Court File and Parties
COURT FILE NO.: CV-15-11163-00CL DATE: 20160531 SUPERIOR COURT OF JUSTICE – ONTARIO COMERCIAL LIST
BETWEEN:
CALLIDUS CAPITAL CORPORATION Plaintiff
AND
JEFFREY J. MCFARLANE Defendant
BEFORE: Newbould J.
COUNSEL: John D. Leslie and Lisa S. Corne, for the plaintiff Alan B. Merskey and Nicole Marcus, for the defendant
HEARD: May 24, 2016
Endorsement
[1] The plaintiff (“Callidus”) moves for summary judgment on a guarantee made by the defendant Jeffery McFarlane of obligations of Xchange Technology Group LLC and companies related to it (“XTG”) and to enforce a mortgage given by Mr. McFarlane in support of his guarantee.
[2] The documentation in this case is not without its complexities. Callidus says that Mr. McFarlane is liable for US $3million plus interest and the costs of enforcing its security. Mr. McFarlane says that it has valid defences and that there is no basis for summary judgment. For the reasons that follow, Callidus is entitled to summary judgment as requested.
Factual Background
[3] Mr. McFarlane is the former President and CEO of XTG. Historically, XTG obtained traditional operating capital and financing from Royal Bank of Canada and then PNC Bank under various credit facilities. On October 11, 2012, Callidus purchased XTG’s then outstanding debt to PNC Bank pursuant to an Amended and Restated Loan Agreement. Callidus paid US $11.6 million for the purchase of the XTG debt and charged a facility fee of US $2.25 million. In contrast to the Royal Bank of Canada and PNC Bank, Callidus is a high risk distressed debt lender with substantially higher interest rates.
[4] Callidus obtained a guarantee from Mr. McFarlane of all obligations of XTG to Callidus limited to US$3 million plus interest at the rate in the XTG loan agreement plus costs of enforcing the guarantee.
[5] XTG went into default under its loan agreement with Callidus. It blames Callidus for this. XTG entered into negotiations in June 2013 with Callidus for a forbearance agreement to avoid immediate enforcement upon the XTG debt. In conjunction with those negotiations, the limited guarantee was amended again on June 6, 2013. It is the language of the amended guarantee (“Guarantee”) that is in issue.
[6] Mr. McFarlane’s affidavit states that he was alarmed by Callidus’ lending tactics and practices and was particularly alarmed by Callidus’ high fees and accumulating charges. As a result, he insisted that he would not be responsible for any portion of the XTG debt that arose from Callidus’ fees, past or future and the Guarantee was amended to reflect that concern. He was not cross-examined on this part of his affidavit.
[7] The Guarantee as amended thus provided:
2.1 The undersigned (“Guarantor”) hereby jointly and severally (if more than one) guarantees payment to the Lender, upon demand therefore being made upon the undersigned, of all Obligations (as defined in the Loan Agreement) now or at any time and from time to time hereafter due or owing to the Lender from or by the Borrowers or by any successor of the Borrowers, excluding however the $2,250,000 Facility Fee as defined in the Loan Agreement or any forbearance fee charged by Lender in connection with any forbearance agreement with Borrowers, limited to the lesser of:
x) the Limited Principal Amount [$3 million] or
y) provided that Guarantor is in compliance with the terms of the letter agreement dated June 6, 2013, by which Guarantor suspended and relinquished powers and authorities over the Borrowers (“Letter Ceding Authority”), the Deficiency Amount,
in each case as defined below, plus interest thereon at the rate of interest applicable to such Obligations (or the applicable rates of interests if different rates of interest apply to different parts of such obligations), from and including the date of demand until payment, and legal or other costs, charges and expenses. [Emphasis added]
[8] Deficiency Amount is defined as:
…the amount of the Obligations, excluding however the $2,250,000 Facility Fee as defined in the Loan Agreement or any forbearance fee charged by Lender in connection with any forbearance agreement with Borrowers, that remains outstanding at the end of the Collateral Liquidation Period. [Emphasis added]
[9] Apart from the facility fee of US $2.25 million, there were two further forbearance fees later charged by Callidus of US $250,000 each so that the total fees Mr. McFarlane was not responsible for were US $2.75 million.
