SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 26356/13

DATE: 20140210

RE: 1531193 Ontario Inc. o/a D & L Investments, Applicant

AND:

Northern Credit Union Limited and The Toronto Dominion Bank, Respondents

BEFORE: E.J. Koke

COUNSEL: Counsel, for the Applicant, Christian C. Provenzano

Counsel, for the Respondents, Gordon P. Acton

HEARD: January 28, 2014

ENDORSEMENT

I. Introduction

[1] This is an application for the return of monies which the applicant alleges were improperly seized by the respondent, Northern Credit Union Limited (“NCU Limited”) from the applicant’s bank account at The Toronto Dominion Bank (“TD Bank”). In issue is the interpretation and enforceability of a General Security Agreement (“GSA”) in favour of NCU Limited over the collateral of the applicant. The applicant also submits that in seizing the monies, NCU Limited did not follow the requisite steps as set out in the provisions of the Personal Property Security Act, R.S.O. 1990, c. P.10 [PPSA].

[2] The application is denied for the reasons set out below.

II. Background

[3] In the months of October and November 2009, the applicant corporation, 1531193 Ontario Inc. (“D & L Investments”), together with a related corporation, 1743412 Ontario Inc. (the “Realty Corporation”) entered into financing arrangements with the respondent, NCU Limited.

[4] Lisa Lofstrom is the sole shareholder, officer and director of both D & L Investments and the Realty Corporation. As president of the Realty Corporation, Ms. Lofstrom signed a Commitment Letter with NCU Limited dated November 6, 2009 which set out the terms of the financing arrangements. In this letter, NCU Limited agreed to provide the Realty Corporation with a loan in the sum of $1,090,000. Ms. Lofstrom signed a further loan agreement dated November 12, 2009 on behalf of the Realty Corporation, D & L Investments, and in her personal capacity. In it, the Realty Corporation agreed to borrow the aforementioned amount, and to make monthly installment payments in relation in the sum of $9,015.71. D & L Investments and Lisa Lofstrom personally guaranteed the payments.

[5] In addition to these documents, Ms. Lofstrom signed separate guarantee agreements in her personal capacity and on behalf of D & L Investments on October 20, 2009, guaranteeing the indebtedness of the Realty Corporation to NCU Limited. She also signed two general security agreements (“GSA”s) on the same day, one which she signed on behalf of the Realty Corporation and which provided NCU Limited with security over collateral and equipment of the Realty Corporation and another one which she signed on behalf of D & L Investments. It is this second security agreement which is the subject of this application.

[6] The loan to the Realty Corporation was set up in such a way that payments in relation to the loan were paid out of D & L’s business bank account at NCU Limited.

[7] Throughout the fall and winter of 2011-2012, D & L Investments and the Realty Corporation experienced financial stress. NCU Limited responded by closely monitoring D & L Investments’ account and financial transactions, and on occasion extending additional credit to the applicant so it could meet its current obligations.

[8] Notwithstanding the fact that it had an existing banking relationship with NCU Limited, and in breach of its financing agreement with NCU Limited, D & L Investments established a bank account with TD Bank in February 2013, and began to deposit funds into this account. D & L Investments used this account to pay some of its creditors.

[9] By letter dated April 2, 2013, NCU Limited’s lawyers notified D & L Investments that the Realty Corporation was indebted to NCU Limited in the sum of $1,017,478.78 and was in default of its payments, and that on the basis of the applicant’s corporate guarantee, NCU Limited was making a formal demand to the applicant for repayment in full of this amount. Enclosed with this demand letter was a Notice of Intention to Enforce Security pursuant to s. 244(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. By notices dated the same day, NCU Limited also demanded payment of the loan from the Realty Corporation and it notified Ms. Lofstrom that NCU Limited was holding her accountable to pay the loan pursuant to her personal guarantee.

[10] Discussions ensued between the applicant’s solicitors and the solicitors for NCU Limited. This culminated in a final request by NCU Limited to the applicant’s solicitors on October 18, 2013 that at a minimum, $28,181.12 of arrears of principal and interest outstanding on the loan be paid by close of business on October 22, 2013, failing which NCU Limited would instruct its solicitors to take steps to enforce its security. No payment was made by the applicant and the outstanding sum remained unpaid.

