XPG v. Royal Bank, 2017 ONSC 2598

CITATION: XPG v. Royal Bank, 2017 ONSC 2598

COURT FILE NO.: 457/10

DATE: 20170427

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

XPG, a partnership and C & M Seeds Manufacturing Inc.

Plaintiffs

– and –

Royal Bank of Canada

Defendant

Thomas J. Corbett, for the Plaintiffs

Markus Koehnen and Calie Adamson, for the Defendant

HEARD: May 16, 17, 18, 19, 20, 24, 25, 26, 27, 30, 31, June 1, 2, 3, 8, 9, 10, 13, 14, 15, 16, November 14, 15, 16, 24 and 25, 2016

Raikes J.

[1] On February 26, 2008, the defendant bank notified Palmerston Grain, its long-time customer, that the bank would no longer advance funds to pay margin calls on grain hedges held by the plaintiff grain elevator. Those hedges were an essential and prudent component of the plaintiff’s risk management.

[2] The refusal of the bank to permit its credit to be used for that payment had an immediate impact on the plaintiff which liquidated all its hedges at a significant loss.

[3] On February 28, 2008, only two days after its refusal to advance the funds, the Bank agreed to provide new financing so that the plaintiff could re-enter the futures market to re-hedge in part.

[4] The central issues in this case are whether the defendant bank was required to give reasonable notice or any notice to the plaintiff debtor that the bank would no longer advance credit for this payable; whether, in fact, such notice was given; and whether the Bank was obliged to extend credit. The determination of these issues, among others, requires a detailed consideration of the history of the parties’ banking arrangements, the terms of their agreements and their course of dealing.

[5] I pause at the outset to note that this case involved many witnesses and documents and extensive case law. Both sides were represented by skilled counsel who presented their clients’ positions in a thorough, capable and organized fashion in keeping with the best traditions of the Bar.

The Plaintiffs

[6] The plaintiff, XPG, was previously named Palmerston Grain (hereafter “PG”). PG is a partnership of three privately held companies: The Kjeba Corporation, J & K Agro Services Inc. and BJ & S Enterprises. Each of the three companies is owned by one of three siblings: Anne Schneider, Jim McLaughlin and John McLaughlin.

[7] In 2007 and 2008, PG owned and operated one of the largest inland grain terminals in Ontario. PG was in the business of buying, drying, storing, cleaning, selling and transporting grains to customers in Canada and the United States. PG bought and sold wheat (spring and winter), corn, soybeans and canola. Wheat was by far PG’s principal commodity. PG’s competitors included industry giants like Cargill, Thompson and Parrish.

[8] C & M Seeds Manufacturing Inc. (hereafter “C & M”) operated a seed business. It researched, developed and marketed varieties of seeds to farmers. C & M is a separate but related business to that carried on by PG.

The Defendant

[9] The defendant, Royal Bank of Canada (hereafter either “RBC” or “the Bank”), is one of Canada’s big national banks, with operations across Canada and internationally. Both PG and C & M were long-standing customers of RBC going back to 1990.

[10] In this trial, various bank employees from different departments or units in the bank testified.

PG’s Business Operations

[11] PG was in the grain elevator business. It purchased grains from producers (farmers), smaller grain companies and independent elevators. It had approximately 1000 farmers and 10-15 elevators from whom it purchased grain.

[12] PG received the harvested grain at a number of locations including the Palmerston facility, two satellite facilities and some independent facilities from whom PG rented storage space.

[13] In addition to purchasing grains, PG also stored grain for farmers, including grain it had not yet agreed to purchase. PG charged a fee for storage which would be credited against the purchase price payable to the farmer if he or she later agreed to sell that grain to PG. There was an expectation that if PG stored the grain, it would purchase that grain if the farmer asked PG to do so.

[14] The different grains had the following general planting/harvest cycle:

a. Winter wheat – planted in September/October and harvested in July/August of the following year;

b. Spring wheat – planted in April – June and harvested after winter wheat was planted;

c. Corn – planted in May and harvested in late October;

d. Soybeans – planted in May and harvested in September – November; and

e. Canola – planted in April and harvested in August – September before the corn harvest.

[15] Farmers who harvested a crop could sell or store all or part of the crop. The timing and quantity of grain delivered to PG for sale by farmers varied as did the quality.

[16] When PG contracted with a farmer, there were various options available:

a. PG could purchase the grain immediately as it was delivered;

b. PG could agree to store the grain with a future date(s) fixed for purchase of the grain stored;

c. PG could agree to purchase the grain for later delivery and the grain would be stored by the farmer on the farm until then;

d. PG could simply agree to store the grain in one of its facilities with no contracted obligation to purchase; and

e. PG could contract to buy future crop not yet harvested; in fact, that crop might not yet be planted (“new crop”).

[17] During the trial, counsel and the witnesses distinguished between “old crop” and “new crop”. As its moniker implies, “old crop” is crop already planted and harvested. It may have been held in storage at a farm, another elevator, a PG facility or just freshly harvested from the field.

[18] By contrast, “new crop” is crop that has not yet been harvested. The purchase of “new crop” is referred to in the evidence as “forward contracting”. In that case, the farmer is agreeing to sell and PG is agreeing to buy a portion of the farmer’s future crop for a price fixed at the time of the contract. Typically, a farmer will forward contract no more than 30-40 % of their anticipated crop. Both Mr. Wilson and Mr. Omland of PG testified that in their experience over many years, it was extremely rare that a farmer would default on a forward contract for new crop. That evidence was not contradicted.

[19] According to Mr. Wilson, PG engaged in forward contracts for new crop for two reasons:

1. Doing so secured a source of inventory for future crops for its long-term flour mill customers; and

2. If PG did not forward contract when farmers wanted to sell new crop, PG risked that farmers would go to a competitor which could undermine its producer base for old crop purchases.

[20] A forward contract specified the quantity of grain, the place for delivery, the timeframe for delivery, the specifications for quality and type of grain, and the price to be paid when delivered. No advance payments were made to the farmer on forward contracts; viz. payment to the farmer for the grain was made on delivery of that crop.

[21] For “old crop”, the price was quoted based on delivery to a particular location or FOB; viz. the price quoted included the cost of transportation by PG from the farm to PG’s facility. PG advertised or quoted to farmers on its website or over the phone if a farmer called for that information. For other elevators from whom it purchased grain, PG also used bid sheets setting out the price per bushel.

[22] The purchase price for a bushel of grain was comprised of two components: the futures price according to the applicable commodities exchange for that grain and PG’s “basis”.

[23] Whether purchasing old or new crop, the price paid per bushel was tied to the current futures price for the most appropriate month for delivery of the grain. There are multiple commodities grain exchanges where the futures price for a particular type of grain is established by that exchange and publicly disseminated. The two principle exchanges referred to in evidence during this trial were the Chicago Board of Trade (CBOT) and the Minneapolis Board of Trade (MBOT). Both Exchanges establish futures prices in U.S. dollars.

[24] On any given day, trading on the exchanges establishes a price for a particular grain, say spring wheat, for various months since the actual date of delivery may vary. Choosing the appropriate month to use in fixing its price at the elevator was an essential part of PG’s day-to-day business.

[25] For example, if PG entered into a forward contract with a farmer on September 3, 2007 for delivery of spring wheat in October, 2008, the futures price would be tied to the price established by the Exchange on September 3, 2007 for October 2008. If the Exchange price for spring wheat went up or down between September 3, 2007 and October 2008 when the wheat was actually delivered to PG, that change had no effect on the price paid by PG to the farmer as the price per bushel was already set at the time of the contract.

[26] The second component of the price paid by PG was its “basis”. Unlike the futures price which was established by the Exchange, the basis was determined by PG. In broad terms, the basis was the difference between the futures price and the cash price paid to the farmer or elevator selling to PG. Each grain elevator buying grain sets its own basis which is what distinguishes competitors for the grain a farmer has available for sale.

[27] While PG could not control the futures prices set by the Exchanges, it could and did control its own basis. In deciding what its basis should be, PG took into account, inter alia:

a. Local supply and demand;

b. Transportation costs;

c. The basis its competitors were offering;

d. Its assessment of potential future profit; and

e. Currency hedging considerations.

[28] According to Mr. Wilson, if PG wanted to buy more grain, it increased its basis and thereby increased the price offered to the farmer. If PG wished to buy less grain or discourage farmers from offering to sell their grain to PG, it lowered its basis. Lowering its basis reduced its competitiveness.

Sale of Grain

[29] PG sold the wheat it purchased to flour mills. It sold corn to feed mills, and soybeans and canola to processors. Soybeans and canola did not stay in storage long; those grains had a relatively quick turnover.

[30] Wheat and corn were sold on a 12 month cycle; viz. buyers entered into supply agreements with PG for delivery of specified amounts of grain at fixed intervals over a period of months or a year. Accounts receivable for PG were short-term with most customers paying within 10 days of delivery.

[31] The price paid by buyers of grain from PG was also a function of the appropriate futures price and a “selling basis” established by PG through negotiation with each customer.

[32] Where the purchase of grain took place for the most part in and around the time of harvest, the sale of grain, especially wheat and corn, was more gradual, spreading out over the year. As a result, PG had the ongoing carrying cost for the grain waiting to be needed and delivered, as well as the risk of increased transportation costs and possible market downturns for its customers.

[33] The biggest risk faced by PG was a decline in the futures price of grain between the date of purchase by PG and the date of sale to a customer. Even a modest decline in futures prices could have an enormous financial impact on a grain elevator. PG used hedging to insure against that risk.

Hedging by PG

[34] When PG bought grain from a farmer or sold grain to a user, it did so in the “cash market”. If one could be sure that grain prices would always rise, there would no risk that the amount paid to the farmer would be more than what the elevator could get back for the same grain later. There is no such guarantee. Being unhedged is a huge risk. It places the grain elevator in the position of a speculator.

[35] To insure against the risk of a decline in the futures price between the date the grain was purchased and the date that grain was sold, PG purchased futures contracts on the applicable grain commodity exchange; viz. it roughly matched the cash market transactions on an aggregate basis by a transaction in the “futures market”. PG’s general manager, Archie Wilson, used the analogy of a teeter totter.

[36] Commodities markets like CBOT and MBOT trade futures contracts, also called “hedges”. Each futures contract is 5,000 bushels of grain.

[37] The grain purchased by PG from each farmer varied in quantity. As a result, it is not possible to match a specific grain purchase to a specific futures contract. PG aggregated its purchases net of sales of grain each day. It then bought futures contracts to balance its net position. The goal was to be fully hedged if possible.

[38] In broad strokes, the hedging program at PG worked as follows:

1. When PG purchased grain, it sold a roughly equivalent quantity of grain on the commodities exchange. The purchase of grain in the cash market is referred to as “going long” in the cash market. To offset or match that position, PG purchased futures contracts to sell grain which is referred to as “going short” in the futures market;

2. For each futures contract, PG was required to pay an initial deposit called a “maintenance margin” in an amount set by the exchange. That maintenance margin could and did rise over time. If there was an increase, the holder of the futures contract was required to pay the new price for purchases of new contracts and to pay the amount of the increase for each futures contract already in place;

3. In addition, PG was required to pay margin calls on each futures contract if the futures price of grain rose. The amount of the margin call per contract is market driven and will correspond to the amount of increase in the grain price on that exchange;

4. If the price of grain declined on any given day, PG would receive a refund or rebate of monies previously advanced for margin calls. Again, the amount of money returned depended on the extent of the decline in the grain price;

5. Each exchange set daily limits on the amount of increase or decrease in grain price it would tolerate as a means of controlling the market. After hours trading showed the next day’s trend;

6. PG purchased futures contracts through a broker, F.C. Stone;

7. At the beginning of each trading day, F.C. Stone sent a statement to PG setting out PG’s position and the amount refunded (if there was a decline in grain price that day) or the amount required to pay its margin call(s). Margin calls were payable immediately by wire transfer to F.C. Stone’s broker account;

8. PG traded in various types of grain each of which had its own commodity price. Hence, PG could have a margin call for one type of wheat for which it held futures contracts and a refund for a different type of wheat. The F.C. Stone account statements reflected those different futures accounts;

9. Failure to pay margin calls when due would result in the liquidation of PG’s hedge positions; viz. the sale of its futures contracts which would leave PG unhedged;

10. When PG sold grain from its inventory, it unwound hedges in the approximate same quantity as the grain sold in the cash market. It did so by “going long” in the futures market; viz. it purchased a contract to buy grain. Doing so effectively balanced out the amount of grain it had sold short.

[39] In practice, the purchase of futures contracts and ongoing payment of margin calls insured that when PG disposed of its inventory months after it was acquired, any decline in grain price would be covered by a payment from the futures market. Likewise, any increase in grain price in the cash market would be offset by a corresponding loss in the futures market.

[40] PG made its profit largely on the difference between the “buying basis” and the “selling basis” which I have described above. Basis was not hedged.

[41] As is evident, both the CBOT and MBOT are based in the United States. The grain prices, maintenance margins and margin calls set on those exchanges are in U.S. dollars. PG also hedged currency fluctuations to insure against declines in the value of the Canadian dollar relative to its U.S. counterpart.

[42] PG employed Dana Omland to manage its hedging program. Mr. Omland had considerable prior experience in that role and was very knowledgeable of the grain industry and hedging practices. The hedging program in place at PG was examined by George Corneil of RBC Dominion at the request of RBC. He concluded that the hedging practices at PG were appropriate and prudent for its book of business.

C & M’s Business Operations

[43] C & M developed and sold seeds to farmers. It searched out seed varieties from around the globe and planted those seeds to compare performance. If a particular seed showed promise, C & M contracted with some farmers to “multiply” the seed. Once sufficient stock was available, C & M then sold the seed commercially to farmers generally.

[44] PG and C & M shared the same management personnel and structure. Archie Wilson was the general manager. Adele Gibbings did the financial reporting and Dana Omland was responsible for merchandising grain and managed the hedging programs for both companies.

C & M’s Hedging

[45] Although C & M hedged the cost of seed, particularly where it purchased that seed at a high price, hedging was less critical and somewhat looser for C & M than for PG. Hedging was used to insure against a reduction in seed price. The goal was to ensure a good average cost of seed.

[46] I note that the vast majority of the evidence focused on PG. Undoubtedly, some of that evidence applied to some degree to C & M without specific reference to C & M. For its part, RBC recognised that C & M was a separate company with its own lending facilities but tended to consider the two borrowers as a single customer in its administration of the banking relationship.

Grain Prices 2007-2008

[47] It is undisputed that grain prices rose dramatically during the last 6 months of 2007 and until February 25, 2008. Prices rose steadily but not in a linear fashion; viz. some days the price for a particular grain dropped only to rise to new never seen before heights.

[48] The meteoric and historic rise in grain prices caught those like PG by surprise. There was a sense that the markets would correct themselves and return to normalcy but as time passed and grain prices soared, it became harder to know when or if that correction would happen. Was this merely a bubble or a move to a new price for grains that would eventually stabilize at the higher level? This was uncharted territory.

[49] The fast rise of grain prices on commodities exchanges had several consequences for PG including:

1. Farmers sought to take advantage of the higher grain prices by selling their crop inventory and by locking in the price for grain for future crops (new crop);

2. PG was required to fund ever increasing margin calls for its futures contracts;

3. PG was forced to pay increased maintenance margins when the exchanges unilaterally increased those expenses; and

4. PG needed a significant increase in cash to fund these ordinary business expenses over which it had little or no control.

[50] Although adequately capitalized with sufficient bank financing to carry on business successfully in ordinary times, the rising tide of grain prices posed a new and significant challenge for PG. RBC demanded that the principals of PG inject new capital or provide additional security to secure increased financing from the Bank but that was never provided. None of the principle owners of PG testified at trial so it remains unknown whether they were unable or merely unwilling to inject additional cash into PG or provide additional security to RBC.

Banking Arrangements

a. April – September 2007

[51] As of April 2, 2007, PG had two credit facilities with RBC:

1. A $15 million revolving demand loan which was to reduce to $14 million by April 16, 2007 and to $10 million on June 30, 2007; and

2. A $1 million revolving term loan.

[52] The availability of the revolving demand loan was subject to a margin formula. These facilities were also subject to reporting requirements and financial covenants. It is unnecessary to go into more detail regarding the terms of these loan facilities because they were superseded and replaced by new lending arrangements which I will set out in more detail below. However, I observe that some of the terms and covenants found in the subsequent loan agreements are the same as those in place in April 2007.

[53] The revolving demand loan did not reduce in April and June 2007 as contemplated by the April 2, 2007 loan agreement. By then, the effects of rising grain prices were being felt. PG needed more credit to meet its buying commitments to farmers selling existing crop (old crop) and to fund margin calls. By the early summer of 2007, it was evident to PG that additional bank financing was needed and it initiated discussions with its bank, RBC, for that purpose.