[10] On July 26, 2013 Callidus issued a demand for payment to XTG on all loan facilities. The letter was also addressed to Mr. McFarlane as a guarantor of the loans and stated that notice was being given to the borrowers and the guarantors that multiple events of default had occurred and were continuing.
[11] On August 3, 2013, Callidus, XTG, and McFarlane, as guarantor, entered into a Forbearance Agreement. Under the Forbearance Agreement:
(a) Callidus extended the time period for enforcement of the XTG debt to August 15, 2013; (b) Callidus charged a forbearance fee of US $250,000, which was then added to the XTG debt; (c) XTG and Mr. McFarlane provided a very broad release to Callidus that provided that they had no defences, set-offs or counterclaims with respect to the XTG loans and no causes of action against Callidus.
[12] Also on August 3, 2013 Mr. McFarlane signed a letter to Callidus in which he confirmed that he had relinquished his powers as an officer and director of XTG and that those powers could be carried out by Mr. Alan Rupp, the CFO of XTG.
[13] Following expiry of all forbearance periods under the Forbearance Agreement, Callidus applied to the Ontario Superior Court of Justice for the appointment of Duff & Phelps Canada Restructuring Inc. as receiver of XTG and the order was made by Justice Morawetz (as he then was) on October 29, 2013. The order authorized the receiver to accept a stalking horse asset purchase agreement which contained a credit bid for the assets of XTG by a nominee numbered company owned by Callidus and provided for a sales process to be undertaken by the receiver. The order provided that if a superior bid was not received and accepted by the receiver within the time for the sales process, the receiver was entitled to complete the stalking horse transaction without further approval of the court, but the receiver was required to apply for an appropriate vesting order.
[14] In his endorsement made in connection with the receivership order, Morawetz J. said the following regarding the stalking horse bid:
12 The record also establishes that, based on the results of the recent refinancing efforts and the liquidation analysis of the XTG Group's assets prepared Duff & Phelps, it appears that, if the XTG Group's businesses and assets are liquidated or sold to a third party, Callidus will incur a substantial shortfall such that there is no value for creditors ranking subordinate to Callidus.
13 Callidus takes the position that, rather than incur a loss in the recovery of its loans, it would prefer to restructure the XTG Group's businesses and assets, with a view to improving its recovery in the future. In the anticipation of this application, a newly incorporated company owned and controlled by Callidus, executed and delivered the Stalking Horse Offer. The Stalking Horse Offer covers all of XTG Group's business and assets, including the shares of the foreign affiliates. The purchase price would be the amount owing to Callidus by the XTG Group at the date of closing, plus priority payables as of the date of closing, less $3 million. The purchase price will be satisfied, in part, by credit bid and, in part, by payment or assumption of priority payables. [1]
[15] Mr. McFarlane was represented by counsel at the hearing before Morawetz J. There is no indication in the endorsement that he objected to the approval of the stalking horse bid. Morawetz J. did state, however, at the conclusion of his endorsement that the parties were in agreement that nothing in the order shall affect any defences that Mr. McFarlane may have with respect to the personal guarantee he granted to Callidus.
[16] The receiver undertook the sales process as provided for in the receivership order. No offers were submitted by the bid deadline. On November 19, 2013 the receiver advised Callidus that it was the successful bidder and that the receiver would apply to the court for a vesting order contemplated by the receivership order.
[17] The vesting order as drafted provided for a declaration that the sale was to be approved and that it was commercially reasonable. The order was changed to remove that draft provision and to replace it with the words “as no Superior bid was received in the Sales Process” the receiver was authorized to complete the transaction.