[11] On October 23, 2013, NCU Limited’s counsel prepared and served on TD Bank a “Warrant and Direction to Seize” collateral in which it identified the collateral to be seized as “TD Canada Trust Bank Account of 1531193 Ontario Inc. o/a D & L Investments: Account Number 79485219104”. The borrower was identified as 1743412 Ontario Inc. and the guarantor was identified as 1531193 Ontario Inc. o/a D & L Investments. The warrant and direction purported to rely on a guarantee and general security agreement dated October 20, 2009. The warrant and direction indicated that the seizure was being made “for the purpose of realizing the sum of …$59,606.51”.

[12] On October 29, 2013, NCU Limited’s counsel forwarded by fax a second “Warrant and Direction to Seize” collateral on the TD Bank in which it identified the collateral to be seized as “TD Canada Trust Bank Account of 1743412 Ontario Inc.” The borrower was identified as 1743412 Ontario Inc. and the warrant and direction purported to rely on a guarantee and GSA dated October 20th, 2009. The seizure purported to be made “for the purpose of realizing the sum of …$59,606.51”.

[13] Following receipt of these two warrant and directions, TD Bank transferred funds from the applicant’s TD Bank account to NCU Limited’s counsel. These funds totalled $34,067.

[14] At the hearing, the applicant did not deny that the Realty Corporation was in default of its obligations to NCU Limited, nor did it deny the validity of the guarantee whereby D & L Investments guaranteed the indebtedness of the Realty Corporation.

III. Analysis

[15] The applicant contests the validity of the seizure on five grounds:

A. NCU Limited served the wrong security agreement with the warrant and direction

B. The GSA on which the seizure was based was not a valid and enforceable agreement

C. The applicant was not in default under the GSA

D. NCU Limited was obligated and failed to give notice to the applicant on receiving the funds from TD Bank and applying them to the indebtedness of the borrowers

E. The warrant requested seizure of the account, not the monies in the account.

[16] I do not accept any of these arguments and will deal with each of them in turn.

A. NCU Limited served the wrong security agreement with the warrant and direction

[17] When NCU’s counsel served the two warrants and directions on TD Bank on October 23 and October 29, 2013, they included copies of relevant supporting documents, including copies of the loan agreement of November 12, 2009, the personal guarantees of Ms. Lofstrom and D & L Investments and copies of the GSAs dated October 20, 2009.

[18] The warrant and direction which was served on October 23, 2013 was a request to seize the bank account of the applicant company. However, the security agreement which was served with this warrant and direction was the security agreement which was signed by Lisa Lofstrom on behalf of the Realty Corporation. This security agreement only covered the collateral of the Realty Corporation and did not cover the collateral of the applicant corporation.

[19] Following some discussions between the lawyers for NCU Limited and TD Bank, the security agreement which covered the applicant company’s assets and accounts was faxed to TD Bank on October 29, 2013, together with the warrant and direction requesting the seizure of the bank account of the Realty Corporation.

[20] The applicant argues that because TD Bank did not receive a copy of the security agreement which covered the applicant’s collateral concurrently with the October 23, 2013 warrant and committal, the seizure of the funds in the applicant’s bank account was invalid.

[21] In my view, the applicant’s argument fails for the following reasons:

[22] First, the evidence is clear that by the time TD Bank transferred funds from D & L’s account to NCU Limited, it had in its possession both security agreements, the one binding collateral of D & L Investments and the one which bound collateral of the Realty Corporation. The evidence indicates that there were discussions and correspondence between TD Bank and NCU Limited between October 23 and October 29, 2013 and I am satisfied that TD Bank did not transfer these funds until after it had reviewed both general security agreements and satisfied itself that one of these agreements covered the assets of D & L investments, including its accounts.

[23] Second, there is no evidence before me which sets out a legal requirement that a secured creditor which seeks to enforce its security pursuant to the provisions of the PPSA must necessarily serve a copy of its security agreement together with its warrant and direction to seize. In fact, the respondent tendered evidence which suggested that it is accepted practice to serve only the warrant and direction in such cases.

[24] Third, it would appear that the failure by NCU Limited’s solicitors to serve the correct GSA on October 23, 2013 resulted from inadvertence, and the applicant has not established that it was prejudiced in any way thereby.

B. Was the GSA on which the Seizure was based a Valid and Enforceable Agreement?

[25] The GSAs signed by the two corporations on October 20, 2009 were prepared using similar forms.