[54] On July 10, 2007, Mr. Omland of PG provided income, cash-flow and balance sheet projections to Terri Lang of RBC. Ms. Lang was a senior account manager in the Agribusiness unit of RBC in Guelph, Ontario. She was the account manager at RBC for PG and C & M until PG’s accounts were moved to Special Loans in 2008. Ms. Lang worked closely with Ms. Paddock who was then Vice President of Commercial and Agribusiness, and Colin Marson of the Risk Management unit in Calgary in managing the PG accounts in 2007 and early 2008. Agribusiness was part of the Bank’s commercial lending operations.

[55] In his email of July 10, 2007, Mr. Omland projected an increase of 11.5% in total tonnes handled over the previous year. He reminded Ms. Lang of an earlier conversation held at PG’s offices in which she was advised that the “historic rise in grain prices…will result in a doubling of our cash-flow funding requirements for the upcoming year.”

[56] On July 26, 2007, Ms. Lang wrote an email to Ms. Gibbings, the Controller at PG and C & M, seeking a current list of futures contracts and a short explanation of the hedging strategy. Ms. Gibbings responded the same day. She explained that PG hedged all of its inventory and futures contracts which were lifted as sales were made; they had “no commodity at risk”.

[57] On July 31, 2007, Ms. Lang with input and approval by Ms. Paddock made a submission to increase the credit limits for PG to help PG deal with their increased cash-flow needs. No new formal loan agreement came from that submission but increased credit was permitted. In the meantime, there were ongoing discussions between the Bank and PG to better understand the underlying causes for the increased financing needs, how to mitigate risk for the Bank and how to best address PG’s anticipated financing going forward.

[58] To that end, the Bank requested and PG provided information as to accounts receivable, operating costs, the cost and value of inventory, contractual commitments for the purchase of grain yet to be delivered as well as various forecasts.

b. September 2007 Financing Steps

[59] On September 5, 2007, Mr. Wilson spoke with Ms. Lang and Ms. Paddock about new financing and the Bank’s suggestion that PG secure additional financing from Farm Credit Corporation (FCC). By then, PG was well beyond the $15 million loan limit set out in the April 2, 2007 agreement.

[60] The following day, Cal Whewell of F.C. Stone (PG’s broker) wrote to Ms. Lang to provide an explanation of PG’s “disciplined approach” to hedging. In doing so, he outlined some of the challenges commercial grain elevators faced with all-time high grain prices.

[61] Thus, by early September 2007, Ms. Lang of RBC was alive to the following:

1. How and why commercial grain elevators hedged in the futures market;

2. The benefit to the elevator of being hedged as a means to protect inventory against falling grain prices;

3. The need to fund ongoing margin calls for hedges; and

4. The failure to hedge would put PG in the position of “speculating” in the grain market.

[62] On September 7, 2007, Ms. Lang emailed Mr. Wilson to advise that the Bank was prepared to increase the total operating loan facilities to $24 million “very temporarily”, with the operating loan to be reduced to $19 million as quickly as possible. Ms. Lang indicated that the Bank wanted to transfer PG’s account to its Asset-Based Lending department (ABL) because ABL could offer a higher operating loan limit using different loan ratios than those required by conventional financing.

[63] In her email, Ms. Lang indicated that until the operating loan was reduced to $19 million or the business was transferred to ABL, the Bank required:

1. A weekly cash-flow budget to be discussed every Monday morning. “We will decide on a weekly basis what activity we will support for that week”;

2. No further purchases or purchase contracts were to be entered into beyond those the Bank was made aware of and authorized during the weekly budget reviews;

3. The partners’ personal guarantees were to be increased to $1 million;

4. The Bank would charge a weekly “monitoring fee” of $500 and an arrangement fee of $10,000.

[64] The requirements expressed by Ms. Lang flowed from instructions received from Kent Peters by email on September 6, 2007. Mr. Peters was the Director of the Risk Management unit to whom Mr. Marson reported.

[65] On September 7, 2007, Ms. Lang completed and submitted a request to authorize new or expanded credit to PG. This request is referred to as a BBTR.

[66] In that request, Ms. Lang sought to increase direct credit facilities by $9 million from the $15 million authorized in April to $24 million. The purpose of the additional credit was stated to be “to assist with cash flow requirements during their time frame of heavy grain purchases”.

[67] In the proposal outline section of the BBTR, Ms. Lang indicated:

1. They were exploring moving the operating loan to RBC’s ABL unit. A meeting with ABL was arranged for September 10;

2. PG had stepped up marketing efforts to sell more wheat sooner to bring in cash as quickly as possible;

3. To reduce cash outflow, PG had lowered its basis to deter farmers selling their wheat;

4. PG had existing forward purchase contracts in place with farmers that needed to be honoured when that wheat was delivered;

5. High wheat prices at harvest resulted in more farmers wanting to sell at harvest. As a result, PG was buying wheat at harvest that they would normally purchase over a longer timeframe;

6. Increases in wheat prices created large margin calls on PG’s futures contracts resulting from “their prudent hedging strategy”;

7. Hedging is “an important part of their risk management strategy to mitigate the risk of prices decreasing between the time they make forward contracts with producers and when they secure a sale to an end user”;

8. PG projected purchasing 262,000 metric tonnes of grain in fiscal 2008 which was a 40,000 metric tonne increase over 2007;

9. PG projected being able to sell all of their purchases to long-time customers who were reputable companies. They had already secured contracts with some of these companies for as much or more than they had projected to sell to them; and

10. The increased operating loan requirements were mainly due to higher commodity prices with less than 20% of the increase due to higher purchase volumes.

[68] In the summary of the BBTR, Ms. Lang wrote:

“We recommend as outlined, on a temporary basis, until this account can be moved to asset – based lending. The nature of the business warrants this level of operating loan. The present cash crunch is in large part due to their prudent hedging strategy. The borrower has a proven history of managing and growing this profitable business. Were it not for the high debt:equity level, which will be approx. 5:1 with $24 MM outstanding, this would represent good conventional financing business. With the client’s growth agenda, ABL is better suited to their needs. This account could potentially return to conventional financing if they improve their equity position.”

[69] The financing request was approved on September 10, 2007 by Doug Hickey, Risk Manager. In the approval comments, Mr. Hickey indicated his understanding that Ms. Lang had already communicated to PG the need to do everything within its control to limit further purchases of grain beyond that already contracted to stay within approved limits, while recognizing that the uncontrollable variable will be wheat futures prices which may require further margin calls.

[70] As the BBTR indicated, PG was a well-managed company with a history of profitable growth. Its cash-flow challenges were directly related to the ongoing dramatic increases in the price of grain over which PG had no control. As early as September 2007, PG attempted to slow down or dampen the enthusiasm of farmers wishing to sell when grain prices were high by reducing its basis, the second component in the price paid for grain. PG also tried throughout the remainder of 2007 and early 2008 to sell more grain inventory sooner to end users, even at discounted prices.

c. September 2007 Agreement

[71] On September 13, 2007, PG and RBC entered into a new loan agreement that expressly superseded and cancelled the previous loan agreement dated April 2, 2007.

[72] By this agreement, RBC extended the following credit facilities to PG:

1. A $19 million revolving demand facility reducing to $10 million on February 1, 2008; and

2. A $5 million non-revolving term facility repayable in full on November 30, 2007.

[73] The availability of the $19 million facility (Facility #1) was subject to the following:

1. A borrowing limits formula which comprised the aggregate of 75% of good accounts receivable and 75% of the lesser of cost (including inventory hedging costs) or net realizable value of unencumbered inventory; and

2. The Bank could, in its discretion, “cancel or restrict the availability of any unutilized portion at any time and from time to time”.

[74] Thus, while the loan limits on their face totalled $24 million, PG’s right to borrow to that limit depended on whether the application of the margin formula permitted access to that amount and whether the Bank exercised its discretion to refuse access to any of the monies available and not yet advanced under the facility.

[75] The margin formula in the loan agreement included the cost of hedging but only in respect of inventory on hand; viz. hedging costs on new crop could not be taken into account.

[76] The loan agreement expressly stated that the loans were repayable on demand whether or not the term of the loans had matured or expired.

[77] The loan agreement included financial covenants, reporting requirements as well as certain standard terms and conditions that were appended. The Bank relies upon these covenants, requirements and terms and conditions; in particular, the Bank asserts that despite its best efforts to get PG to abide by the terms of these agreements and its good faith efforts to help its customer through a difficult period, these terms continued to apply and were not met by PG.

[78] Under the heading “Financial Covenants”, the agreement stated:

“Without affecting or limiting the right of the Bank to terminate or demand payment of, or cancel or restrict availability of any unutilized portion of any demand or other discretionary facility, the Borrower covenants and agrees with the Bank that the borrower will: …

b) not, without the prior written consent of the Bank:

i. make any purchase or purchase contracts for grain until Facility #2 is repaid in full.

c) ensure that additional working capital of $1,500,000 is injected in the Borrower’s operations from the refinancing of the Borrower’s properties by no later than November 30, 2007.”

[79] The additional capital injection of $1.5 million was never made.

[80] Mr. Wilson acknowledged in his evidence that the representatives of the Bank repeatedly urged PG not to enter into new contracts for the purchase of new crop. While no money is payable to the farmer unless and until he or she delivers that crop, PG nevertheless hedged that transaction. By hedging contracts of new crop, PG was required to pay the initial maintenance margin as well as any margin calls on that futures contract.

[81] By the September 13, 2007 loan agreement, PG agreed to provide the following reporting to the Bank:

1. Weekly forecasted balance sheets, and income and cash-flow statements for that week by 11 a.m. on the first business day of the week;

2. Weekly actual balance sheets, and income and cash-flow statements with comparison to the forecasted financial statement for the previous week;

3. Monthly company-prepared financial statements within 20 days of each month end;

4. Monthly activity statements for F.C. Stone within 30 days of each month end;

5. Quarterly company prepared financial statements with comparisons to budget and commentary on variances within 30 days of each fiscal quarter end;

6. Annual audited financial statements within 90 days of each fiscal year end;

7. Annual forecasted balance sheet and income and cash flow statements prepared on a quarterly basis for the next following fiscal year within 90 days of each fiscal year end; and

8. Any other financial or operating statements and reports as and when the bank reasonably required same.

[82] These reporting requirements were intended to serve a number of purposes: to keep the Bank informed and better positioned to deal with its risk; to focus PG on its cash flow management; to promote compliance by PG with the terms of the loan agreement; and to permit the Bank to better monitor compliance by PG.

[83] It quickly became apparent that there was insufficient time to prepare the weekly reports for the Bank by 11 a.m. on the Monday of each week. Despite Ms. Gibbings’ best efforts, she was unable to meet that deadline on a regular basis. She simply provided those reports as and when she could at the earliest opportunity. For its part, the Bank reluctantly accepted Ms. Gibbings’ explanations for the late delivery of the weekly reports.

[84] The fiscal year end for PG was June 30. PG did not provide its audited financial statements to RBC for the fiscal year ended June 30, 2007 at any time before February 26, 2008. Follow-up requests for these audited financial statements were made by the Bank in 2007 and early 2008 without success.

[85] According to the terms and conditions appended to and forming part of the loan agreement, PG was subject to the following general covenants:

1. To pay monies when due under the terms of the agreement;

2. To immediately advise the Bank of any event that constitutes “an event of default” (a defined term);

3. To deliver to the Bank such financial and other information as the Bank reasonably requested from time to time, including but not limited to the reports and information set out in the reporting requirements; and

4. To advise the Bank immediately of any unfavourable change in its financial position that may adversely affect its ability to pay or perform its obligations in accordance with the terms of the agreement.

[86] The agreement also contained the usual clause that no amendment or waiver of any of the provisions of the agreement was effective unless in writing, signed by both parties, and that no failure or delay on the part of the Bank in exercising any right or power under the agreement operated as a waiver thereof. There is a separate clause by which the parties agreed that the agreement constituted the whole and entire agreement between them with respect to the credit facilities.

[87] As mentioned, “an event of default” is a defined term which entitled the Bank, in its sole discretion, to cancel any credit facilities, demand immediate repayment in full of any monies owing on any facility and to realize on security if,

1. There was a failure by the borrower to pay any amount when due pursuant to the agreement; and

2. There was a failure by the borrower to observe any covenant, condition or provision of the agreement.

There are other defaults/failures set out which may constitute an event of default but they are not relevant to this case.

[88] The ink on the agreement was barely dry when it was apparent to RBC that PG was offside its loan margin formula and was continuing to enter into contracts to buy grain, both old crop and new crop, despite repeated admonitions from the Bank and the covenant in the loan agreement.

d. September – October 19, 2007

[89] On September 17, 2007, Ms. Lang emailed Mr. Peters in Risk Management seeking approval for credit for PG beyond the limits just agreed to. She noted that the account was at $23.450 million after a margin deposit from F.C. Stone that day and that PG expected to pay out margin calls of approximately $1.127 million that day and the next. In addition, she estimated that PG had another $3 million of inventory to pay for with no firm commitment for sales to match.

[90] By September 19, 2007, PG was $2.394 million dollars over its $24 million authorized credit limits, a fact Ms. Lang duly brought to the attention of Mr. Peters, Mr. Marson and Ms. Paddock. Mr. Peters confirmed the excess and in doing so, he brought the matter to the attention of Bruce Campbell, Senior Vice-President.

[91] Mr. Campbell had previous experience in risk management at the Bank. His opinions carried significant weight. It was Mr. Campbell’s view that the company was living beyond its means. It was not doing enough to stay within its established credit limits and the formula for accessing that credit. He wrote to Mr. Peters, Ms. Paddock, Ms. Lang, Mr. Marson and others on September 19:

“While the companies [sic] hedging strategy mitigates the price risk for the client it has placed significant pressure on the companies [sic] balance sheet. Rather than continuing to back into the bank, the shareholders and company should be required to cover the margin calls to the hedging company and should be escalating their efforts to move current inventory to bring the line back to within the approved limit. Please ensure they refrain from purchasing additional inventory that will place a further pressure on the $24 mm approved.”

[92] Mr. Campbell’s views as expressed in this email reflect the view and approach taken by the Bank going forward in its dealings with PG. Regardless what efforts PG made to discourage farmers from selling grain to PG or to fast-track sales to end-users, PG’s inability to stay within its borrowing limits was seen to be a by-product of its own making: whatever it was doing, it was not doing enough.

[93] The ongoing steady climb in grain prices coincided with the harvest cycle in 2007. PG had long-established relationships with hundreds of farmers which Mr. Wilson and Mr. Omland believed would be imperilled if PG simply stopped buying the grain those farmers produced and wanted to sell to PG. Likewise, if PG refused to enter into forward contracts for 2008 crops, it risked losing those customers that wished to do so to competitors which may have had long term implications for PG’s business.

[94] There was an unmistakable tension between doing what was necessary to keep the Bank on side and carrying on business as a going concern while riding the tsunami of rising grain prices. PG tried to do both. By reducing its basis, it tried to dissuade farmers from selling as much product as they might otherwise sell. Nevertheless, PG continued to buy not only existing harvested grain but continued to enter into contracts for future crops; viz. forward contracts. It feared that ceasing grain purchases would send the wrong message: that it was in financial trouble and possibly going out of business altogether.

[95] However valid the business reasons behind this strategy, it had implications from a cash-flow perspective. Unless PG was prepared to be a speculator, i.e. gamble that the price of grain would not decline, forward contracts were hedged in the futures market. They attracted maintenance margins and margin calls but, because the grain had not yet been harvested or in some cases not yet even planted, it could not be considered inventory against which the Bank was prepared to lend.

[96] I note that PG later did take a limited speculative position to try to stay within its borrowing limits until new financing could be placed; a fact which was not disclosed to the Bank.

[97] According to an email by Ms. Lang to Colin Marson and Mr. Peters in Risk dated September 21, 2007, PG’s credit lines were at $25.784 million with another $4.1 million in cheques written but not issued. In addition, PG expected to have a margin call that day and had over $1 million in issued cheques outstanding. In simple terms, PG was spending more money than it had available to spend unless the Bank authorized these excesses, which it did.

[98] These daily excesses required Ms. Lang to seek and obtain daily approvals from Risk. She and Ms. Paddock told management at PG that they lacked the authority to approve both the new loan facilities granted on September 13, 2007 and the ongoing daily excesses. They made clear to PG that they had to seek approvals elsewhere in the Bank.

[99] An informal protocol developed between Ms. Lang and Ms. Gibbings. Ms. Gibbings would call and/or email Ms. Lang each morning to advise what cheques were outstanding, the amount of any margin calls payable, monies received or expected and provide updates on efforts made to sell grain in inventory. For her part, Ms. Lang constantly pressured PG to get back within its loan margins and used the information from Ms. Gibbings to seek authorization from Risk for the excesses.

e. October 19, 2007 Amending Agreement

[100] In September 2007, it was evident that the new credit facilities were inadequate to meet PG’s ongoing needs for financing. Ms. Paddock and Ms. Lang were convinced that their unit lacked the tools to finance in the amount and manner necessary to meet PG’s needs in the volatile market at that time. They recommended that PG meet with and consider moving its financing from the Agribusiness group to ABL.