Analysis
[18] The Guarantee is a commercial agreement and should be construed accordingly. The principles are well known. Winkler C.J.O. articulated the test for construing a commercial contract in Salah v. Timothy's Coffees of the World Inc. (2010), 2010 ONCA 673, 74 B.L.R. (4th) 161 as follows:
16 The basic principles of commercial contractual interpretation may be summarized as follows. When interpreting a contract, the court aims to determine the intentions of the parties in accordance with the language used in the written document and presumes that the parties have intended what they have said. The court construes the contract as a whole, in a manner that gives meaning to all of its terms, and avoids an interpretation that would render one or more of its terms ineffective. In interpreting the contract, the court must have regard to the objective evidence of the "factual matrix" or context underlying the negotiation of the contract, but not the subjective evidence of the intention of the parties. The court should interpret the contract so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity. If the court finds that the contract is ambiguous, it may then resort to extrinsic evidence to clear up the ambiguity.
[19] In Kentucky Fried Chicken v. Scott's Food Services Inc. (1998), 41 B.L.R. (2d) 42 (Ont. C.A.) Goudge J.A. stated the following regarding the interpretation of a commercial agreement at para. 27
Where, as here, the document to be construed is a negotiated commercial document, the court should avoid an interpretation that would result in a commercial absurdity. City of Toronto v. W.H. Hotel Ltd. (1966), 56 D.L.R. (2d) 539 at 548 (S.C.C.). Rather, the document should be construed in accordance with sound commercial principles and good business sense; Scanlon v. Castlepoint Development Corporation et al. (1992), 11 O.R. (3d) 744 at 770 (Ont.C.A.). Care must be taken, however, to do this objectively rather than from the perspective of one contracting party or the other, since what might make good business sense to one party would not necessarily do so for the other.
[20] I take the principles in Kentucky Fried Chicken and in Salah, the latter adopted by Cronk J.A. in Downey v. Ecore International Inc. 2012 ONCA 480 and by Juriansz J.A. in Ariston Realty Corp. v. Elcarim Inc. 2014 ONCA 737, as the applicable principles governing this case. See also Unique Broadband Systems Inc. (Re) 2014 ONCA 538 at para. 88. [2] They are consistent with the principles enunciated by Rothstein J. in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53.
[21] It is contended by Mr. McFarlane that if there is any ambiguity it should be resolved in his favour because of the contra preferentum rule. Reference is made to Manulife Bank of Canada v. Conlin, [1996] 3 S.C.R. 415 in which it was stated that if there was an ambiguity in the guarantee that was at issue, it should be resolved in favour of the guarantor because of the contra preferentum rule. I do not think that case is applicable. It involved a typical guarantee form drafted by the bank. Cory J. did state:
In my view, it is eminently fair that if there is any ambiguity in the terms used in the guarantee, the words of the documents should be construed against the party which drew it, by applying the contra proferentum rule.
[22] However, this statement was preceded by his comments that made clear that he was speaking of a guarantee that was considered to be a contract of adhesion in which the guarantor had no role to play in the language of the guarantee:
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.
[23] That is not the case here. The amended Guarantee and the Forbearance Agreement were all settled and signed at the same time on August 3, 2011. Mr. McFarlane was represented by Norton Rose who negotiated terms. It is clear that the language of the amended guarantee restricting the liability of Mr. McFarlane to exclude liability for the $2.75 million facility and forbearance fees was inserted at the insistence of Mr. McFarlane. It is that very provision that is at issue.
[24] I do not see room for the contra preferentum rule in these circumstances. The rule is one of general application whenever there is ambiguity in the meaning of a contract which one of the parties as the author of the document offers to the other, with no opportunity to modify its wording. See Hillis Oil & Sales Ltd. v. Wynn's Canada Ltd., [1986] 1 S.C.R. 57 at para. 17. The rule applies to contracts and other documents on the theory that any ambiguity in a term of a contract must be resolved against the author if the choice is between him and the other party to the contract who did not participate in its drafting. See McClelland and Stewart Ltd. v. Mutual Life Assurance Co. of Canada, [1981] 2 S.C.R. 6 at p. 15. In any event, I do not see any ambiguity in the terms of the amended Guarantee.
