Inland to its successors. When pressed for clarification, Bill, on behalf of Growmark (formerly FS and formerly Inland) confirms that the debt was not transferred in the 2005 agreement to FS.
[80] Accordingly, I am satisfied that the effective date of the assignment was the “clean-up” agreement dated February 27, 2009.
(iii) Section 98- Court of Justice Act
[81] Having determined the effective date of the transfer of the receivable, I must now determine whether the facts before me meet the test for “relief from forfeiture” set out in section 98 of the CJA. The parties agree that this case does not meet the test for “penalty” under s. 98.
[82] Forfeiture has been described as a penalty for breach of duty or breach of contract.[^4]
[83] The Ontario Court of Appeal earlier this year has provided a summary of the applicable principles in applying section 98 of the CJA.[^5] These include:
i. the court has the power to protect against loss of a right arising from failure to perform a condition in an agreement;
ii. the remedy under section 98 is both equitable and discretionary and courts are to interpret relief from forfeiture broadly;
iii. relief from forfeiture is granted sparingly; and
iv. In assessing relief from forfeiture the court should consider three factors:
(a) the conduct of the applicant;
(b) the gravity of the breach; and
(c) disparity between the value forfeited and the damage caused by the breach.[^6]
(a) Conduct of the Clarks
[84] I must consider all of the facts in the relationship between the parties in considering the reasonableness of the behaviour of the Clarks.
[85] I note that the last instalment paid by them was on January 3, 2009, with the cheque being made payable to Inland Cooperative/FS Partners. This cheque appears to have been negotiated by the recipient without difficulty. The concerns of the Clarks were evident at that time yet they were still able to meet their obligation.
[86] They have not paid any money into a trust account or into court since 2009. They ask this court to grant them a reasonable period of time to pay the outstanding principle amount of $60,000.
[87] When clarification was sought, they were informed that the receivable was NOT transferred in 2005. They have made repeated requests for a copy of the entire agreement that gives effect to the transfer in 2009. They suggest they received this in 2014 shortly before the trial.
[88] Yet the documentary evidence filed with the court makes clear that they were aware of the “clean-up” agreement in 2010 when their counsel was sent relevant excerpts from this agreement. In fact, Bruce testifies that his account was probably transferred in late 2009 but that he needed to “see the document”.
[89] In 2009, he received through his counsel on or about December 14, 2009, two pristine e-mails from Bill that confirmed Growmark now owned his debt. I accept Bill’s evidence in its entirety and rely on it where it conflicts with other witnesses. I have no doubt that the Clarks knew or ought to have known that their debt was with Growmark after these e-mails.
[90] I am at a loss to understand why Growmark would not simply provide them with a copy of this complete agreement. By all accounts, this would have settled the matter. However, this does not give the Clarks the right to withhold payment.
[91] This is a contract with clear terms. At a minimum, they could have made the final payment in July 2010 in trust and thereafter confirm the proper recipient.
[92] I cannot agree with the suggestion that the Clarks took very active steps to obtain proof of assignment. They were content to allow for the passage of time in an effort to delay this payment. Even today, they ask the court for a reasonable time to pay these outstanding amounts.
[93] The Clarks could have sought a release from Growmark with the payment which would have absolved them of liability if the cheque were made out to wrong the party. The concerns raised before me were on their minds in 2009 when they wrote a cheque to both Inland and FS. There were no problems with that cheque being negotiated.
[94] In all of the circumstances, I am NOT satisfied that the Clarks acted reasonably in withholding payments pending written confirmation that their debt was assigned.
[95] Given my findings in this regard, I need not address the remaining two branches of the test which have little relevance to the facts before me.
[96] In any event, I am also of the view that there is no “penalty or forfeiture” in the facts before me and a contractually agreed upon and reasonable interest rate does not meet the definition of forfeiture or penalty. There was no acceleration clause in the minutes of settlement in the event of default and the 5% interest rate does not amount to “forfeiture” in the event of default.
[97] The Clarks argue that although there is no evidence of a penalty, the forfeiture in this case stems from the accrued interest resulting from their “technical” breach of their obligation to pay the settlement debt. I cannot agree. These are not the sort of facts that attract equitable relief.
[98] In one of the cases relied upon by the Clarks, the court, in granting relief from forfeiture, did NOT extend such relief to obligations for principle and interest under the terms of an
instalment contract.[^7] In another, in granting relief from forfeiture, the court did NOT extend relief to the main obligation for principle and interest arising under a promissory note.[^8]
[99] There was evidence before me of the ongoing fiscal challenges faced by the Clarks. It is reasonable to infer that the driving reason for the non-payment of the debt was other pressing farm expenses.
Disposition
[100] For the above reasons, I find in favour of Growmark.
[101] Judgment in the agreed upon amount of $98,666.04 owing as of April 3, 2014 shall issue with interest from that date to the date of judgment at the contractual rate of 5% per annum.
[102] Post judgment interest shall also be at the contractual rate of 5% per annum.
Costs
[103] In the event that the parties cannot agree, I will receive submissions on costs, not to exceed two pages (exclusive of offers to settle and cost outlines) by no later than 30 days from today for Growmark and 15 days thereafter for the Clarks.
[104] I wish to make a few of preliminary comments regarding costs:
i. I was impressed with the evidence of Bill and have empathy for the position of the Clarks in light of the evidence presented.
ii. I believe that the Clarks were not unreasonable in requesting confirmation of assignment of their debt.
iii. Reiterating my earlier comment, Growmark should have simply provided a copy of these entire agreements upon request and likely obviated the need for this proceeding (or at least the request for relief from accumulated interest).
[105] I ask Growmark to consider these comments in determining their position on costs.
“Justice M. A. Garson”
Justice M. A. Garson
Released: July 18, 2014
COURT FILE NO.: 11-212-SR
DATE: 2014/07/18
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Growmark Inc.
Plaintiff
– and –
Bruce Clark and Elizabeth Clark carrying on business in partnership under the firm name and style of Hamland Farms
Defendants
REASONS FOR JUDGMENT
Garson J.
Released: July 18, 2014
[^1]: Section 98 reads: A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.
[^2]: See Ontario Court of Appeal four-part test in Marks v. Ottawa (City), 2011 ONCA 248, [2011] O.J. No. 1445
[^3]: See the words of Osborne J.A. in Griffiths v. Zambosco (2001), 2001 24097 (ON CA), 54 O.R. (3d) 397 (OCA).
[^4]: See Johnston v. Dominion of Canada Guarantee and Accident Insurance Co. (1908), 17 O.L.R. 710 at 711.
[^5]: See Kozel v. Personal Insurance Co., 2014 ONCA 130
[^6]: See Saskatchewan River Bungalows v. Maritime Life Assurance Co., 1994 100 (SCC), [1994] 2 S.C.R. 490; citing with approval Liscumb v. Provenzano (1985), 1985 2051 (ON SC), 51 O.R. (2d) 129 (H.C.J.), aff’d 1986 2595 (ON CA), 55 O.R. (2d) 404 (C.A.)
[^7]: See Liscumb, supra, at p. 10
[^8]: See Sorel v. North American Development Group, 2008 29605 (ONSC)