[101] ABL was a separate lending division within the Bank. Asset-based lending was relatively new. Mr. Boyer was part of the ABL team in Toronto. He described it as “frontier lending” because the approach, while well-developed in the United States, was still in its infancy in Canada.

[102] Starting in September 2007, Mr. Boyer had discussions with Mr. Wilson and others at PG to better understand the business PG operated, how hedging worked, and what level and kind of financing would work best for PG going forward. Ms. Paddock referred to ABL as “the light at the end of the tunnel”. There was an expectation that new financing would be placed through ABL which would pay out the financing in place through the branch in Guelph.

[103] It is against that backdrop that RBC agreed to amend the September 13, 2007 loan agreement to increase the Facility #2 loan limit to $14 million. The amending agreement is dated October 19, 2007 and was signed by the principals of PG on October 30, 2007. By its terms, PG agreed to repay that facility in full on December 31, 2007. The availability of the unutilized portion of the facility was subject to the same Bank discretion already in place for Facility #1 described above.

[104] PG was eager to proceed with ABL financing. They met with and spoke to Mr. Boyer several times and provided to him all of the information requested. As part of his due diligence, Mr. Boyer asked for an external field examination by Fuller Landau of PG’s accounts receivable, inventory, accounts payable and other matters including its books. PG agreed to this examination and paid for it.

[105] On November 2, 2007, Fuller Landau provided its draft report which disclosed no concerns.

[106] Mr. Boyer also engaged Hilco Appraisal Services to provide an evaluation of PG’s inventory and an appraisal of that inventory on the basis of current market conditions and on a net orderly liquidation value. Hilco produced its report for Mr. Boyer on November 16, 2007. Again, PG cooperated and paid for that report. At page 13 of its report, the author wrote the following in relation to hedging:

“Hedging is similar to insurance, in that the Company is protecting itself against a potentially negative future event. A reduction in risk translates to a reduction in potential profits. Therefore, hedging is not as much about making money as it is about reducing potential loss. Palmerston’s objective in its hedging activities is to lock-in future margin for inventory agreed to be purchased in advance of delivery.”

[107] In addition, in early December, 2007, Mr. Boyer contacted George Corneil of RBC Dominion to seek his advice concerning PG’s hedging practices. Mr. Corneil was then Vice President and Director of commodity futures with extensive experience in grain commodity hedging. He had no role or position in ABL or the approval of financing. He was asked by Mr. Boyer to look at PG’s books to confirm there was a balanced book in terms of commodity and currency. As a related company to RBC, there was potential that PG’s hedging book of business would move to RBC Dominion if ABL financed.

[108] Mr. Corneil and Mr. Boyer met with Mr. Wilson and Mr. Omland from PG to discuss PG’s hedging program. Mr. Corneil reviewed PG’s books from a hedging perspective. He advised Mr. Boyer that:

1. PG’s book was balanced and there was no speculation on the futures position; and

2. Maintenance monies are returned to PG once the hedge is lifted.

[109] Mr. Boyer prepared a loan submission for PG on December 18, 2007. He submitted that document to Mark Horrock in the Risk department with which ABL dealt. Mr. Boyer was the underwriter of the loan submission but the decision to lend ultimately rested with Risk. Mr. Boyer testified to his frustration with the lack of response from Risk and the narrow approach taken to the assessment of risk for this application.

FCC Term Sheet

[110] On October 19, 2007, the same day the Bank agreed to increase Facility #2, PG engaged Ernst & Young to find alternate financing. Its ongoing struggles with RBC and the lack of meaningful progress on the ABL side were factors. PG wanted a significantly increased credit facility and to explore the financing options available to it.

[111] Meanwhile, the Bank grew increasingly frustrated with PG’s inability to consistently operate within the loan margin limits; viz. the amount of credit used by PG exceeded the amount it was entitled to borrow based on the formula set out in the September 13, 2007 loan agreement.

[112] On November 26, 2007, Ms. Lang recommended to Mr. Marson that a default letter be issued requiring PG to rectify the excess not later than December 3, 2007. PG was then $418,000 over its loan margin limit with an expectation of a margin call that day that would increase its excess position to near $1 million.

[113] Later on the same day, Ms. Paddock advised Mr. Marson that the Bank had been in touch with FCC who indicated that FCC hoped to have a term sheet by the next day. FCC financing was expected to be $5 million. Ms. Paddock recommended that they continue to tolerate the excess position given a surplus value on a mortgage held on property. She wrote: “Resolution of this situation will come from approval & advance of FCC funds and eventually advance of ABL funding.”

[114] Mr. Marson wrote on November 27, 2007 to Ms. Lang and Ms. Paddock to confirm the excess requested. He asked that PG be reminded again during the weekly call of their prior agreement that no inventory purchases beyond those contracted at that point in time were to be undertaken and that they expected management’s full cooperation on their buying decisions and strategies until such time as FCC and ABL financing were in place.

[115] PG received a draft term sheet proposal from FCC dated November 30, 2007. FCC proposed to provide $5 million in financing, $700,000 of which would be used to retire term loans at RBC. The balance of $4.3 million was to provide working capital for PG.

[116] The term sheet was conditional on PG providing confirmation prior to disbursement that it had a provider of a revolving operating credit of not less than $25 million. The letter noted that if RBC was to provide that funding, it would have to amend Facility #1 so that it no longer reduced to $10 million by December 31, 2007 or remove the “permanently reduced” terminology from Facility #2.

First Forbearance Letter

[117] On December 5, 2007, Ms. Lang of RBC prepared a forbearance letter addressed to the principals of the three companies that comprised PG. In that letter, Ms. Lang itemized PG’s non-compliance with the financial covenants in the September 13, 2007 loan agreement and with the various reporting requirements in the same agreement. Ms. Lang indicated that the Bank was prepared to forbear taking steps to enforce its rights under the loan agreement upon the terms and conditions that were set out (9). The terms included:

1. A reduction in aggregate borrowings by December 12, 2017 to within loan margin limits;

2. PG was to provide a copy of a term sheet from FCC confirming approval of $5 million in new credit facilities with no outstanding conditions by December 10, 2007;

3. PG was to provide a tangible plan of how it would reduce the aggregate borrowings under Facilities (1) and (2) not later than December 10, 2007;

4. PG was to have a commitment to alternate financing to pay out Facilities (1) and (2) not later than December 12, 2007; and

5. The Bank’s forbearance would end on December 12, 2007.

[118] Ms. Lang also asked that PG and the guarantors acknowledge that Facilities #1 and #2 would “expire” on December 31, 2007 and that enforcement by the Bank may include cheques being returned for non-sufficient funds.

[119] There is some dispute in the evidence as to whether this first forbearance letter was actually provided to PG. If it was, it was not signed back to the Bank.

[120] Ms. Lang was cross-examined extensively on the reasonableness of these terms and conditions. I find that these terms were by and large unreasonable and incapable of performance by PG in the abbreviated time provided. Further, the letter misstated the maturity date for repayment of Facility #1 which did not reduce until February 1, 2008 and then only to $10 million.

[121] I note that the refusal of PG and its principals to execute either forbearance letter was perceived in some quarters of the Bank in a negative light. Mr. Campbell, for example, expressed that view. Frankly, it ought to have been readily apparent to Ms. Lang and others at the Bank that no properly advised debtor would agree to or be able to carry out the terms the Bank sought to impose.

[122] My finding in this regard should not be taken to mean that the Bank was not within its rights to issue a forbearance letter. The problem here was the manner of its execution. It was ill-conceived and unreasonable on its face.

[123] On the same date the forbearance letter was issued, Ms. Lang prepared an internal “Watchlist Profile” for PG. The purpose of the document was to enhance oversight of a borrower and to provide an overview of issues including the strategy to remedy the borrower’s non-compliance.

[124] Ms. Lang listed five key issues:

1. High leverage, over-trading;

2. Rapid, significant increase in wheat prices

3. Financial reporting – accuracy and timeliness

4. Current under-margin position created in part by margin calls on forward contracted wheat where there was no underlying asset to provide margin value

5. Lack of compliance with Bank covenants, especially as it relates to grain purchases.

[125] Under the heading “Client Strategy”, Ms. Lang wrote:

“Although we put a covenant in place indicating that no purchase or forward purchase contracts for grain were to be made without the prior consent of the Bank when we agreed to an increase in credit facilities in September, the borrower continued to purchase grain and enter into forward purchase contracts for 2007, 2008, 2009, and 2010. They have committed with producers to purchase $27MM of grain in the next 3 years and have outstanding commitments for 2007 amounting to $14.4MM. They have forward contracts in place to hedge the price risk on these contracts. As there is no physical inventory associated with these contracts, they can not margin a larger operating loan to help fund the associated margin calls.” [Note: “MM” means million.]

[126] Under “Strategy”, Ms. Lang indicated that PG was working with ABL to obtain an operating facility that better met its needs and was in possession of a discussion paper from ABL to provide a $25 million operating loan and $3 million temporary loan; however, no such discussion paper had been provided by ABL to PG by this date.

[127] As early as September 2007, the commercial banking division hoped and expected that its lending position would be paid out by refinancing through ABL and FCC. Unfortunately, that process was neither timely nor effective as will be seen. ABL did not actually present any proposal to PG until February, 2008 and then in an amount far less than PG needed; in fact, the amount was less than the financing in place through commercial banking.

[128] There was a clear disconnect in the timing and expectations of commercial banking and ABL. If commercial banking had been better informed of the status of Mr. Boyer’s efforts in ABL, the commercial banking unit would have had a more realistic understanding of the timing of ABL financing.

[129] For its part, PG cooperated fully with ABL. It provided whatever information was requested. It attended whatever meetings were needed. It provided access to the Bank and its agents and waited for ABL to provide its proposal regarding financing. PG had no control over those steps and the time that process took. In the meantime, it awaited the search for financing by Ernst & Young which would yield fruit later in December, 2007.

Second Forbearance Letter

[130] On December 12, 2007, Ms. Lang provided to Mr. Marson and Ms. Paddock a weekly cash-flow projection from PG to the end of February 2008. Ms. Lang noted that the cash-flow showed that PG would be out of margin by $5.14 million next week and would stay out of margin above $3 million for the following few weeks. PG projected grain purchases of almost $6 million over the next 11 weeks which did not take into account margin calls. In short, the cash-flow projection provided by PG to the Bank reflected more purchases of grain and continued borrowings in excess of available credit for a prolonged period.

[131] Later the same day, Ms. Lang emailed Ms. Paddock regarding the updated cash-flow projection. She indicated that PG did not have a tangible plan to get back within margin. She also indicated that she had spoken to Mr. Boyer to answer his questions but believed that he was having difficulty “selling his plan to Risk”.

[132] On December 13, 2007, Ms. Lang wrote to Ms. Paddock regarding a telephone conversation she had with Mr. Marson. She advised Ms. Paddock that: “He [Mr. Marson] doesn’t think we can bounce cheques until the operating loan limit exceeds $33MM (the limit approved).”

[133] PG relies upon this email and that statement as part of its argument that the Bank had, in effect, agreed to a course of dealing pursuant to which PG was entitled to utilize funds from the Bank up to $33 million even if those funds were not available under the loan margin formula.

[134] Ms. Lang also reported to Ms. Paddock in the same email that Mr. Marson advised that the Special Loans Group (SLG) did not have capacity to take on PG until December 31. She advised Ms. Paddock that she would revise the forbearance letter to say that the Bank’s forbearance would end December 31.

[135] Unbeknownst to the Bank, PG received an offer to finance from CIT through Ernst & Young on December 14, 2007. The offer to finance was for a credit facility of $45 million. The offer to finance was conditional. The conditions included satisfactory completion of various due diligence requirements on the part of the CIT, final credit approval by CIT and a new term loan of $5 million to be closed before or coincident to the closing of this financing.

[136] By this point, PG had in hand a term sheet from FCC to advance a loan of $5 million. That term sheet required a revolving credit facility of the sort contemplated by the CIT financing. FCC was not prepared to advance those funds unless that operating line was in place.

[137] Ms. Lang spoke with FCC on December 14, 2007. She was advised that FCC would not give final approval for the PG term loan until they had approval of the $25 million operating loan from another lender such as RBC.

[138] Thus, RBC could not access a cash injection by way of new lending from FCC unless it was prepared to provide funding of at least $25 million by way of a revolving operating line. The commercial banking unit was not prepared to do so and had pinned its hopes for takeout financing on ABL from whom no commitment or proposal had yet been received by PG.

[139] From the perspective of the commercial banking unit at RBC in early to mid-December, 2007, the situation was as follows:

1. RBC had advanced credit to PG beyond what it was strictly entitled to access based on the loan margin formula;

2. PG’s projections show that this was no short-term bulge but was likely to continue to the end of February at least;

3. PG had not complied with its reporting obligations;

4. PG continued to buy grain including entering into forward contracts despite clear direction from the Bank not to do so;

5. Grain prices continued to rise which necessitated likely ongoing substantial margin call payments to fund PG’s hedged position in the futures market; and

6. The so-called “light at the end of the tunnel”, ABL financing, remained a distant flicker.

[140] On December 17, 2007, Ms. Lang produced a second forbearance letter. Again, it was addressed to the principals of the three companies that comprised PG. It detailed the same breaches of covenant and reporting requirements. It contained essentially the same terms and conditions as the December 5, 2007 forbearance letter with minor changes to the dates by which those conditions were to be fulfilled.

[141] The December 17, 2007 forbearance letter asked that the borrower and guarantors acknowledge that the two credit facilities would expire on December 31, 2007. The letter contained a space for each of the guarantors and someone on behalf of PG to sign.

[142] There is no dispute that this second forbearance letter was provided to PG and the guarantors. The December 17, 2007 forbearance letter was never signed back to the Bank. Mr. Wilson testified that it was not signed back because PG did not believe that it could fulfil its terms by the deadlines set; in particular, the credit facilities from ABL. Curiously, when faced with a clear signal from the Bank that its patience had worn thin, PG did not disclose the existence of the CIT offer letter.

Maturity of Facility #2

[143] On December 19, 2007, Mr. Boyer of ABL wrote to George Corneil to advise that the application “is into our Risk group”. He advised Mr. Corneil that Risk had some questions concerning monies held by F.C. Stone and asked Mr. Corneil to confirm the correctness of the information provided to Risk. Thus, the application to Risk by ABL was initially submitted for approval three months after Mr. Boyer was first introduced by Ms. Paddock to Mr. Wilson and PG.

[144] The October 19, 2007 agreement contemplated repayment of Facility #2 ($14 million) on December 31, 2007. That did not happen.

[145] The December 17, 2007 forbearance letter contemplated the expiry of both credit facilities on December 31, 2007 even though credit Facility #1 was not supposed to reduce until February 1, 2007. Regardless, PG did not repay and the Bank took no steps to make demand for payment or to enforce its security when the calendar pushed into 2008. Instead, both parties continued to deal with one another and with the existing credit facilities as before.

ABL Delay

[146] In early 2008, both PG and the commercial banking unit were waiting on a discussion paper from ABL; viz. a draft financing proposal. On January 8, 2008, Ms. Paddock wrote to Frank McAuley of RBC to express her concern that “things may be going off the rails with Palmerston Elevators, Asset Based Lending and Risk (Colin).” She noted the delay in getting a discussion paper in front of the clients and her frustration as nothing could happen with the FCC funding until PG could demonstrate that they had an operating line of credit.

[147] On January 9, 2008, Mr. Marson submitted a request to Mr. Peters for approval to extend the existing credit facilities to January 31, 2008. Mr. Marson reported that:

1. The total borrowings remained within the total authorized amount of $33 million;

2. PG remained out of margin up to $5.2 million largely as a result of margin calls and forward contracts for which there was no real inventory to underpin the borrowings;

3. The amount needed to bring the account within borrowing margins would be paid from monies advanced from FCC;

4. Risk management was waiting for a final version of ABL’s proposal which was expected January 10. If approved, a term sheet could be provided to the borrower by January 12;

5. Risk had weekly conference calls with management to review progress;

6. PG continued to be advised of daily margin positions; and,

7. Mr. Chang and Mr. Hall of Special Loans continued to be apprised of the situation on a weekly basis.

[148] Although the file had not yet been transferred to Special Loans to be administered, Mr. Hall had previously been assigned to shadow the activities of the commercial banking unit. He was copied on some but not all earlier email correspondence.

[149] Mr. Marson recommended to Mr. Peters that if ABL did not present a term sheet by the end of the week, a letter should be sent to PG providing 60 to 90 days to find alternate financing arrangements.

[150] Mr. Peters forwarded Mr. Marson’s submission to Bruce Campbell for his approval. Mr. Peters supported Mr. Marson’s approach.