[25] The amended Guarantee provides that Mr. McFarlane will be liable for all of the Obligations [approximately $37 million], “excluding however” the facility and forbearance fees [$2.75 million], limited to the lesser of the Limited Principal Amount [$3 million] or the Deficiency Amount [$37 million less $2.75 million, or $34.25 million]. In dollar terms, Mr. McFarlane guaranteed $34.25 million with his liability limited to $3 million.
[26] What has given rise to the dispute are the terms of the asset purchase agreement derived from the credit bid of the Callidus owned subsidiary. The purchase price was the amount of the obligations of XTG to Callidus at the closing date less $3 million, i.e. $37 million less $3 million, or $34 million. [3] The purchase price was to be paid by the payment or assumption of priority payables owing by XTG to third parties with the balance to be the assumption by the purchaser [the Callidus wholly owned subsidiary] of the XTG obligations to Callidus less $3 million.
[27] Mr. McFarlane argues that as he guaranteed obligations of $34.25 million and as the purchase price on the credit bid was $34 million, he his liable for only $250,000. I do not agree. The obligations of XTG were not extinguished by the credit bid APA. There is still $3 million outstanding that is owed by XTG to Callidus that has been guaranteed by Mr. McFarlane.
[28] Mr. McFarlane also argues that the effect of this situation will be that he has to pay the $2.75 million in the facility and forbearance fees, something that was excluded from his guarantee. I do not agree. The obligations of XTG to Callidus included those fees, which have been paid for by the credit bid APA. If Mr. McFarlane were right in his contention, it would mean that the $3 million remaining as XTG’s obligation to Callidus would have to be designated or considered as including the $2.75 facility and forbearance fees. I see no basis in the APA to conclude that.
[29] Nor does the law require that. See McGuiness, Law of Guarantee, 3d ed, LexisNexis (Markham: 2013) at §12.37 which states that a surety who has given a continuing guarantee for a stated amount of the principal’s indebtedness is not entitled to be discharged merely because the principal has paid the creditor an amount equal to the limit of the guarantee if after that payment the principal continues to be indebted to the creditor. There is no general principle which requires all payments received from the debtor to be applied by the creditor to the guaranteed portion of the debt.
[30] It is obvious that the $3 million carve-out was intended to maintain Mr. McFarlane’s guarantee obligation. The analysis of Duff & Phelps in its pre-receivership report to the Court was that previous attempts to refinance by Canaccord Genuity and KPMG had failed and that absent the stalking horse credit bid offer or a superior transaction, it was unlikely that XTG would be able to operate on a going concern basis. It referred to a letter of intent from a prospective purchaser provided by Mr. McFarlane which was for about 50% of the Callidus debt, implying that there was no value to the equity in the business. That undoubtedly is what led Callidus to take the position before Justice Morawetz who authorized the stalking horse credit bid that rather than incur a loss in the recovery of its loans, it would prefer to restructure the XTG Group's businesses and assets, with a view to improving its recovery in the future. The only asset that Callidus had other than its security over the assets of the XTG business was its guarantee from Mr. McFarlane which it wished to protect. [4]
[31] Mr. McFarlane also contends that Callidus has received in full the value of the obligations of XTG and thus there are no amounts owing under the Guarantee. He says this because the interim financial statements of Callidus as at September 30, 2015 records assets held for sale in the amount of $66.9 million. It is acknowledged that this refers to the assets acquired by Callidus from XTG under the APA.