[26] The applicant does not question the validity and enforceability of the security agreement signed by the Realty Corporation. This security agreement purported on its title page to be entered into by the Realty Corporation as “member” and NCU Limited as the “Credit Union”. The party which provided the security is referred to as the “member” throughout this agreement. On page 6, which is the signing page, the agreement was signed by Lisa Lofstrom as “President”, with the corporate name of the Realty Corporation typed on a line above her signature. The signing page included a Schedule “A” which was initialled by Ms. Lofstrom as “member” and this schedule identified the “equipment” referred to in the GSA as “all equipment of 1743412 Ontario Inc.”.

[27] Ms. Lofstrom also signed page 6 of the second agreement as “President”, but in the case of this agreement she signed below the printed line which identified the party on whose behalf she was signing as 1531193 Ontario Inc. Schedule “A” on the signing page identified the equipment referred to in the agreement as “all equipment of 1531193 Ontario Inc.”. This schedule was initialled by Ms. Lofstrom as “member”. The name of the Realty Corporation does not appear on the signing page of this agreement and nowhere in the agreement does it purport to be signed on behalf of the Realty Corporation. However, on the face page the agreement purports to be an agreement between the Credit Union and the Realty Corporation as “member” and between the Credit Union and 1531193 Ontario Inc. as “guarantor”.

[28] The applicant argues that the failure to identify the applicant on the face page as the “member” makes this agreement ambiguous, and therefore unenforceable. The applicant relies on the doctrine of contra proferentem and submits that in accordance with this doctrine any ambiguity should be settled in favour of the applicant on the basis that when an agreement or term thereof is ambiguous, the preferred interpretation is the one that works against the party who drafted the agreement which is, in this case, NCU Limited.

[29] The authorities are clear that in interpreting an agreement of this nature it is necessary to do so in the context of the entire transaction.[^1] After reviewing and considering this agreement in such context, I have concluded that the security agreement in question is valid and enforceable as against the applicant, for the following reasons:

[30] First, when one examines the social policy reasons which underlie the contra proferentem doctrine, it is evident that one of the primary reasons is to protect an unsophisticated and vulnerable debtor. One of the leading cases in this area is Manulife Bank of Canada v. Conlin, 1996 182 (SCC), [1996] 3 S.C.R. 415 (QL). Cory J. of the Supreme Court of Canada gave the majority decision, and stated at para. 7:

7. In many if not most cases of guarantees a contract of adhesion is involved. That is to say the document is drawn by the lending institution on a standard form. The borrower and the guarantor have little or no part in the negotiation of the agreement. They have no choice but to comply with its terms if the loan is to be granted. Often the guarantors are family members with limited commercial experience. As a matter of accommodation for a family member or friend they sign the guarantee. Many guarantors are unsophisticated and vulnerable. Yet the guarantee extended as a favour may result in a financial tragedy for the guarantor. If the submissions of the bank are accepted, it will mean in effect that a guarantor, without the benefit of notice or any further consideration, will be bound indefinitely to further mortgages signed by the mortgagor at varying rates of interest and terms. The guarantor is without any control over the situation. The position adopted by the bank, if it is correct, could in the long run have serious consequences. Guarantors, once they become aware of the extent of their liability, will inevitably drop out of the picture with the result that many simple and straightforward loans will not proceed since they could not be secured by guarantors.

[31] NCU Limited tendered into evidence a copy of a letter dated October 21, 2009 addressed to NCU Limited from the applicant’s legal counsel which confirmed that the guarantee and security agreement were witnessed by the applicant’s counsel and that the applicant was provided with legal advice at the time the documents were signed. In the letter, the applicant’s counsel submitted among other things that they had examined the original copies of the commitment letter, the guarantee and the general security agreement, and after doing so they were of the opinion that the “security documents have been duly executed and delivered by the Company and are valid and binding obligations of the Company, enforceable in accordance with their terms”.

[32] Clearly, in this case the applicant debtor is neither unsophisticated nor vulnerable and accordingly, I find that the social policy considerations referred to by Justice Cory and Geoff R. Hall have only limited applicability.