[151] Mr. Campbell inquired as to what controls were in place to ensure the margin deficit did not increase. Mr. Marson advised that the Bank received daily margin reports and weekly cheque runs which were matched to the weekly cash flows. He also noted that PG had removed their bid for new wheat from their website and were no longer bidding or contracting for new crop (forward contracting). He indicated that the only reason the margin deficit would increase would be margin calls against hedged positions that were already in place. Every $.30 increase in the price of wheat represented approximately $1 million by way of margin call.

[152] Mr. Campbell instructed that the proposed extension of credit to January 31 was approved. He also indicated that if the ABL facility was not approved by January 31, he supported “demarcating the connection” which he testified meant ending the relationship with the customer.

[153] On January 24 and 25, 2008, Mr. Boyer and Mr. Horrock of Risk exchanged emails dealing with concerns held by Risk with respect to futures contracts and security for the Bank’s position. Mr. Boyer advocated for the submission that he had underwritten and attempted to address the concerns expressed by Mr. Horrock. Suffice to say, Risk did not share Mr. Boyer’s enthusiasm.

[154] The extension of credit to January 31, 2008 was an internal process at RBC. No amending agreement was signed even though according to the October 19, 2007 loan agreement, repayment of the entirety of Facility #2 was due December 31, 2007. Commercial banking did not advise PG that credit had been extended to the end of January; rather, the parties merely continued to deal with PG’s ongoing credit needs on the same basis as before.

CIT Financing

[155] While the ABL proposal wound its way slowly through the Bank’s approval process, PG had ongoing discussions with CIT regarding its term sheet. On January 11 and January 28, 2008, CIT issued further signed term sheets to provide $45 million in credit including a $40 million revolving line of credit. These term sheets came to PG through Ernst & Young.

[156] On January 31, 2008, Mr. Wilson signed and accepted the January 28, 2008 term sheet from CIT. Again, PG did not disclose to RBC the term sheets received from CIT nor that PG had accepted CIT’s financing proposal on January 28, 2008. Instead, PG continued to await ABL’s financing proposal and to deal with RBC under the existing credit facilities.

[157] Article 25 of the January 28, 2008 CIT term sheet provided that the parties would work toward closing the financing agreements by February 29, 2008 but in any event, closing of the financing arrangements would occur on or before March 31, 2008, failing which the lender’s commitment would expire.

[158] The term sheet also contained the following clause in relation to the revolving line of credit:

“After giving effect to all Revolving Advances and Ancillary Credit Products to be extended at closing, Credit Parties’ Excess Availability (“Excess Availability”) at closing only shall exceed $3.500,000. Such excess revolving loan availability requirement contemplates that all of the Borrower’s debts, obligations and payables are then current in accordance with Borrower’s usual business practices.

Excess Availability is defined as Availability (as defined in paragraph 1(b)), less the aggregate amount of Revolving Advances and Ancillary Credit Products.”

[159] This clause contains a number of defined terms. It is unnecessary to unpack that terminology; however, as will be seen, this clause took on significance when RBC later calculated whether PG could satisfy this condition to permit closing of the CIT financing. RBC concluded that it could not.

RBC Extension to February 29, 2008

[160] On January 31, 2008, Mr. Marson made a further request to Mr. Campbell and Mr. Peters to extend the PG credit facilities to February 29, 2008. Mr. Campbell authorized that extension on that date. That extension was not communicated to PG.

[161] RBC did not send a letter to PG providing 60-90 days’ notice to find financing elsewhere as proposed in Mr. Marson’s January 9, 2008 request for credit authorization. By this date, no proposal for funding by ABL was yet in hand.

[162] On February 1, 2008, Ms. Lang wrote an email to Mr. Marson and Ms. Paddock to provide an update on PG’s credit status. She noted that PG’s loan balances stood in aggregate at $30.102 million and that cheques processed the day before included monies advanced from PG to C & M. She suggested that the payment to C & M was “kiting”. She also suggested that they return cheques as PG was out of margin by $6.095 million with an expected large margin call that day. She indicated that “they obviously aren’t getting the message about managing their cash flow, nor have they provided us with all the information that we have requested”.

[163] Ms. Paddock replied as follows:

“I don’t think we should be selectively returning cheques. We’ve told the clients that their limit is $33MM and that they needed to manage their cash to stay under that limit. We have also set the precedent that we will tolerate a margin deficit. In the event there requirements go over $33MM, we definitely need to return items – even if it’s the margin payment.” [Emphasis added]

She also indicated that she did not consider the advance made to C & M by PG to be kiting.

[164] The plaintiffs rely on Ms. Paddock’s statement to confirm their understanding in 2008 that they were permitted to borrow against the credit facilities up to $33 million; the margin formula would not be strictly applied to limit the availability of that credit. Mr. Wilson testified that he understood that as long as PG stayed under its $33 million loan limits, it could access credit in the ordinary course of business for payables including margin calls to F.C. Stone.

[165] Ms. Paddock testified that she did not communicate to PG that the margin formula did not apply and the Bank would continue to lend so long as the aggregate of the loans stayed under $33 million. She and other bank witnesses, notably Ms. Lang and Mr. Marson, continued to push PG to reduce its indebtedness to bring it within the available credit under the margin formula. Further, Ms. Lang communicated on an almost daily basis with Mr. Marson for authority to advance funds to PG including wire transfers for margin calls to F.C. Stone.

[166] It is RBC’s position that none of that would have been necessary if RBC had indeed communicated to PG that so long as PG stayed under $33 million, everything was fine.

[167] I find that the Bank did communicate to PG that it would not tolerate and would not permit any advance of credit beyond the $33 million borrowing limits. I do not accept that the Bank effectively advised PG that the margin formula was no longer applicable or that PG need not concern itself with being within loan margins.

[168] I am satisfied that the Bank continued to stress to PG and to press PG to do whatever it could to bring itself back within loan margins while recognizing that some of the expense being incurred by PG was entirely beyond its control. The Bank continued to seek regular credit approvals from Risk for advances/payments by PG for grain and margin calls. That exercise would have been redundant if the only mile marker was the $33 million ceiling.

[169] In short, the Bank repeatedly approved credit advances while PG was within it loan limits but outside its available credit according to the margin formula. In doing so, the Bank was waiving compliance with that requirement for that day’s advance. Whether those repeated waivers beginning November 21, 2007 and continuing through February, 2008 represent a new agreement based on course of dealing or an amended agreement will be discussed below in the analysis.

[170] I also observe that PG’s actions during this period were consistent with the premise that loan margins remained relevant. In this regard, I note the following:

1. Ms. Gibbings continued to provide detailed information on payables, margin calls, sales and margin refunds on an almost daily basis;

2. Ms. Gibbings made inquiries whether margin calls would be paid; viz. whether RBC would advance funds and wire those funds to F.C. Stone;

3. PG participated in regular telephone calls and/or meetings with Bank representatives in which compliance with the margin formula was a regular topic;

4. PG aggressively sold grain inventory including wheat at a discounted price to a key competitor of one of its long-term customers thereby risking that relationship;

5. PG reduced its selling basis and thereby its profit to entice flour mills to buy more grain sooner than they might otherwise do;

6. PG reduced its buying basis to discourage farmers looking to sell grain to PG; and

7. On February 11, 2008, PG withdrew from purchasing wheat and posted that position on its website.

[171] PG understood that it faced a cash-flow crisis. It depended on the Bank’s credit to meet that crisis, which at times was overwhelming. Its effort to sell grain and to manage its cash-flow to keep the Bank on side was a Herculean task given the market at that time. Its actions were, in part, in response to the Bank’s repeated reminder and demands that PG get back within loan margins.

PG Discloses CIT Financing

[172] On February 6, 2008, Mr. Marson reported to Mr. Campbell as follows:

1. PG’s loan margin deficit was $8 million;

2. ABL was expected to present a final credit submission to Risk the next day;

3. He expected that an approved facility could be presented to PG by next week;

4. There was agreement in principle between Risk and ABL to provide a $25 million credit facility;

5. PG’s under-margin position was expected to continue for at least the next 90 – 120 days;

6. The ABL $25 million facility would effectively trigger FCC disbursement of $5 million which would reduce the margin shortfall to $3 million by the end of February;

7. If ABL did not grant the facilities, Risk would extend a $25 million facility to September 30, 2008 during which time commercial banking would continue to manage the account; and

8. The margin shortfall was expected to be fully absorbed by May – June, 2008 at which point the account could be “re-marketed”.

[173] Mr. Marson testified in cross-examination that he believed that June 2008 was a reasonable timeframe to “de-market” the PG account based on the information at hand in February 2008.

[174] Mr. Campbell testified that he did not agree with Mr. Marson that RBC would continue to manage the account until the margin shortfall was absorbed but he did not respond to this email to convey that disagreement.

[175] On February 6, 2008, Mr. Boyer emailed Mr. Wilson for financial forecasts for ABL. On the same date, Mr. Boyer spoke with Ms. Paddock to advise that he had just spoken to Ms. Gibbings who had promised to have the cash-flows that morning. Ms. Paddock offered to “light a fire under them [PG]” if the cash flows were not received as promised. She advised Mr. Boyer by later email that she had spoken to Mr. Wilson who assured her that Mr. Boyer would have their full attention and cooperation that afternoon.

[176] Mr. Boyer indicated in his testimony that PG had provided everything required as of January 29; he was probably seeking additional information to satisfy Mr. Marson and Mr. Horrock of Risk.

[177] On February 8, 2008, Mr. Wilson had a telephone call with Stephen Lewis of Ernst & Young. Mr. Lewis wanted to provide to CIT the Fuller Landau report for which he needed RBC approval. He expected that he would have to disclose the CIT commitment to get that approval.

[178] Mr. Wilson’s notes from that telephone call contain the following entry:

“If Royal bank – doesn’t fund margin call – will Steve and Tim Lowes to discuss options”

[179] In cross-examination, Mr. Wilson indicated that he was concerned about what would happen when PG notified RBC of the CIT financing. He did not know what to expect as, from his perspective, RBC was “acting funny”. He agreed that it was fair to say that he contemplated the possibility that RBC would not fund margin calls.

[180] On February 11, 2008, Mr. Boyer and Mr. Wilson spoke by telephone. Mr. Boyer indicated that he had removed an impasse which Mr. Wilson understood was a reference to senior people at the Bank who did not support his efforts. Mr. Boyer indicated that he thought he had a $25 million ABL facility for PG and hoped to have an answer from Risk by Wednesday. He also indicated to Mr. Wilson that Risk was not supportive of ABL and did not trust Mr. Boyer or PG.

[181] In cross-examination, Mr. Wilson testified that he did not believe the $25 million facility was enough money; however, he did not communicate to Mr. Boyer that he already had a commitment from CIT for $45 million or that a facility of $25 million was a non-starter. Instead, Mr. Wilson merely accepted the information provided.

[182] On February 12, 2008, Mr. Boyer submitted an ETR report (Recommendation for ABL financing) with the support of Mr. Horrock and others in Risk. The proposed financing included a $7 million bridge loan, $4.4 million of which would be retired by the funds to be received from FCC not later than March 31 with the balance to be retired by April 30, 2008. The $7 million was to pay down the loan margin shortfall which was then more than $7 million.

[183] On the same day, Mr. Wilson spoke to Ms. Paddock to advise that the commodities exchanges had increased their maintenance margins. That resulted in increased margin calls from F.C. Stone in order to keep PG’s margin positions.

[184] On February 13, 2008, Mr. Marson emailed Ms. Lang to advise that “there needs to be some discussion with management about margin calls as we will not continue to support the [loan] margin shortfall”. Ms. Lang responded that she would call him to discuss before the scheduled conference call with PG that day.

[185] The February 13, 2008 conference call was cancelled because Ms. Gibbings and Anne Schneider, one of the principals of PG, were not available.

[186] In answer to an undertaking from the examination for discovery of the Bank, Ms. Paddock indicated that there was a conference call with PG on February 13, 2008 during which PG was advised that no further margin calls would be honoured; viz. RBC was not prepared to extend further credit for margin calls when its loan margins were in deficit.

[187] Ms. Paddock in cross-examination at trial conceded that the February 13 conference call was cancelled and re-scheduled to February 19. Her answer to the undertaking was wrong. In point of fact, it was a blatant falsehood and the excuse offered for that misstatement lacks any credibility.

[188] The same undertaking applied to Ms. Lang. Like Ms. Paddock, she indicated that the conference call was held on February 13 and that PG would have been advised in that call that any further deterioration in margin limit would not be supported. She also indicated that PG was told that margin calls made while PG was in a margin deficit would not funded.

[189] In cross-examination, Ms. Lang also conceded that the February 13 conference call did not occur. Her answer to the undertaking was wrong. She suggested that she must have seen it in her calendar and that “no one is going to remember exactly what was said on any specific date almost 8 years ago”. Her rationale for providing false information in answer to the undertaking and her apparent lack of concern that she did so is disturbing.

[190] Plaintiffs’ counsel invites me to find that Ms. Lang and Ms. Paddock must have discussed their respective answers to the undertakings; that there is a corporate hymnbook from which both are singing. I am not prepared to go that far. I have noted this inconsistency and have taken it into account in making findings of fact herein.

[191] At long last, ABL provided a written financing proposal to PG, albeit in draft summary form, late on February 15, 2008. The proposal was for $32 million as follows:

1. $20 million operating loan;

2. $5 million seasonal bulge available between August 1, 2008 and February 29, 2009; and

3. $7 million bridge loan which would reduce to $2.6 million by March 31, 2008 and to zero by April 30, 2008.

[192] The margin formula offered no consideration or leverage for equity in the F.C. Stone accounts. While the percentages for receivables etc. were higher than the margin formula in the September 13, 2008 loan agreement, the proposal was very disappointing especially in light of the length of the banking relationship, the long wait for a proposal, the expenses incurred for the due diligence and the clean bill of health for its hedging book. To add insult to injury, the Bank wanted a $40,000 application fee.

[193] Mr. Marson emailed Mr. Campbell that same day to advise that ABL had approved a $27 million facility (evidently he did not count the seasonal bulge). He advised Mr. Campbell that there was a conference call scheduled with the principles of PG the next Tuesday. He proposed that they be advised that “we will no longer cover the margin calls beginning next week.”

[194] Mr. Marson agreed in cross-examination that he was proposing to Mr. Campbell that RBC give PG some notice of RBC’s intention not to cover margin calls. He agreed that giving notice “would be reasonable and fair in the circumstances”.

[195] Mr. Marson noted to Mr. Campbell that as PG never signed the forbearance agreement in December “they remain in default”. He also proposed to advise PG that it remained in default and was required to provide a plan of action to sell inventory, to sell forward contracts and to unwind forward contracts.

[196] Mr. Campbell confirmed that plan of action by responding email on February 19, 2008. He indicated that the account should be moved to Special Loans and noted that there would be little if any surplus once the restructured facilities were put in place if the price of wheat continued to increase. He recommended a more aggressive strategy and asked Mr. Marson to work with Mr. Horrock of Risk and Mr. Chang of Special Loans to transition the account.

[197] On February 15, 2008, the margin call for F.C. Stone was $1,484,815. As at Sunday, February 17, PG’s loan margin deficit stood at $9.111 million; viz. that is the amount by which PG’s borrowings exceeded what was available to it under the margin formula in the September 13, 2007 loan agreement. Even at that level, PG remained under the $33 million loan ceiling.

[198] Monday, February 18, 2008 was Family Day in Ontario. The conference call with PG was scheduled for Tuesday, February 19. Ms. Lang provided a summary of PG’s loan position to Mr. Marson and Ms. Paddock in anticipation of the scheduled call. She advised them:

1. The total outstanding loan balance that morning was $28.771 million;

2. The loan margin deficit before Friday and Tuesday’s margin call was $7.398 million;

3. The margin call for Friday of $1.5 million was not sent;

4. An additional $590,000 was required for a wire transfer for a margin call for that day;

5. 75% of the inventory and accounts receivable (the margin formula) was $18.847 million and 2.526 million, respectively.

[199] On February 19, 2008, Ms. Lang sent an email to Mr. Marson and Ms. Paddock in which she set out a proposed agenda for the conference call with PG. The proposed agenda was as follows:

1. Advise PG that the Bank could not support any further deterioration in their loan margin deficit based on the fact that inventory plus funds expected from FCC were less than the total outstanding;

2. Remind PG that it was in default and that its facilities were expired and on a demand basis; and

3. Find out from PG how it intended to correct its margin deficit situation.

[200] In the same email, she recommended paying the $1.5 million margin call due to F.C. Stone from the preceding Friday.

[201] It is undisputed that a conference call with PG did take place on February 19. It is also undisputed that during that call, PG revealed that it had a financing commitment from CIT. PG agreed to forward a copy of that financing letter immediately after the call which it did.

[202] However, Bank witnesses also testified that PG was specifically advised during the telephone call that the Bank would no longer support payment of margin calls to F.C. Stone given the significant deficit in the loan margin. Mr. Wilson for PG testified that no such message was delivered; it never came up.