[32] Callidus acquired title to the XTG assets under the vesting order of November 22, 2013. I do not read the July 26, 2013 demand letter from Callidus to XTG to be a demand on the Guarantee. It just gave the guarantors notice of the defaults under the loan agreement. The statement of claim was issued on January 15, 2015 and I take that to be the demand on Mr. McFarlane. At that time, Callidus did not hold any assets from XTG as collateral for the outstanding amount of the XTG loan of $3 million. Callidus owned those assets under the APA.
[33] Mr. McFarlane argues that the liability of McFarlane has been terminated by the equivalent of payment through the transfer of assets to Callidus worth well in excess of XTG’s liability. There is no evidence, however, that the assets at the time of the APA were worth more than the outstanding obligations of XTG to Callidus. The evidence is to the opposite as appeared from the pre-receivership report of Duff & Phelps and from its receivership report at the time of the application for a vesting order in which it stated that the sales process was commercially reasonable, that further marketing was unlikely to result in a superior transaction, that the sale provided for the greatest recovery in the circumstances and that the value of the transaction significantly exceeded the liquidation value of XTG’s assets.
[34] What gave rise to the figure of $66.9 million recorded in the Callidus financial statement for assets held for sale as at September 30, 2015 is not at all clear. As at December, 2014, well after the assets were acquired by Callidus under the APA, there was no amount recorded in the Callidus financial statements for assets held for sale.
[35] In any event, the issue is whether at the time of the APA and the vesting order, Callidus had acquired more in value from the sale than the amount of the outstanding loan. That is the point in time in which the assets under the security held by Callidus were realized. Assuming the assets in the hands of Callidus increased in value after that realization, that would provide no defence by Mr. McFarlane on his guarantee on a theory that Callidus had realized on its security for more than the outstanding debt. The time to consider what the lender, in this Callidus, has realized on its security is when the assets under the security were sold. If a lender on a credit bid acquired the assets that had been secured and those assets decreased in value after the sale to the lender, would the guarantor be liable on the guarantee for the amount of the decrease in value of the assets sold? I think not. The assets are no longer assets subject to the security granted by the borrower. Any increase or decrease in value would be for the buyer’s account.
[36] Mr. McFarlane also contends that Callidus impaired its security and relies on the principle referred to in Pax Management Ltd. v. Canadian Imperial Bank of Commerce, [1992] 2 S.C.R. 998 at para. 43 that if a creditor impairs the value of the security held in respect of the guarantee, the surety is entitled to be discharged to the extent of the prejudice which he or she suffers as a result of the loss of the security.
[37] Mr. McFarlane refers to a number of actions of Callidus that he says destroyed XTG starting in 2012, including a financing proposal from Falcon Strategic Partners IV, LP for up to $35 million in debt and equity financing. He alleges that Callidus refused to allow XTG to fund the due diligence in a timely fashion and obstructed XTG’s efforts to successfully conclude this financing. These all took place before the Forbearance Agreement was signed on August 3, 2013 which contained a broad release by Mr. McFarlane which precluded any claim based on these assertions of Mr. McFarlane. The release provided:
…the Borrowers and Guarantors have no defences, set-offs or counterclaims with respect to the Obligations. If there are any such defences, claims for set-off, counterclaim, claim cause of action, damages or otherwise on any basis whatsoever against the Lender, they are expressly released and discharged and the Lender can rely upon this acknowledgement and release as a full and complete answer to same.
[38] Mr. McFarlane refers to two offers he arranged following the date of the release during the refinancing process undertaken by Canaccord Genuity. On or about August 15, 2013, HIG Growth Partners submitted a letter of intent to Callidus to purchase XTG’s business and assets for US $15 million. Callidus advised that it was not prepared to consider the offer. HIG then offered to purchase the XTG debt to Callidus for US $17 million. Callidus was not prepared to consider the offer. These offers were referred to in the pre-receivership report of Duff & Phelps filed in connection with the motion to appoint a receiver and to authorize the stalking horse credit bid of Callidus.