[33] Secondly, this is not a case where a court is being asked to decide between two reasonable interpretations of a document, which is generally the case when there is an ambiguity in an agreement and the contra proferentem rule is invoked. The only reasonable interpretation which can be given to the security agreement is that it secures the collateral belonging to the applicant. It is signed by the president of the applicant Corporation, on behalf of the Corporation. It is initialled on behalf of the applicant Corporation, by the president of the Corporation who is identified as a “member” in schedule “A”. Furthermore, the equipment which comprises the collateral is identified as belonging to the applicant Corporation.

[34] In my view, it would be manifestly unreasonable to interpret this agreement, which is clearly executed by the president of D & L Investments and on behalf of D & L Investments, as granting a security interest over the Realty Corporation’s collateral. In fact, it would be absurd to argue that it does, because on the same day that the security agreement in question was signed by Ms. Lofstrom, she signed another security agreement which bound the collateral of the Realty Corporation. The credit union did not require two separate documents binding the same assets.

[35] Third, the applicant does not complain that it relied on the failure by NCU Limited to identify D & L on the cover page as a “member” to its detriment, and it does not submit that it never intended to provide security over the collateral of D & L Investments to NCU Limited. Clearly, the failure to refer to the applicant on the title page does not prejudice the applicant in any way.

[36] Fourth, D & L Investments was in fact a member of the NCU Limited, and was required to be a member pursuant to its agreement with the bank.

[37] Finally, although in this case the security agreement was only signed by one party, the agreement contemplated a situation where the security agreement is signed by a party who is not identified as a member. Below the heading “Execution” on page 6 of the document, such a situation is addressed as follows:

16. If more than one person executes this Agreement, the term “Member” shall include each as well as all of them, and all of their obligations hereunder shall be joint and several and these presents and such obligations shall continue in full force and effect and apply notwithstanding any change for any cause or in any manner whatsoever in the composition of or membership of any firm or company which is a party hereto.

[38] In conclusion, it is my view that the failure to identify the applicant as the “member” on the title page of the security agreement does not invalidate it or make it unenforceable. The circumstances surrounding the execution of the agreement and the wording of the agreement make it clear that the parties intended to provide NCU Limited with security over the applicant’s assets.

C. Was the Applicant in default under the Security Agreement?

[39] The applicant submits that it was not in default under the terms of the GSA of October 20, 2013 and that it is possible for it to be in default of its obligations under its guarantee but not under the security agreement.

[40] I find that there is ample evidence to find it in default, for the reasons which follow.

[41] Para. 7 of the security agreement is entitled “Events of Default”. Paragraph 7 (a) defines such an event as follows:

7 (a) The Member fails to pay when due any of the Obligations, or to perform or rectify a breach of any of the representations or warranties or covenants of this agreement or any other agreement between the Member and the Credit Union including any accepted offer to finance or loan agreement;

[42] The applicant does not take issue with the fact that by signing the guarantee dated October 20, 2009 it guaranteed the payment and discharge of the Realty Corporation’s indebtedness to NCU Limited. Nor does it take it issue with the fact that the Realty Corporation was in default of its loan payments to NCU Limited, and that it had received notice of this default by letter dated April 2, 2013, together with a demand that it pay the outstanding amount in full.

[43] The evidence before the court clearly establishes that the Realty Corporation remained in default of its obligations pursuant to the loan agreement on October 23, 2013, and that the applicant had not paid off the loan or brought the payments up to date.

[44] In my view, the guarantee signed by the applicant falls into the category of “any other agreement between the Member and the Credit Union” as set out in paragraph 7 (a) of the security agreement. The applicant failed to pay its obligations under its guarantee and was therefore in default of the terms of both the guarantee and the security agreement at the time the warrant and direction was issued.

D. Was NCU Limited obligated to give notice to the applicant that it had received the funds from the TD Bank account, and it intended to apply such funds as against the outstanding indebtedness of the Borrowers?

[45] The applicant submits that pursuant to s. 63(4) of the PPSA, it was entitled to notice in writing of the seizure within 15 days thereof, and NCU Limited did not provide such notice. According to the applicant, the failure to give this notice entitles it to the return of the seized monies.

[46] Subsection 63(7) of the Act provides a number of exceptions to this notice requirement. Subsection 63(7)(c) provides an exception in those circumstances where the collateral is of a type customarily sold on a recognized market. Money is customarily traded on recognized money markets. In my view, the proceeds from the bank accounts fall within the exception set out in s. 63(7) of the PPSA, and I find that the applicant was not entitled to formal notice within 15 days following the seizure.