[203] I prefer the evidence of Mr. Wilson on this point and find that the Bank did not advise PG that it would not pay margin calls during the February 19 conference call. In coming to that finding, I observe:

1. Mr. Wilson was an excellent witness. He answered questions throughout in a manner that was internally and externally consistent. He was careful and thoughtful;

2. Ms. Paddock and Ms. Lang were, as described above, not consistent;

3. There is no memo to file or email to PG or internally at the Bank that confirms this very important advice to the client;

4. In an email dated February 21, 2008 by Richard Hall to Raymond Chang, Mr. Hall noted Mr. Campbell’s advice that PG had been told that the Bank would not fund margin calls once it exceeded 100% collateral coverage. Mr Hall wrote: “I did not get that impression when we were on the phone with Collin [Marson]”;

5. By the February 19 conference call, PG had had time to digest the ABL finance proposal and to weigh it against the financing commitment from CIT that better addressed PG’s current and future financing needs; and

6. PG was concerned that it was missing opportunities in the market by the restrictions and efforts placed on its operations to satisfy RBC. There was undoubtedly a measure of frustration and disappointment in the proposal by ABL and the tenor of the dealings with RBC.

[204] While the Bank intended to communicate that it would no longer fund margin calls given the deficit position, that message was superfluous if PG had take-out financing with the prospect that the Bank would be made whole in the not distant future. Faced with that new information disclosed in the conference call, I find that no one from the Bank delivered the intended message.

[205] Ernst & Young forwarded the commitment letter with CIT to Ms. Paddock following the call. She forwarded it immediately to Mr. Marson, Ms. Lang and Mr. Boyer. Mr. Marson, in turn, forwarded it to Mr. Chang and Mr. Hall of Special Loans.

C & M Financing

[206] I pause at this point to briefly detail the banking arrangements between RBC and C & M as C & M’s margin calls come into play at this point in the piece.

[207] C & M had its own loan facility with RBC.

[208] On July 11, 2007, C & M entered into a loan agreement with RBC by which C & M had two credit facilities:

1. A $2.5 million revolving demand facility which was to reduce to $2 million on September 1, 2007 and then to $1.5 million on December 16, 2007; and

2. A $534,161 non-revolving term loan which was repayable in full on December 31, 2007.

[209] That loan agreement was replaced by a new loan agreement on December 5, 2007. The new agreement also provided two credit facilities:

1. A $2.5 million revolving demand loan which would reduce to $1.5 million on January 1, 2008; and

2. A $474,744 term loan repayable in full on December 31, 2007.

[210] The remaining terms and conditions applicable to these facilities are not germane to the issues.

[211] As mentioned, C & M also hedged in the futures market with the same broker; however, its volume of business and margining was far less than PG.

[212] Like PG, C & M paid its maintenance margins and margin calls by wire transfer from RBC to F.C. Stone. Both businesses relied on credit from RBC for payment of those amounts when due.

Move to Special Loans

[213] On February 19, 2008, Mr. Chang emailed Mr. Hall to advise that the PG account was coming in immediately. In that email, Mr. Chang wrote:

“…There is no more cash call that Bruce will approve as they have got not [sic] more margin availability. It is maxed out at $28MM.

The CIT commitment letter is also a surprise; they just got it today and the ABL deal from Ada’s group is dead (insufficient now to pay the bank out as they cut the amount down to just $20MM).”

[214] Mr. Chang testified that the Bank was not surprised that PG was seeking financing elsewhere, nor was he surprised that another financial institution was prepared to underwrite credit to PG.

[215] Once the PG file came to Special Loans, all credit decisions were to be made by that unit. Mr. Hall testified that Mr. Campbell’s views were relevant to Special Loans’ decisions. Mr. Campbell was in charge of commercial credit across the country and his comments about advancing no further funds to PG would be seriously considered on a go-forward basis.

[216] Plaintiffs’ counsel suggested that it was more than mere coincidence that PG’s account was transferred to Special Loans on the same day the Bank learned that its ABL financing offer would not be accepted and PG intended to go to another lender. He suggested that the change to Special Loans was a punitive measure. I do not agree.

[217] Mr. Campbell suggested to Mr. Marson the transfer of the account to Special Loans on February 19 before he became aware of the CIT commitment letter. Mr. Campbell testified that Special Loans brought a specialized expertise to help a troubled company and had the ability to provide a greater degree of monitoring. While I do not accept Mr. Campbell’s suggestion that Special Loans was a benign and benevolent unit, there to help customers, by the same token, I do not regard the transfer to Special Loans as a reaction to PG’s decision to take its business elsewhere.

[218] By February 19, 2008, there was a widely held view in the commercial banking division which included Mr. Campbell, Risk and the Agribusiness team, that PG could not and would not live within its loan margins, had contributed to its excesses by wilfully disregarding the Bank’s wishes, and showed little or no prospect of getting back on side in the near future. The extent of the efforts by PG to appease the Bank and to manage its cash-flow were not understood or appreciated, nor did the Bank accept that its own delay had contributed to the situation.

ABL Tries to Match CIT

[219] On February 20, 2008, Ms. Lang emailed Mr. Marson and Ms. Paddock to advise that she had spoken with Darryl Lelac of CIT. Based on that discussion, she indicated that the timeline for CIT financing to be in place was 2-3 weeks. She asked for direction on limits for further advances during that period.

[220] On the same day, Mr. Boyer of ABL asked Ms. Paddock to inquire of PG whether it had interest in a further proposal from RBC. Mr. Boyer wished to keep PG as a client of RBC and, as a result, ABL sharpened its pencil to try to match the CIT commitment. That effort by ABL was known to Mr. Hall, Risk and Ms. Paddock.

Proposed New Financing for C & M

[221] On February 21, Ms. Lang emailed Mr. Marson and Ms. Paddock with a new financing proposal for C & M which was seeking a $1 million increase in its operating loan until the end of May, 2008. Ms. Lang advised that: “They have a margin call that they need to pay for the past 4 days of $258M [thousand]. This would put them in excess by $158M today.”

[222] Based on strong year-to-date results and expected results for the rest of the year, Ms. Lang recommended a temporary increase of $500,000 for 30 days to allow the company to pay its margin calls “as this is a prudent business practice”. She advised that based on current demand, she expected C & M to sell all its existing inventory and have a market for the seed it had committed to purchase for 2008.

[223] The requested financing for C & M was declined with no reasons given or anyone taking responsibility for that decision.

CIT Closing in Question

[224] On February 21, 2008, Ms. Lang also prepared calculations based on the terms of the CIT financing commitment and the cash-flows she had from PG to ascertain whether PG would be in a position to close the CIT financing soon. She concluded that PG would not be able to close in March because of the condition cited above which required that PG have a $3.5 million borrowing limit surplus on the day of closing. Ms. Lang informed Mr. Marson by email of her calculations.

[225] Upon receipt and review of Ms. Lang’s email, Mr. Marson emailed Ms. Paddock and Ms. Lang with a copy to Mr. Peters that it was very important that PG be informed that RBC would no longer cover margin calls, that PG remained in default and, as such, was required to provide a plan of action to sell inventory, sell forward contracts and unwind forward contracts. He also suggested that FCC be contacted to determine whether it had a copy of the CIT commitment, was prepared to disburse based on that commitment and if so, when.

[226] On February 22, 2008, Mr. Campbell emailed internally that he would not support approving further excesses where CIT and the FCC facilities would not provide coverage.

[227] Ms. Lang brought to PG’s attention her concerns that PG would not be able to close the CIT financing and meet the $3.5 million condition. Ms. Gibbings insisted that PG could meet the CIT requirements and that they had worked through the numbers with Ernst & Young to ensure that they could do so. Ms. Lang was at a loss to figure out how.

RBC Refuses C & M’s Margin Call

[228] At 9:22 a.m. on February 21, 2008, Ms. Gibbings emailed Ms. Lang to determine whether the Bank was prepared to “approve the wire” of funds for C & M’s margin call of $259,000.

[229] Ms. Lang responded at 9:28 a.m.. She indicated that she had no answer yet but would try to get it that morning. She noted that C & M had $120,000 available that could be sent to FC Stone unless there were outstanding cheques.

[230] At approximately 4:51 p.m. on February 21, 2008, Ms. Lang informed Ms. Gibbings by telephone that the Bank would not wire funds to pay the margin call owed by C & M. Ms. Gibbings told Ms. Lang that if they did not make the margin call that day, C & M would lose the $1.3 million of maintenance margin at F.C. Stone.

[231] I find that:

1. The Bank knew and was informed by Ms. Gibbings that if the margin call was not paid on February 21, the hedges for C & M would be collapsed and C & M would lose $1.3 million of equity in its hedging account;

2. Ms. Lang’s telephone call on February 21 with Ms. Gibbings was the first time the Bank communicated to C & M that it would not fund a margin call;

3. The Bank did not give prior notice to C & M that it would not fund its margin calls; and

4. Ms. Lang did not seek further instructions when provided the consequences to C & M of non-payment.

[232] For greater certainty, I find that the Bank did not provide any notice, oral or written, to C & M that as at a particular date no further margin payments would be advanced.

[233] I note, however, that the margin call funds requested by C & M would have pushed its debt to an amount that exceeded the amount available to it under its existing credit facilities with the Bank; viz. it needed a bulge or additional credit to make this payment.

[234] In addition, there is little or no track record of the Bank continuing to fund C & M while it was out of its borrowing margins.

E & Y’s Cash-flow Projections

[235] On February 22, 2008, Mr. Leslie of Ernst & Young provided cash-flow projections for PG to Ms. Paddock. These were the cash-flow projections that Ernst & Young prepared with Ms. Gibbings to satisfy PG that it could close the CIT financing at the end of March 2008.

[236] Thus, even on the projections prepared by Ernst & Young, PG would not be able to close the CIT financing for at least five weeks. Like all projections, there were many underlying assumptions about future events. As at February 22, 2008, PG’s ability to close the CIT financing was by no means a certainty.

PG’s Margin Call Not Funded

[237] On Monday, February 25, 2008, RBC received draft account agreements from CIT that would be needed to facilitate the changeover from RBC to CIT. Clearly, CIT was moving toward completion of its financing arrangement with PG and at no point before February 26, 2008 did CIT communicate otherwise to RBC

[238] That same day, Ms. Lang analyzed the cash-flow spreadsheet that Ernst & Young had provided to Ms. Paddock. She also spoke to Mr. Leslie of Ernst & Young and Mr. Omland at PG. She indicated in an email to Mr. Hall and others that:

1. Mr. Leslie confirmed that PG could not presently meet CIT’s requirements but he expected PG would be able to do so by March based on the projections;

2. The cash inflows on the projections were largely based on the market going down between February 25 and July, 2008 which would see money flowing in from F. C. Stone; and

3. With the projected inflow for March, PG would be $500,000 short of meeting the CIT condition and without those inflows, PG would not meet CIT’s requirement in April.

[239] No one from Ernst & Young testified at trial. Although cross-examined on her analysis of the cash-flow projections from Ernst & Young, Ms. Lang was largely unshaken in the conclusions that she drew and the information that she provided to Special Loans. Certainly no witness on the plaintiffs’ side convincingly demonstrated that Ms. Lang’s conclusions were fundamentally in error.

[240] On February 26, 2008 at 10:23 a.m., Ms. Lang emailed Mr. Hall and Mr. Chang:

“3) I talked to a broker at RBCDS who is familiar with grain trading to confirm some aspects of the hedging. His advice was that lifting the hedges would be the worst possible option for all involved as when the hedge is lifted, the client is exposed to a potential loss if the market falls. The margin calls may be expensive in the short-term, but they are guaranteeing the client a profit when the grain is sold. Essentially, we should be guaranteed to get our money back when the grain is sold if it is hedged, but if it is not hedged, this leaves the client exposed and if the market drops before the grain is sold, it will be sold at a loss due to the amount of margin call money already invested and the possibility they will have to sell at lower than what they purchase for.

The loss cannot be quantified at this point as it is dependent on the price the grain is sold at.

The one potential flaw in this system would be if the producers do not deliver on their forward purchase contracts. Historically, this type of default in [sic] unusual, but with the changing market conditions, there is some potential that the producers could default on $8 contracts if they have the opportunity to sell their wheat for $15 after it is harvested.

He did advise that if margin calls could not be made, the client should work with the broker to lift hedges in a strategic manner that is in the best interest of the client.”

[241] Ms. Lang’s email was forwarded by Mr. Chang to Mr. Dia, to whom both Mr. Chang and Mr. Hall reported. Mr. Dia was the Director of Special Loans. It appears that Mr. Dia was out of the office much of the time between February 19 and February 26. Nevertheless, the decision whether to continue to fund PG’s margin calls rested with him.

[242] When he forwarded Ms. Hall’s email to Mr. Dia, Mr. Chang indicated:

“Ibrahim, please read just point 3 below as it is relevant to our discussion as to whether we should just cut them off from all margin cash call or not. My recommendation is that until we in SLAS [Special Loans] really understand the profile of these hedges, to keep funding these margin cash calls, painful as they are, is a better option than to risk collapsing the entire hedge program without knowing what are the consequences to the Bank.

Unfortunately if we don’t respond, their broker, FC Stone, may have no option but to unilaterally lift all hedges. They have $3MM in a margin reserve account but it is suppose to be replenished daily as per the commodity exchange rules.”

[243] On that same date and before Mr. Dia made his fateful decision, Ms. Paddock provided two recent articles that touched upon the grain industry and margin calls. One of the articles raised the spectre that farmers may default on delivery of crops under forward contracts if the price of grain continued to rise significantly. Both articles were forwarded to Mr. Dia by Mr. Hall. It is unknown whether he read those articles as he did not testify for health reasons.

[244] In any event, despite Mr. Chang’s recommendation and Mr. Hall’s warning of the potential consequences, Mr. Dia decided late in the afternoon on February 26 that the Bank was no longer prepared to fund any further margin calls for PG. Mr. Chang reported Mr. Dia’s decision and his rationale in an internal email at 4:39 p.m.:

“I just had my discussion with Ibrahim and wish to inform the team that as there is no certainty as to when these margin cash calls will end, SLAS/Bank is not prepared to continue provide [sic] funding going forward. A structure whereby the shareholders will provide outside collateral to fund one or more of these cash calls will not work for the same reason. I have a message to Archie for him to call me ASAP.

I assume as a result of this, the CIT take-out financing will now unlikely to happen. We now need to work with the company to see what the next steps will be but priority must now be to secure the cash flow to liquidate our unmargined position soonest.”

[245] Mr. Dia’s decision was made late in the business day, shortly before 5 p.m.. When Mr. Wilson returned Mr. Chang’s telephone call he was informed of the Bank’s decision not to fund the margin call for PG for February 25 or any future margin calls. On that date, the margin call payable was $1,629,675.

[246] The Bank urges me to find that notice that margin calls would not be funded was previously provided to management at PG; that at a minimum, PG had notice because it was aware that the Bank had refused to fund the margin call for C &M four days earlier.

[247] The Bank also asked that I find that PG knew and accepted that whether the Bank would fund a margin call on any given day was a decision the Bank would make on that day. That argument is best addressed in the analysis below dealing with the nature and scope of the banking relationship by February 2008.

[248] PG was in excess of its authorized borrowing limits according to the loan margin formula from November 21, 2007 to and including February 24, 2008. On each occasion that a margin call was due during that period, RBC advanced funds by way of wire transfers to F.C. Stone.

[249] The Bank did not draw a line in the sand with PG by which it gave advance notice that its margin calls would not be funded beyond a particular date. Similarly, the Bank did not communicate to PG that it would no longer fund margin calls above a certain amount or beyond a certain credit limit below the $33 million. I have already rejected the Bank’s evidence that PG was so informed on February 19 during the conference call.

[250] I find that no notice was given to PG of the Bank’s intention to refuse to fund PG’s margin calls prior to Mr. Chang’s telephone conversation with Mr. Wilson after 5 p.m. on February 26, 2008. That management common to both borrowers knew that RBC had refused to fund a margin call for C & M four days earlier is not notice to PG that the Bank intended to do the same to PG on February 26.

[251] Simply put, there was no advance notice to PG that the Bank would not fund its margin call on February 26, 2008 just as it had for the past three plus months.

Hedges Unwound

[252] PG decided to unwind all of its hedges as a result of the position taken by the Bank. Frankly, it had little choice but to do so since it could not fund the margin call due without credit from the Bank. Thus, on February 27, 2008, its hedge positions were liquidated and PG became unhedged. Its margin maintenance accounts were reduced to zero and PG still owed F.C. Stone $1,159,000.

[253] Mr. Wilson testified that PG consulted with Mr. Whewell of F.C. Stone and decided to liquidate all hedges at once. He observed that if PG remained partially hedged and grain prices rose again, it would potentially owe even more money for margin calls which it could not fund.

[254] I observe that on February 26, no had a crystal ball to foresee that grain prices would decline. Both Mr. Dia and Mr. Wilson made their respective decisions in anticipation that grain prices would continue to rise or, at a minimum, could do so.