[39] I do not see the refusal of Callidus to accept these offers as being an impairment of the security it held. It chose not to accept offers that would require it to release a large part of the debt owing to it by XTG. What Callidus did was to apply to court for the appointment of a receiver, which was granted, and to have its stalking horse credit bid authorized, which was granted. As stated by Duff & Phelps in its pre-receivership report, the offer obtained by Mr. McFarlane implied there was no equity in the business and the refusal of Callidus to accept that situation gives no grounds for an action for impairment of the security it held.
[40] Finally, Mr. McFarlane argues that the record is not complete and that it prevents a decision on two of the three issues that have been joined upon this motion: the ultimate value of the XTG assets and Callidus’ impairment of the XTG assets at the time of the receivership. He says that he required further documents on these issues. Further documentation, if it existed, would not help the situation. Mr. McFarlane has no legitimate claim to any impairment of the XTG assets held as collateral by Callidus. Regarding the ultimate value of the XTG assets, Mr. Merskey acknowledged that he is relying on the $66 million figure in the 2015 financial statements of Callidus. That figure was not questioned by Callidus.
[41] This argument was part of an argument that the matter should have been adjourned because of a failure of Mr. McFarlane to be present during the argument and that Mr. McFarlane “has not been permitted” to conclude cross-examinations and other investigative steps. The adjournment request was heard by Justice Conway on May 12, 2016 who refused to adjourn the matter, subject to the motion judge deciding otherwise. She said the motion had been scheduled for months (it was scheduled on February 18, 2016) and that fact that Mr. McFarlane was unavailable for business reasons was not a reason for the adjournment. There was argument about cross-examination schedules and who was or was not available. Justice Conway stated that those schedules were not a reason to adjourn. On the hearing of the motion before me, no request for an adjournment was made, although the stated need for documents was argued. In reviewing the state of play on the cross-examinations, I think it fair to say that counsel for Mr. McFarlane could have reacted faster than he did and I see no reason to question the order made by Justice Conway. In any event, what Mr. McFarlane now says he needs is not relevant.
Conclusion
[42] Callidus is entitled to summary judgment for US $3 million plus interest at 21% from the date of the demand against Mr. McFarlane, being the date of the issuance of the statement of claim on January 15, 2015. It is also entitled to possession of the mortgaged property.
[43] Callidus is entitled to its costs on a full indemnity basis in accordance with the loan documents. It claims actual fees, including HST and disbursements, in the amount of $86,817.30. This is not far off the actual fees claimed by Mr. McFarlane in his cost outline of $75,112.59. Callidus is entitled to costs as claimed of $86,817.30.
Newbould J. Date: May 31, 2016
[1] See 2013 ONSC 6783.
[2] I prefer this test to that articulated in Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 2007 ONCA 205, 85 O.R. (3d) 254 (C.A.), in which it was said that interpreting a contract that accords with sound commercial principles is limited to situations in which there is some ambiguity. I do not think that is correct and it is not what other cases of appellate authority have stated. See my comments in Thomas Cook Canada Inc. v. Skyservice Airlines Inc. (2011), 83 C.B.R. (5th) 106 at para. 13 and Oncap L.P. v. Computershare Trust Co. of Canada (2011), 94 B.L.R. (4th) 314 at paras. 21 to 24. See also Geoff R. Hall, Canadian Contractual Interpretation Law, 2nd ed. (Markham Ont.:LexisNexis 2012 at p. 46 fn. 191. See also Nortel Networks Corporation (Re), (2015), 2015 ONSC 2987, 27 C.B.R. (6th) 175 at paras. 52-54, leave to appeal refused 2016 ONCA 332.
[3] The ASA incorrectly referred to CDN $3 million. The intent was that it be U.S. $3 million. On January 14, 2016 an order was made by Justice Conway rectifying the APA to correct the currency references to reflect U.S. dollars.
[4] The Forbearance Agreement recognized a second guarantor named Hire Information Technology Limited, as U.K. subsidiary of XTG. Its shares were acquired by Callidus under the APA.