E. Is the seizure invalid because the warrant and direction to seize requested seizure of the applicant’s bank accounts and the monies were seized not the account?

[47] The applicant does not dispute the fact that once NCU Limited established that the applicant was in default, NCU Limited had the right under the terms of the security agreement to seize its account. It argues however that NCU Limited did not seize its bank account, as requested in its warrant and direction to TD Bank, but rather it seized the monies in the account. According to the applicant, there is a distinction between the monies in an account and the account itself, and NCU Limited therefore seized collateral to which it was not entitled.

[48] In arguing that there is a difference between an account, and money in an account, the applicant uses the example of a lawyer’s trust account, pointing out that the money in the trust account does not belong to the lawyer but is held in trust on behalf of clients, and the lawyer does not become entitled to any of the monies unless he or she renders an account to a client who has deposited money in the account.

[49] I do not disagree with the applicant’s submission that the named owner of a trust account does not hold money on his or her own behalf but holds it in trust for the beneficiaries of the trust. As such, a lawyer’s trust account should not be viewed as an asset of a debtor which can comprise collateral in a security agreement and become the subject of a seizure by a secured creditor.

[50] In this case however, the applicant’s bank account was not a trust account; it was established as a business account which was used by the applicant to pay creditors, and the monies in the account were monies which belonged to the applicant and could therefore become subject to a charge in a security agreement. The evidence before the court was that NCU Limited had conducted a search under the PPSA, determined that there were no other secured creditors who had registered an interest in relation to the applicant’s bank account or the monies in the account, and thereafter issued the warrant and direction for the seizure of the account.

[51] Section 25(1) (b) of the PPSA provides as follows:

25 (1) Where collateral gives rise to proceeds, the security interest therein,

… (b) extends to the proceeds.

61 (1) … upon default under a security agreement, a secured party is entitled,

… (b) to take control of any proceeds to which the secured party is entitled under section 25. [Emphasis added.]

[52] In my view, the funds in the account comprised the proceeds of the account, and in the circumstances, NCU Limited was entitled to seize these monies directly.

[53] I note that by seizing the proceeds of the account directly, NCU Limited used the most efficient and effective way to realize its security. Had NCU Limited seized control of the account, rather than the money, I expect it would simply have taken the next step and seized the proceeds by way of cheque or some other means to transfer the funds in the account to itself. By seizing the proceeds directly, it eliminated an unnecessary step in the seizure process. Also, I note that by choosing to seize the proceeds, as opposed to the account, NCU Limited ensured that it would not find itself in a position where it was in possession of an account which held more money than it claimed in its Warrant and Direction; this could have resulted in hardship to the debtor. Finally, I do not find that the seizure of the funds directly resulted in any prejudice to the applicant.

[54] In conclusion, I find that NCU Limited realized on security to which it was entitled in the most expeditious and least costly manner possible, and in compliance with the provisions of the PPSA.

IV. Summary and Decision

[55] Having considered the evidence before me and the submissions of counsel, I find that the applicant was in default of the terms of the October 20, 2009 guarantee and security agreement which it had entered into with NCU Limited. Notwithstanding the fact that the applicant was not named as a “member” on the cover page of the security agreement, I find that the agreement comprised a valid and enforceable agreement between the parties. Although a copy of the wrong security agreement accompanied the October 23, 2013 warrant and demand to seize, this error was rectified and TD Bank had in its possession the security agreement which covered the collateral of the applicant prior to complying with the demand to seize. By conducting a search under the PPSA prior to seizing the funds, NCU Limited ensured that the applicant’s business account and the money therein was not subject to any other security interest. The decision by NCU Limited to seize the funds in the account directly, rather than seize the bank account, was in compliance with the act and did not prejudice the applicant in any way.

[56] For the above reasons, this application is dismissed. If the parties cannot agree on costs, they can make written submissions in relation thereto within 20 days of the release of this decision and provide copies to each other. Thereafter, they have ten days within which to reply to each other’s submissions. The submissions are to comprise a maximum length of three pages, in addition to any schedules and exhibits attached thereto.

Edward J. Koke (SCJ)

Date: 20140210

[^1]: Geoff R. Hall, Canadian Contractual Interpretation Law, 1st ed. (LexisNexis, 2007) at 168.