[255] Once PG liquidated its hedges, PG was at risk of significant losses if the grain prices declined, which they did. The timing of the Bank’s decision not to advance funds for payment of margin calls and the liquidation of the hedges could hardly have been worse. Starting February 27, 2008, grain prices declined from record highs. Like their rise, the decline was not entirely linear as some days prices went up, but overall, the trend was downward. If hedged, that decline would have resulted in substantial margin monies returned to PG and thereby the Bank.

[256] As discussed above, there is a correlation between grain prices in the futures market (on the exchanges) and the price of grain in the cash market. The decline in grain prices in the futures market meant a corresponding drop in the value of grain in inventory in the cash market. Thus, the value of the grain held by PG to secure its indebtedness to RBC also eroded as grain prices fell. Without hedges, that erosion had no safety net; the Bank’s risk increased substantially. This risk was known or should have been known to the Bank through the advice it received from, among others, Mr. Whewell and Mr. Corneil.

[257] Likewise, the Bank knew or should have known that if unhedged, PG stood to lose its investment already paid for futures contracts and would suffer losses from the drop in grain prices in the cash market; its insurance against that risk was gone. PG was walking the high wire without a net. This position was made clear to Mr. Chang and Mr. Hall in telephone conversations with Mr. Wilson prior to Mr. Dia’s decision.

Re-hedging

[258] On February 27, 2008, Mr. Wilson spoke by telephone with Mr. Chang and Mr. Hall about re-hedging as soon as possible. He desperately emailed Mr. Chang and others at the Bank as well as Mr. Corneil, seeking funding to re-hedge, especially in spring wheat where PG had a large part of its inventory. He outlined to the Bank the cost of doing so and drove home the cost/risk of continuing to be unhedged. He wrote: “What is important to understand is that the same financial loss to both Palmerston Grain and RBC when the market moves limit down if we remain unhedged is that same $5,232,500 each day that we remain unhedged.”

[259] Mr. Wilson set out PG’s plan to further liquidate inventory to reduce its exposure.

[260] Mr. Hall emailed Mr. Dia on February 28, 2008 to seek approval to advance funds to pay the initial maintenance margins to re-hedge “old crop” only and subsequent margin calls. He noted PG’s efforts to reduce its exposure on its old crop obligations. On that date, PG owed the Bank $29.524 million. It had margined inventory of $18.582 million and margined accounts receivable of $2.608 million. In short, PG was still off-side the margin formula by $8.334 million.

[261] Despite the continued non-compliance with the margin formula and other defaults, on February 28, 2008, only two days after the decision not to fund the margin call due, Mr. Dia in Special Loans decided to advance new funding of up to $6.6 million to re-hedge in the futures market.

[262] Mr. Chang indicated that this decision to advance new funds to re-hedge was an entirely different transaction and did not amount to recognition by the Bank that it had made a mistake on February 26. I disagree. By February 27, only a day after the refusal to advance funds, the effects of liquidation of the hedges were being realized. The risks the Bank was warned of were already happening, with consequences not only for PG but the Bank as well.

[263] This transaction cannot be considered in isolation. Looked at in the context of the events which led to the decision not to fund the margin call on February 26 and what immediately flowed from that decision, the new funds signified a reversal of Mr. Dia’s initial decision.

[264] I find that the decision to advance these new funds came principally from the Bank’s internal assessment of its risk, not out of benevolence or concern for PG’s losses. A light of understanding turned on: the Bank recognized that the value of its security in inventory held by PG was unprotected from the market decline in grain prices and its exposure to non-payment was rising.

[265] Mr. Wilson testified that when he first learned that Special Loans was to take over management of PG’s accounts, it was portrayed as a positive for PG; Special Loans would bring added expertise and assistance. Mr. Campbell testified that a transfer to Special Loans was not bad news for a customer because Special Loans had added experience and time that it could bring to bear to help a customer in trouble. However, Mr. Chang testified that: “…when a file comes into Special Loans our mandate is to maximize the recovery of the bank’s exposures, and we will do whatever it takes for us to do that.”

[266] The new advance was to purchase hedges for old crop only; viz. the funds were not to be used to purchase hedges for forward contracts. In short, the Bank was advancing PG new money to protect inventory it could realize upon if necessary. The new funding also paid the outstanding account owing to F.C. Stone.

[267] Mr. Wilson coordinated the wire of funds from the Bank to F.C. Stone to pay the arrears owing and to re-hedge. Because of delays at F.C. Stone in processing the funds advanced which threatened to defer the re-hedging by another day, Mr. Wilson urgently made alternate arrangements to place the hedges with RBC Dominion and to have the excess already advanced to F.C. Stone returned.

[268] On February 28, 2008, PG began re-hedging from the funds newly advanced by RBC. The number of new hedges purchased does not correspond with the number of hedges liquidated. The Bank contends that notwithstanding PG’s agreement that the use of the funds was limited to old crop, PG used the additional credit provided by the Bank to re-hedge some of its forward contracts. PG disputes this contention but it is clear that PG “over-hedged” old crop as a guard against being fully unhedged on forward contracts.

[269] C & M’s hedges were not replaced; viz. no re-hedging occurred.

CIT Closing and RBC Gap Loan

[270] On March 4, 2008, Mr. Wilson met with Mr. Dia and others from Special Loans. His objective was to convince the Bank to permit him to re-hedge new crop. In that meeting, Mr. Wilson indicated that closing the CIT financing would be more difficult because of the losses suffered by PG when the hedges were liquidated and he asked whether the Bank would be willing to consider a small loan. Mr. Dia signalled that the Bank would consider holding such a loan.

[271] Discussions continued between Mr. Wilson and Mr. Chang regarding funding for hedges for new crop but ultimately, the Bank did not agree to do so. It did not fit the Bank’s risk profile. By early March 2008, it was clear that PG could not close its financing deal with CIT. Mr. Wilson attributed that inability to the losses caused by the Bank’s decision not to fund the margin call on February 26, 2008.

[272] In May, 2008, discussions continued on a new $7 million loan which was referred to in the evidence as the “gap loan”. The purpose of this new loan was to bridge PG’s finances to permit it to close its financing with CIT and FCC. That refinancing with CIT would see the Bank paid out most of what it was owed, with the new loan repayable over a set period.

[273] During the discussions on the gap loan, a dispute arose. PG became aware that the Bank had been charging an increased interest rate during the period it was out of its loan margins. The Bank was charging prime plus 5%.

[274] In early July, Mr. Wilson prodded Mr. Hall to finalize the interest overcharge issue and move ahead with the gap loan.

[275] On July 8, 2008, the Bank produced a loan facility letter for the gap loan.

[276] On July 11, 2008, PG and RBC entered into a $7 million gap financing agreement. The loan permitted the CIT financing to close. By its terms, PG was to pay interest at the Bank’s business prime rate until June 30, 2009. From July 1, 2009 to June 30, 2010, interest accrued at prime plus 1%. Thereafter, interest accrued at prime plus 2%.

[277] The gap loan was repayable on the following schedule:

1. $1 million on June 30, 2009

2. $1 million on or before October 15, 2010

3. $1 million on or before October 15, 2011

4. $1 million on or before October 15, 2012, and

5. The remaining indebtedness on or before May 8, 2013.

[278] PG paid interest on the gap loan of $640,074 between July 2008 and March 2012.

[279] Both parties led evidence on damages including expert evidence. I will deal with that evidence to the extent necessary as part of the analysis below.

Plaintiffs’ Position

[280] The plaintiffs assert that RBC was required to provide reasonable notice if it was not going to advance funds for margin calls. That obligation arose as a matter of contract, pursuant to a duty of care owed to the plaintiffs or pursuant to a limited fiduciary duty to have regard for the plaintiffs’ interests. RBC failed to do so, thereby causing damages when PG and C & M were forced to liquidate their respective hedges.

[281] In contract, the plaintiffs advance four arguments, three of which assume that the loan agreements signed by the parties continued to apply, in which case RBC must rely upon the “discretion clause” to justify its refusal to advance funds for the margin calls. The fourth argument contends that there was a new agreement which arose by course of conduct.

[282] Under the heading “Availability”, the September 13, 2007 and October 19, 2007 loan agreements with PG provided that:

“The Borrower may borrow, convert, repay and re-borrow up to the amount of this facility provided this facility is made available at the sole discretion of the Bank and the Bank may cancel or restrict the availability of any unutilized portion at any time and from time to time.”

The same provision is found in the December 5, 2007 loan agreement between RBC and C & M.

[283] The plaintiffs maintain that this is the contractual provision RBC must rely upon for its decision not to fund the margin calls for each plaintiff in February, 2008.

[284] If the loan contracts continued to govern the contractual relationship between the parties and that clause applies, the plaintiffs argue that:

1. This discretion clause must be given a reasonable commercial interpretation. On its face, that clause would entitle RBC to refuse to advance funds on the operating lines of credit the day after signing these agreements for no commercially sound reason which would likely destroy each company as an operating business. Such a draconian result requires precise contractual language. Requiring “reasonable notice” creates a reasonable balance of commercial interests between the parties;

2. A term requiring “reasonable notice” is implied by law; and

3. As a matter of law, RBC must exercise its discretion in “good faith”. “Good faith” is the absence of “bad faith” which is “conduct that is contrary to community standards of honesty, reasonableness or fairness”. The decision not to fund the margin calls was unreasonable and thereby not made in good faith.

[285] In the alternative, the plaintiffs argue that the commercial relationship and banking arrangement in 2008 were defined by the course of conduct of the parties through 2007 – 2008. That course of conduct included their mutual dealings in the extraordinary circumstances of the historic rise of grain prices. If so, there was an obligation to provide reasonable notice to each plaintiff if RBC was going to refuse to advance funds for margin calls.

[286] The tort claim is based in negligence. The plaintiffs allege that there was sufficient proximity between the parties to recognize that negligence on RBC’s part could foreseeably damage the plaintiffs. A duty of care was owed by RBC to the plaintiffs. The banking arrangements in February 2008 did not exclude liability in negligence. The Bank’s decisions not to provide reasonable notice and not to wire the fund margin calls was unreasonable and a breach of the duty of care owed.

[287] Finally, the plaintiffs argue that the Bank’s exercise of the “discretion” created a limited fiduciary duty on RBC to take the plaintiffs’ interests into account when exercising that discretion.

[288] I note that plaintiffs’ counsel reiterated throughout the trial that the plaintiffs do not assert any reliance or detrimental reliance by the plaintiffs.

Defendant’s Position

[289] RBC asserts that the banking relationship between the parties in February 2008 continued to be governed by the loan agreements signed by the parties. It owed no express contractual obligation to provide reasonable notice of any decision not to fund margin calls, nor should such an obligation be implied. Similarly, RBC owed no duty of care or equitable duty, nor did it breach same. RBC was entitled to prefer its commercial interests and all times acted reasonably and appropriately.

[290] Alternatively, if it had an obligation to provide reasonable notice that it would not fund margin calls, it provided ample warning/notice to the plaintiffs. In any event, reasonable notice would have changed nothing; the plaintiffs could not fund the margin calls except through monies borrowed from RBC. They would have become unhedged regardless.

[291] RBC argues that by February 21 and 26, 2008, the loans made to the plaintiffs had expired or matured. Further, the plaintiffs were in default by virtue of their breaches of the loan agreements. The loans were by then demand loans. Any funds advanced by RBC to the plaintiffs in the face of their defaults and the expiry of the loan terms amounted to good faith indulgences to help a long-standing customer, and should not be construed otherwise.

Issues in Contract

[292] As mentioned, the plaintiffs advance their claims in contract, negligence and fiduciary duty. I will deal with the issues in the same order.

[293] The following issues arise in contract in this case:

1. Did the loan agreements continue to apply to the parties as at February 21-26, 2008? Put another way, what was the contractual arrangement which governed their banking relationship at that time?

2. Was RBC entitled to refuse to advance funds for, inter alia, margin call payments?

3. Was RBC obliged to give reasonable notice of its decision to refuse to advance funds for margin calls?

4. Did RBC give reasonable notice to the plaintiffs?

5. If not, and reasonable notice is required, what is the appropriate notice period?

6. What damages, if any, resulted from the failure to give notice? (I will deal with this issue after I address the claim in negligence and equity.)

[294] As I will explain, the claim by C & M stands on somewhat different footing than that of PG. As a result, I will deal first with the claim by PG, then address the above issues in relation to C & M.

[295] I turn now to the claim by PG in contract.

Did the loan agreements continue to apply to the parties as at February 21-26, 2008? What was the contractual arrangement which governed their banking relationship at that time?

[296] In Shelanu Inc. v. Print Three Franchising Corp., 2003 CanLII 52151 (ON CA), [2003] O.J. No. 1919 (ON CA), parties to a franchise agreement entered into an oral agreement that was at odds with the terms of the signed written franchise agreement. The written agreement contained an “entire agreement” clause that said that the entire agreement was set out in writing and could not be changed or added to except in writing. On appeal, the appellant asked the court to rely upon the entire agreement clause and ignore a subsequent oral agreement which it admitted had been entered into. At para. 54, Weiler J.A. for the court wrote:

“…Where the parties have, by their subsequent course of conduct, amended the written agreement so that it no longer represents the intention of the parties, the court will refuse to enforce the written agreement. This is so even in the face of a clause requiring changes to the agreement to be in writing. See Colautti Construction Ltd. v. City of Ottawa (1984), 1984 CanLII 1969 (ON CA), 9 D.L.R. (4th) 265 (Ont. C.A.), per Cory J.A.”

[297] The plaintiffs urge me to find that the parties effectively either amended or established a new lending arrangement by their course of conduct before and/or after December 31, 2007. That banking relationship rendered the loan margin formula redundant and was of indefinite duration pending new financing being concluded to pay out the monies loaned by the commercial banking unit of the Bank. On their theory, the critical cap was the aggregate lending limit of $33 million which they never exceeded and would not have exceeded by payment of the margin call on February 26, 2008.

[298] The Bank argues that the loan agreements continued to bind the parties after the loan facilities expired or reduced. The loans were then repayable on demand. The Bank never made demand for payment although it could have done so before and after maturity of the loans. Instead, the Bank accommodated PG’s ongoing financing needs on a day-by-day, case-by-case basis, with new credit approvals from Risk for each new margin call paid. It continued to lend to PG under the signed agreements in the hope and expectation that its debt would be repaid from another source, either the ABL Group at RBC or a third party lender like CIT.

[299] The determination of this issue is relevant to whether the Bank can rely, if necessary, on the discretion clause quoted above at para. 282 for its refusal to fund margin calls. If the signed loan agreements did not govern the banking relationship and a different arrangement governed based on course of conduct, then the discretion clause is moot and the right of the Bank to refuse to advance funds for margin calls must be assessed in light of the new or amended banking arrangement as at February 26, 2008.

[300] In this case, the loan agreements dated September 13, 2007 and October 19, 2007 required reductions in the credit facilities granted. Facility #1, a $19 million revolving demand loan, was to reduce to $10 million on February 1, 2008. Facility #2, a $14 million loan, was repayable in full by December 31, 2007. By February 26, 2008, no reductions or repayment had occurred. In my view, it cannot be disputed that according to the express terms of the September 13, 2007 and October 19, 2007 loan agreements, all or part of the loans extended by the Bank had expired or matured as of February 26, 2008.

[301] The September 13, 2007 loan agreement also contained a loan margin formula for Facility #1 that was intended to limit how much of the credit facility could be used by PG. That formula was more honoured in the breach than the observance. As of February 26, 2008, PG had been in continuous overdraw of its available credit according to the margin formula since November 21, 2007.

[302] In addition, the fact is that there were other breaches of the loan agreements in 2007 and 2008 which were known to the Bank; for example, the continued entry into forward contracts and the failure to inject additional capital to name but two. Despite these breaches and the expiry of the loan facilities, the Bank did not make demand for payment. Instead, the Bank continued to revolve credit to PG to and beyond February 26, 2008.

[303] Not only did the Bank fund margin calls by way of credit, it also served as the conduit for the transfer of funds to F.C. Stone’s broker account. The Bank wired the funds for margin calls to bring PG into good standing with its broker throughout the piece until February 26, 2008.

[304] Like Shelanu, the loan agreements contained “entire agreement” clauses and there is no suggestion of a written agreement between the parties that varied or replaced the loan agreements signed in September and October 2007. Although the Bank delivered at least one forbearance letter during the currency of the term of the credit facilities, PG did not sign the letter or agree to its terms. Those terms on their face would have altered the schedule for repayment of the loans, making the loans repayable sooner.

[305] I find that the signed loan agreements continued to bind the parties as at February 26, 2008. Even if it could be said that the loans had expired or matured, the parties by their conduct continued to govern their relationship in accord with the loan agreements. I do not agree that the September 13 and October 19 agreements were amended or replaced by a new banking agreement based on a course of conduct that differed in any material respect from that previously agreed to.

[306] In this regard, I note the following:

a. Although the loan agreements specified dates by which reductions and repayment were to occur, they contemplated an ongoing banking relationship. For example, Facility #1 was not repayable in full on February 1, 2008;

b. Nothing in the agreements specified that the agreements would cease to operate or bind the parties as at a specific date;

c. PG continued to use the Bank and these credit facilities for its business operations after December 31, 2007 and after February 1, 2008 including writing cheques just as it did before;

d. Both before and after December, 2007, PG could not simply send in a form to the Bank specifying the amount to be wired to F.C. Stone for margin calls, which was the practice earlier when PG was within its loan margin limits;

e. Ms. Gibbings regularly inquired and followed up with Ms. Lang as to whether funds would be wired to F.C. Stone even when the amount payable would not cause PG to exceed $33 million;

f. Ms. Lang continued to harass PG to do anything and everything it could to reduce its indebtedness to the Bank to get back within loan margins and, as indicated above, PG did much to try to satisfy the Bank’s demands in that regard;

g. Ms. Lang made ongoing credit approval requests to Risk for margin call advances, a fact which she made known to PG;

h. Ms. Lang’s need to obtain those approvals for margin calls caused some delays in payment which were also known to PG;

i. Ms. Lang continued to report internally to those higher up as to the extent of PG’s excess over the margined credit available;

j. The parties continued to have regular calls to monitor the Bank debt, and the efforts being taken by PG to sell inventory and generate cash just as they did before December 31, 2007; and

k. Significantly, PG never suggested to the Bank that the loan agreements no longer applied or that they had a different arrangement with the Bank, even immediately after the Bank communicated its decision on February 26, 2008.

[307] The ongoing dealings between the parties or course of conduct must be examined in the particular circumstances present here. From as early as September 2007, those in the commercial banking unit felt that its lending parameters did not meet PG’s credit needs, especially in the face of the rising grain market. Their actions from that point forward were driven to a large degree by the hope and expectation that the Bank’s ABL group would present a new financing proposal to PG that would replace the loans made.

[308] Ms. Paddock and others referred to ABL as the light at the end of the tunnel. They managed the banking relationship with a view to handing off PG as a client to another division of the Bank. No one expected the ABL process would be as lengthy and tortuous as it turned out to be. That process proved to be a colossal waste of time and money.

[309] By mid-February 2008, the Bank’s patience with PG had run out, hence the intention to tell PG that the Bank would no longer fund margin calls in the February 19 call. However, that communication never happened because PG came forward with news of the CIT offer to finance. The Bank then made the decision to continue advancing funds for margin calls expecting the debt would be repaid when that financing closed which was to be soon. When it appeared that the CIT deal could not close or would not close any time soon, the Bank reassessed its position given the significant amounts payable for margin calls.

[310] Simply put, in the short period of time between December 31, 2007 (the repayment date for Facility #2) and February 26, 2007, the parties continued to operate under the loan agreements as they had before December 31 with a view to new banking arrangements being put in place in the short term.

[311] This is not a case where the parties developed a manner of dealing over the course of time which could be said to reflect an intention by them to be bound to new or different contractual terms.

[312] The mere granting of indulgences by the Bank does not preclude the Bank’s right to insist upon compliance with the terms of the agreements between the parties or to rely on those terms for enforcement: John Burrows Ltd. v. Subsurface Surveys Ltd., 1968 CanLII 81 (SCC), [1968] S.C.R. 607 at paras. 15-18. Likewise, the fact that the parties act inconsistent with the strict terms of an agreement does not mean the parties are no longer bound by the terms of the contract: Jedfro Investments (U.S.A.) Ltd. v. Jacyk Estate, 2007 SCC 55 at paras. 19 and 28.

[313] PG relies on Thermo King Corp. v. Provincial Bank of Canada (1982), 1981 CanLII 1731 (ON CA), 34 O.R. (2d) 369 (C.A.) which held that a Bank that allowed a customer to use and carry an overdraft cannot suddenly, and without reasonable notice, refuse to permit the continued use of the overdraft consistent with their established course of dealing. The right to the use of the overdraft was established through course of conduct by the parties. That case is distinguishable on its facts.

[314] First, in Thermo King, the bank allowed the customer (Hamilton) to run an overdraft for three years, a far longer period than here. Second, by its conduct over a lengthy period the bank created an expectation in a third party, Thermo King – the supplier of the product- that the bank would deposit monies from customers to Hamilton’s account and honour payments to Thermo King for the product. It was Thermo King who sued the bank.

[315] I observe that the bank in Thermo King relied on collateral security (an assignment) it held to justify its appropriation of monies received from customers for products purchased through Hamilton; the appropriation of those monies came at the same time as the bank appointed a receiver-manager which was done entirely without prior notice to Hamilton. The appointment of the receiver-manager was effectively a without notice demand for payment of the monies owed to the bank. That is not this case.

[316] I will deal with the requirement, if any, for reasonable notice below. Insofar as course of conduct to modify or replace the loan agreements in this case is concerned, I find that the terms set out in the September 13 and October 19 loan agreements continued to bind the parties as at February 26, 2008.

Was RBC entitled to refuse to advance funds for, inter alia, margin call payments?

[317] On February 26, 2008 and earlier, PG was in breach of the loan agreements. The loans were demand loans; viz. the Bank was entitled to make demand for repayment by the terms of the loan agreements, because the loans had matured or as a consequence of PG’s breach of the agreements signed. Nothing in the loan agreements entitled PG to continued financing of its indebtedness beyond the dates set for repayment or when it exceeded its loan margins. The extension of credit by the Bank was an indulgence given to PG.

[318] The loan agreements contain a clause (see para. 282 above) which gave the Bank the discretion to refuse to allow PG access to any unutilized portion of the available credit. However, the invocation of that discretion by the Bank is only necessary where there is unutilized credit between what has been advanced and what PG would otherwise be entitled to access under the loan agreement. In other words, the Bank need rely on that clause only where there is credit still available to PG under the agreements.

[319] Available credit under the loan agreement is specifically restricted to the amount PG was entitled to borrow based on the loan margin formula. As already noted, PG was off-side that formula continuously from November 21, 2007 onward. There was no credit available beyond that which the Bank was prepared to extend on any given day. PG was in an overdraft position.

[320] Therefore, the Bank’s decision not to advance monies to pay F.C. Stone on February 26 should not be taken to be a step pursuant to the discretion clause; rather, it was a refusal to advance new credit to an already delinquent debtor.

[321] In Fifth Third Bank v. O’Brien, 2013 ONCA 5, the Court of Appeal upheld summary judgment granted by Penny J. against the guarantors of loans made by the bank. The guarantors argued that the bank had an obligation to forbear enforcement of its security and to continue to advance credit to the debtor pending sale of the debtor as a going concern. At paras. 12 and 13, the court quoted the motion judge and wrote:

“[12] The motion judge considered and rejected this argument, stating:

I do not think the concept of commercial reasonableness can or should be extended beyond collateral realization. It cannot be made to apply to the ability of the lender to insist on the debtor’s strict compliance with its obligations to the [Bank] under the agreements between them.

I agree with the [Bank] that to extend the duty of the [Bank] to act in a commercially reasonable manner when selling the debtor’s collateral to the [Bank’s] decision to rely on its contractual rights when making decisions whether to extend or whether to continue to extend credit, would be a fundamental change in the law and have a chilling effect [on] the willingness of financial institutions to extend credit. In any event, I do not understand how reliance on strict legal rights in the context of commercial lending between sophisticated parties who have been represented by counsel, absent intervening principles of equity such [as] estoppel and the like, could be regarded as commercially unreasonable. That is what the parties bargained for. [Italics in original]

[13] We agree. There was no requirement here that the Bank continue to extend credit to MPI, thereby increasing the Bank’s exposure on its credit facilities, when its loan agreements with MPI had expired and MPI’s indebtedness to the Bank remained unpaid.” [Emphasis in bold added]

[322] Similarly, in CIP Inc. v. Toronto Dominion Bank (1988), 1988 CanLII 3370 (BC CA), 55 D.L.R. (4th) 308 (B.C.C.A.), MacDonald J.A. for the court wrote at paras. 16 and 17:

“[16] …There is, I think, a fundamental difference between the situation of a creditor demanding payment and that of a bank facing the decision whether or not to increase indebtedness by advancing more money.

[17] Now, the appellant relies more particularly on the judgment of the Ontario Court of Appeal: Thermo King Corp. v. Provincial Bank of Canada …, a judgment delivered for the court by Wilson J.A., as she then was, and we were referred to p. 265 in which Madam Justice Wilson quoted from Paget’s Law of Banking, 12th ed., wherein this is stated:

“An overdraft is money lent: “A payment by a bank under an arrangement by which the customer has an overdraft is a lending by the bank to the customer of the money”. Per Harman J. in Re Hone (a bankrupt), [1951] ch. 85, at p. 89.”

and emphasis is put on this sentence in Paget: “A banker is not obliged to let his customer overdraw unless he has agreed to do so or” and the word ”or” is doubly emphasized, “or such agreement can be inferred from course of business.”

[323] The court in CIP upheld the decision below where the court found that there was no agreement and there was no course of dealing from which such an agreement could be inferred.

[324] In Barclay Construction Corp. v. Bank of Montréal, 1989 CanLII 5198 (BC CA), [1989] B.C.J. No. 2257 (B.C.C.A.), Gibbs J.A. wrote at p.4:

“... I do not understand it to be the law that when an account is overdrawn, which this one was to the extent of $65,000 above the approved credit maximum, and when the account is also out of margin, which this one was, the Bank is obliged, whatever the circumstances, to continue to honour checks thereby continually increasing a debt about which it has serious concerns which have been expressed to the customer….”

[325] I understand from these cases that there is no obligation on the Bank to extend or continue to extend additional credit to a customer that is overdrawn or whose loan has expired unless there is an agreement or a course of dealing from which it may be inferred that there is an obligation to do so. (See also Khoury Motors Ltd. v. Hepcoe Credit Union Ltd., [2003] O.J. No. 276 (S.C.J.) at paras. 60-61)

[326] I have already found that there was no agreement or a course of dealing which would give rise to such an obligation in this case. Accordingly, the Bank was under no contractual obligation to advance any funds to PG, much less monies earmarked for payment of its margin call to F.C. Stone in the amount of $1,629,625.

[327] I will address the arguments made by counsel for PG as to whether the discretion clause required provision of reasonable notice prior to its exercise. The discretion clause is, however, something of a red herring because the Bank need not rely upon it to justify its refusal to advance the monies for the margin call. The broader question is whether there was an obligation to provide reasonable notice in the circumstances regardless of the discretion clause.

Was RBC obliged to give reasonable notice of its decision to refuse to advance funds for margin calls?

[328] I will first examine whether the discretion clause permitted the Bank to refuse to advance funds for margin calls before considering whether that exercise of discretion required prior advance notice to PG.

[329] By the terms of the loan agreements, the Bank had the sole discretion to determine whether to make the facility available to PG, and could cancel or restrict the availability of any unutilized portion at any time. On its face, the Bank’s discretion was unrestricted; it could withdraw or limit PG’s use and access to credit on a whim and at any time without any notice whatsoever.

[330] The law is clear, however, that every contract is subject to the duty of good faith and the Bank must not exercise its discretion in a fashion that is capricious or arbitrary: Bhasin v. Hrynew, 2014 SCC 71 at para. 89. The Bank could not, for example, refuse access to credit because PG declined to attend a fund-raiser for the Bank manager’s favourite charity. A contractual discretion exercisable by one party to a contract can never be unfettered; it is always subject to the organizing principle of good faith: Graillen Holdings Inc. v. Orangeville (Town), 2016 ONSC 3687 at para. 74.

[331] The first question to be determined is whether the discretion is governed by a subjective or objective standard or both. In Greenberg v. Meffert (1985), 1985 CanLII 1975 (ON CA), 18 D.L.R. (4th) 548 (ON CA), Robins J. A. wrote at p. 554:

“Provisions in agreements making payment or performance subject to “the discretion”, “the opinion” or “the satisfaction” of a party to the agreement or a third party, broadly speaking, fall into two general categories. In contracts in which the matter to be decided or approved is not readily susceptible of objective measurement – matters involving taste, sensibility, personal compatibility or judgment of the party for whose benefit the Authority was given – such provisions are more likely to be construed as imposing only a subjective standard. On the other hand, in contracts relating to such matters as operative fitness, structural completion, mechanical utility or marketability, these provisions are generally construed as imposing an objective standard of reasonableness: see generally, 4 Hals., 4th ed., p.612, paras. 1198-9; Corbin on Contracts (1960), vol. 3A, ss. 644-48; Williston on Contracts, 3rd ed. (1957), ss. 657A, 675B; Hudson, Building and Engineering Contracts, 10th ed., (1970), chapter 7.”

[332] The discretion clause in some contracts imports both a subjective and objective element. I find that to be the case here. The subjective element pertains to the risk tolerance of the Bank. The objective element involves whether the matters relied upon by the Bank were relevant to risk.

[333] There can be no doubt that the decision of Mr. Dia was risk based. The Bank was being asked by PG to advance $1.6 million at a time when it was well outside its loan margins and it was uncertain when the refinancing with CIT would proceed if at all. Mr. Dia had no crystal ball to predict whether grain prices would continue to rise thereby necessitating further margin calls.

[334] PG argues that, in effect, advancing monies for the margin call posed no risk to the Bank and, in fact, protected the Bank. There is some merit to that argument on the evidence. Hedging was a prudent measure by PG. If prices of grain dropped, the Bank would receive back monies advanced for earlier margin calls.

[335] With the benefit of hindsight, Mr. Dia’s decision was a bad choice, but he did not have the luxury of hindsight. From the Bank’s perspective, it was being asked to advance what amounted to fresh credit; viz. additional lending when PG was overdrawn. It had no obligation to do so as I have stated above, even if the advance posed minimal risk.

[336] Moreover, even if I accept the argument by PG that paying the margin call would have posed no additional financial risk to the Bank, surely the Bank was entitled to say: “Enough is enough. You, PG, must comply with the loan agreement you signed and we will not lend more money until you do.”

[337] The Bank’s decision, even if ultimately a bad choice, is still one which it was entitled to make and did make for banking/credit reasons; viz. on a subjective standard as contemplated by the agreement.

[338] I must next consider whether Mr. Dia and the Bank were required to give notice to PG before implementing the decision to refuse to advance funds for margin calls. In other words, even if the Bank was entitled to exercise its discretion as it did, did the Bank act on that decision prematurely because it failed to give reasonable notice to PG?

[339] The discretion clause is silent with respect to notice. Briefly stated, PG argues that I should imply an obligation to provide reasonable notice because:

a. It is necessary to give the contract commercial efficacy;

b. It is an aspect of the Bank’s duty of good faith owed to PG; and

c. The obligation to give reasonable notice applies as a matter of law.

[340] The law recognizes an obligation on a bank to give a customer reasonable notice where

a. The bank makes demand for payment: Bank of Montreal v. Carnival National Leasing Ltd., 2011 ONSC 1007 at paras. 9, 13 and 15; Toronto Dominion Bank v. Pritchard, [1997] O.J. No. 3136 (Div. Ct.) at para. 6; Whonnock Industries Ltd. v. National Bank of Canada, 1987 CanLII 2644 (BC CA), [1987] 6 W.W.R. 316 (B.C.C.A.) at para. 11; Kavcar Investments Ltd. v. Aetna Financial Services Ltd., 1989 CanLII 4274 (ON CA), [1989] O.J. No. 1723 (C.A.) at p. 3 ; and/or

b. The bank terminates its relationship: Dionne v. Banque Canadienne Nationale, [1974] O.J. No. 829 (H.C.J.) at paras. 117-121; Skovsgaard v. Toronto-Dominion Bank, [1994] O.J. No. 2327 (Gen. Div.) at paras. 20-21.

[341] In this case, the Bank did not make demand for payment; in fact, it permitted PG to continue to access credit (borrow) for everything except margin calls. PG continued to write cheques which were honoured by the Bank. Similarly, the Bank did not terminate the banking relationship on February 26, 2008.

[342] A court may imply a term into a contract where it is necessary to give business efficacy to the agreement: Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC), 1987 CarswellOnt 760 (S.C.C.) at paras. 54-55. The applicable test is sometimes referred to as the “officious bystander” test; viz. had an officious bystander drawn the matter in issue to the attention of the parties, the parties would have agreed that the contract should provide for its resolution by the implied term. Put another way, the implied term is necessary to give effect to the reasonable expectations of the parties: Venture Capital USA Inc. v. Yorkton Securities Inc., 2005 CanLII 15708 (ON CA), [2005] O.J. No. 1885 (ON CA) at para. 31.

[343] PG argues that absent an obligation on the Bank to provide reasonable notice, the Bank could refuse to allow PG to revolve credit as intended by the agreement the day after the agreement was signed. That would frustrate the very object of the agreement. Accordingly, it is “necessary” to imply an obligation of reasonable notice to ensure the agreement works.

[344] I note first that the parties to this agreement are sophisticated. Both had legal representation or access to such advice before the agreements were signed. There is no evidence that either party addressed its mind to how and when this discretion could be invoked. It is not the case that I can infer from the evidence that the parties assumed reasonable notice would be given if this discretion clause was used, nor does the evidence support that they would have readily agreed to such a proviso if it had been drawn to their attention.

[345] I agree that the Bank knew at all times that PG was relying on the credit extended by the Bank to cash-flow its business operations. The reasonable expectation of the parties to the loan agreements was that PG would be able to use that credit for its business subject to the limits agreed upon and provided that PG complied with its obligations under the loan agreements. If PG did not comply with its obligations, it had to know that the provision of ongoing credit was at risk.

[346] The duty of good faith required that the Bank not exercise its discretion in a capricious and arbitrary manner (see para. 330 above) which obligation informs and safeguards PG from the very risk it cites as an example requiring the implied term.

[347] In my view, the test of necessity is not satisfied. I disagree that it is “necessary” to the fair and proper function of the loan agreement that the provision of reasonable notice be required as a precondition to or as incidental to the exercise of the Bank’s rights under this clause. The fact is that the Bank loaned money to PG and PG revolved credit as contemplated by the agreement. The credit arrangements between the parties worked without a “reasonable” notice provision.

[348] PG also argues that the duty of good faith imputes an obligation to act reasonably which requires the Bank to give reasonable notice. The decision by Mr. Dia may be a “bad choice” given what happened in the market immediately following; however, I find that decision was not so unreasonable as to amount to a lack of good faith.

[349] In any event, I do not agree that the duty of good faith requires that the Bank provide reasonable notice before the Bank is entitled to refuse to advance funds for payments made by the debtor in these circumstances. It must be emphasized that PG was not in compliance with the terms of the loan agreements and the loans were overdue. It had no obligation to advance further funds once default occurred and the loans were overdrawn.

[350] The corollary of PG’s argument that reasonable notice was required is that the Bank was required to advance credit during that notice period, however short it may be. On PG’s theory, the Bank was required to give notice and fund margin calls even though the Facility #2 loan was expired and unpaid and Facility #1 was unreduced and overdrawn according to the margin formula. That makes no practical sense and runs contrary to the reasonable expectations of the parties as reflected in the agreement. A term will not be implied where doing so runs contrary to the express terms of the agreement or the parties’ reasonable expectations: Agribrands Purina Canada Inc. v. Kasamekas, 2011 ONCA 460 at paras. 50-51.

[351] One could well contemplate an obligation on the Bank to give reasonable notice during the currency of the term of the loans where the debtor is in compliance with the loan agreements. That is consistent with the duty courts have recognized on a Bank to give notice to a customer if it intends to vary the banking relationship: HSBC Bank Canada v. 1100336 Alberta Ltd., 2011 ABQB 748 at para.XX, appeal dismissed 2013 ABCA 235; see also Raypath Resources Ltd. v. Toronto Dominion Bank, [1996] A.J. No. 398 (AB CA) at p.2; Thermo King, para. 36. That is not this case.

[352] I conclude that there is no implied term of reasonable notice that applied on February 26, 2008 in the circumstances.

Did RBC give reasonable notice to the plaintiffs?

[353] The short answer to this question is no. The Bank did not give notice to PG that it would stop advancing credit to pay margin calls before Mr. Chang called Mr. Wilson on February 26, 2008. It may be that PG knew or ought to have known that was a possible step the Bank would take; however, I find that no prior notice was given that the Bank would not fund PG’s margin calls.

If not, and reasonable notice is required, what is the appropriate notice period?

[354] If notice was required, I find that the period of notice applicable would be short – a matter of a week at most given the following:

a. The length of the banking relationship between the parties;

b. The status of the loans;

c. The CIT loan commitment and the timing to complete same;

d. The amounts potentially payable by PG for further margin calls if prices of grain continued to rise; and

e. The risk of non-payment to the Bank.

[355] I note that even if reasonable notice was required, the giving of notice does not carry with it the obligation on the Bank to ignore the terms of the loan agreements and its rights thereunder: Barclay Construction Corp. v. Bank of Montreal (1989), 1989 CanLII 5198 (BC CA), 65 D.L.R. (4th) 213 (B.C.C.A.) at para. 12; Bay Chaleur Construction (1981) Ltd. v. Caisse populaire de Shippigan Ltee, 1996 CarswellNB 595 (C.A.) at para. 9. The right to refuse to advance more credit to an overdrawn debtor is not trumped by the obligation to give notice.

Negligence Claim

[356] Absent a special relationship or exceptional circumstances, the relationship between a bank and its customer is that of creditor and debtor which is governed by the contract between them: Pierce v. Canada Trustco Mortgage Co., 2005 CanLII 15706 (ON CA), 2005 CarswellOnt 1876 (C.A.) at para. 27. A duty of care does not exist in connection with the making of the loan: Pierce, para. 27; Baldwin v. Daubney, 2006 CanLII 32901 (ON CA), 2006 CarswellOnt 5783 (C.A.) at paras. 13-14.

[357] The courts have also consistently rejected the existence of a duty of care on a bank to advance funds or fresh credit to a customer: 1239745 Ontario Ltd. v. Bank of America Canada, 1999 CarswellOnt 2665 (S.C.J.) at paras. 54-56; Bank of Montreal v. Bond, 1987 CarswellBC 2376 (S.C.) at para. 21; Bay Chaleur Construction, at para. 9.

[358] There is no doubt the Bank knew at all times that PG depended on the Bank to make credit available and to wire funds to pay PG’s margin calls. The Bank also knew the importance of the hedges to PG’s business and the potential consequences to PG if margin calls were not paid in a timely way. However, this knowledge does not import a duty of care on the Bank to continue advancing credit or to give notice to PG that it will no longer advance further credit for such payments.

[359] I do not doubt that a claim might be advanced in contract and/or negligence if the Bank had agreed to fund the margin calls and through error, failed to make the required payment. There was no such agreement or undertaking here. There was not even a undertaking or representation by the Bank that it would give PG advance warning if it was going to refuse to fund margin calls.

[360] PG knew the loans had expired or matured. It knew it was in breach of the terms of the loan agreements. It knew the Bank was unhappy with the continued entry into contracts for new crop. It knew the Bank was distressed about the length of time and the extent to which PG was outside its loan margins. It assumed the risk that the Bank would continue to lend and advance credit for, inter alia, margin calls. Certainly, PG or its principals could have made other financing arrangements to ensure the margin calls were paid and did not.

[361] I find that no duty of care existed which required the Bank to provide notice or to fund ongoing advances to pay margin calls. Accordingly, the claim in negligence fails.

Fiduciary Duty Claim

[362] In Baldwin v. Daubney, the Ontario Court of Appeal dealt with whether a fiduciary duty is owed by a bank to advise the borrower about the advisability of the loans he sought. The court wrote at para. 15:

“Finally, we reject the submission that the respondent financial institutions owed the appellants a fiduciary duty to advise them adequately about the loans. Again, we do so for the reasons given by the motion judge. At paras. 65 to 66 of the reasons, he explains:

It is well-established in the case law that the ordinary relationship of lender and borrower does not involve or give rise to a fiduciary duty on the part of the lender towards the borrower. See Mastercraft, supra, at p. 284 in paras. 47 to 49; also Anand v. Medjuck, [1995] O.J. No. 2571 (Gen. Div.) at p. 43 at para. 40 and Bank of Montréal v. Witkin, supra, at paras. 54 and 55 and 59 to 61.

The reason there is no fiduciary duty is simple. A fiduciary duty arises where a relationship between the parties, such as a 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 the lender and the 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.”

[363] Similarly, in Canadian Imperial Bank of Commerce (CIBC) v. De-Jai Holdings Inc., [1993] O.J. No. 640 (Gen. Div), appeal dismissed [1997] O.J. No. 1672 (C.A.), the guarantors argued that where a customer relies on a bank for financing to operate its business, and where the customer has given the Bank security on all that it owns, the Bank is subject to a fiduciary duty to act fairly vis-à-vis the customer and not to prejudice the interests of the customer. At paras. 38 and 39, Simmons J. wrote:

“Here, the fundamental relationship between the C.I.B.C. and De-Jai was that of lender and borrower. Although it is clear that De-Jai relied upon financing from the bank to enable it to carry on its day-to-day operations, there was in my view, no express or implied undertaking on the part of the bank to continue to provide funding for an indefinite period of time. The loans between the C.I.B.C. and De-Jai were structured as “demand” loans. The terms letter provided for a credit review. Although Mr. Johnson apparently assumed that De-Jai would always qualify for credit, that is not an assumption a customer of a bank is in my view entitled to make. Although an agreement to lend money payable on demand made today may give rise to obligations concerning notice of intention to withdraw the loan at some time in the future, that agreement made today does not of itself give rise to an obligation to agree to continue that loan in the future.

This is not a situation where the Bank undertook to give any advice to its customer, nor a situation where the Bank was in receipt of any confidential information from its customer which it in any way abused. Although it had provided a general security agreement to the C.I.B.C., De-Jai was free to negotiate alternate financing with another financial institution at any time using the same security so long as it negotiated sufficient funding to pay out the C.I.B.C..…”

At para. 42, Simmons J. found that the relationship between the CIBC and De-Jai was no more than lender and borrower. There was no fiduciary relationship.

[364] For a fiduciary duty to be owed, there must be an underlying fiduciary relationship. I find that the relationship between PG and the Bank was that of borrower and lender only. The Bank was entitled to consider and place its financial interests ahead of those of PG. The fact that payment of the margin call would potentially benefit the Bank through the protection hedging provided does not elevate the relationship between the parties to a fiduciary one, even a limited fiduciary relationship.

[365] Accordingly, no fiduciary duty was owed. The claim for breach of fiduciary duty is rejected.

[366] Before I turn to damages, I will address the claim by C & M.

C & M’s Claim

[367] As at February 21, 2008, the day RBC refused to pay C & M’s margin call payment to F.C. Stone, C & M was close to its credit facility limits. To make that margin payment, it needed an increase in credit from RBC. There was no agreement nor any course of dealing to make that additional credit available; in fact, an internal credit authorization request was made by Ms. Lang for a “bulge” but the authorization was never granted.

[368] RBC had no obligation to extend additional credit: CIP Inc. v. Toronto Dominion Bank, at paras. 16 and 17; 1239745 Ontario Ltd. v. Bank of America Canada, para. 54.. Ms. Lang made clear to Ms. Gibbings that C & M had $120,000 in available credit on its operating line with the Bank, subject to any outstanding cheques. That C & M stood to lose its hedges does not impose an obligation on RBC to extend more credit.

[369] In those circumstances, RBC cannot have owed an obligation to give notice that it would not pay margin calls for C & M. There cannot be an obligation on a bank to give notice to a customer that it will refuse to advance funds and make a payment to a third party where the customer lacks sufficient funds in its account and does not have sufficient available credit with the bank to cover that payment absent an agreement or obligation which arises by course of conduct. There was no agreement and no course of conduct vis-à-vis C & M to support such an obligation.

[370] I find that:

1. RBC had no obligation to give notice to C & M that it would not pay a margin call that exceeded C & M’s available credit and funds;

2. No duty of care existed that would require notice be given in these circumstances;

3. No fiduciary relationship existed and no fiduciary duty existed that would require the advance of additional credit or notice;

4. Even if notice was given, the outcome would have been the same: the collapse of C & M’s hedges on that date because the giving of notice does not require the extension of new, further credit. C & M lacked the available credit and funds to pay what was owed to F.C. Stone; and

5. It is not RBC’s responsibility to manage C & M’s business to ensure it had enough available funds to pay its bills.

[371] As a consequence, I find that the claim by C & M has no merit and is dismissed.

[372] Before I deal with damages, I observe that the defendant asked that I draw an adverse inference from the failure to testify by any of the principals of the plaintiffs. I decline to do so. Key management personnel who were directly involved with the Bank at the relevant time testified. I am not convinced that the principals of PG had anything material to add to the evidence adduced.

What damages, if any, resulted from the failure to give notice?

[373] I find that there are no damages given that there was no obligation to give notice and in any event, the giving of notice would not require that further credit be extended to PG or C & M.

[374] Had the Bank given notice to the plaintiffs but refused to make available any further credit, the plaintiffs would have been in exactly the same position: unable to pay the margin calls due.

[375] I find that PG’s failure to abide by the terms of the loan agreements, to live within its means, placed PG in a vulnerable position such that the amount of margin call payable was higher - it included margin calls for future crop contracts - and PG lacked the available capital and/or credit to pay F.C. Stone. PG had a financing commitment in hand as early as December 2007. If the Bank’s attitude and approach to credit was insufficient to meet PG’s needs, it ought to have been more diligent in putting other financing in place sooner.

[376] Notwithstanding my conclusions, I will consider what damages accrued to PG on the assumption that there was a duty to give reasonable notice, that notice was at least the 7 days indicated above and the Bank was obliged to advance credit during the notice period.

[377] The plaintiffs’ expert, James Hoare, estimated damages under two different theories of loss:

1. Scenario 1: The actual loss on grain hedges between February 27, 2008 (the date the hedges were removed) and the date the Bank advanced funds to PG to re-hedge. This scenario does not consider losses in the cash market, if any, or the loss on hedges for new crop which were not re-entered;

2. Scenario 2: The loss on hedges between the date the hedging contracts were initially entered and February 27, 2008 when the hedges were removed.

[378] Mr. Hoare testified that Scenario 1 assumes a linkage between the futures market and cash market; viz. the value of inventory on hand (in the cash market) and the price of a hedge (futures contract) are connected or related. In this scenario, he simply looked at the difference between what it cost the plaintiffs to buy (go long in the futures market) back the hedges so as to liquidate those hedges on February 27, 2008 on the one hand, and on the other hand, what it cost to re-hedge old crop (go short in the futures market) when the Bank advanced further credit. He calculated that loss to be $3,139,469.

[379] Scenario 2 compares what it cost PG to initially acquire the hedges that it held on February 26 (to go short in the futures market) and what it cost PG on February 27 to buy back those hedges (to go long in the futures market). Mr. Hoare calculated that it cost the plaintiffs $9,522,539 more to buy back the futures contracts on February 27 than what the contracts initially cost.

[380] Mr. Hoare added the following to the amounts calculated under both scenarios:

a. Interest on old crop $84,574

b. Interest on RBC gap loan $640,074

c. Professional fees – RBC gap loan $170,222.

[381] I have already indicated earlier in these reasons that there is a link between the cash market and futures market. The link is not exact in that one cannot directly trace each grain purchase to a specific futures contract. Nevertheless, the price of grain is tied directly to the grain prices set by the exchanges and the entire purpose of hedging is to mitigate the risk of declines in grain prices over time.

[382] I find that Scenario 2 is not a proper measure of damages because:

a. It ignores the linkage between the cash market and futures market;

b. If futures prices have gone up, there is a corresponding rise in the value of grain in inventory; and

c. As for hedges of new crop where there is no inventory on hand, those contracts were entered into by PG against the wishes of the Bank and contrary to the loan agreements.

[383] Turning to Scenario 1, the plaintiffs ask that I find that having given even modest notice to PG, the Bank would have either extended the same new financing of $6.6 million or continued to fund hedges. In other words, Scenario 1 contemplates that even if the Bank gave notice that it would no longer fund margin calls, the Bank would have reversed that decision and continued to extend credit for margin calls as it did. I disagree.

[384] If the Bank gave 7 days notice to PG that it would no longer fund margin calls, that would only have deferred the collapse of the hedges and the loss which results from liquidation of the hedges. I am not persuaded that in those circumstances, the Bank would have rescinded the decision not to fund margin calls. That requires speculation which I am not prepared to make on the evidence before me.

[385] In these circumstances, the measure of loss is limited to the amounts that PG would have received from the broker for margin rebates as the price of grain fell in the seven days against which one must offset the amount payable for margin calls in that period including the amount payable on February 26. The additional amounts added by Mr. Hoare at para. 380 above are not recoverable as damages.

[386] If there is a loss at all, it is modest. I am unable to calculate it and would direct a reference to determine the amount if the parties are unable to agree on the amount.

Conclusion

[387] I conclude as follows:

a. The defendant did not owe an obligation to provide reasonable notice or any notice to the plaintiffs of its decision not to extend credit to pay margin calls;

b. In any event, the defendant had no obligation to extend credit or to advance funds to either plaintiff for margin calls on February 21 or 26, 3008, respectively;

c. The plaintiffs’ action is dismissed;

d. If the parties cannot agree on costs, they may make written submissions not exceeding 15 pages within 30 days of the release of this decision.

“Justice R. Raikes”

Justice R. Raikes

Released: April 27, 2017

CITATION: XPG v. Royal Bank, 2017 ONSC 2598

COURT FILE NO.: 457/10

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

XPG, a partnership and C & M Seeds Manufacturing Inc.

Plaintiffs

– and –

Royal Bank of Canada

Defendant

REASONS FOR JUDGMENT

Raikes, J.

SCJ

Released: April 27, 2017