CITATION: The Bank of Nova Scotia v. Scholaert, 2017 ONSC 5960

COURT FILE NO.: CV-15-542193

DATE: 20171005

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: THE BANK OF NOVA SCOTIA

AND:

RUDY SCHOLAERT ALSO KNOWN AS RUDY N. SCHOLAERT

BEFORE: FAVREAU J.

COUNSEL: Randy Schlieman Shaun R. Singh

for the Plaintiff for the respondent

HEARD: August 29, 2017

ENDORSEMENT

Introduction

[1] The plaintiff, the Bank of Nova Scotia (the "Bank"), brings a motion for summary judgment in respect of guarantees on loans granted to Mimoza International Inc. ("Mimoza"). The defendant, Rudy Scholaert also known as Rudy N. Scholaert ("Mr. Scholaert"), does not dispute that Mimoza defaulted on the loans. However, Mr. Scholaert argues that the Bank made an improvident sale of Mimoza's assets, and that the Bank is therefore not entitled to the amount claimed. Mr. Scholaert argues that the issue of improvident sale requires a trial, and cannot be decided on a motion for summary judgment.

[2] For the reasons that follow, the Bank's motion for summary judgment is granted. I am satisfied that the record before me allows me to make a just and fair determination of the case, and that a trial is not necessary to determine whether there was an improvident sale in this case. The defendant has failed to meet its burden of proving that whether the Bank's sale of Mimoza's assets was improvident is a triable issue.

[3] I also dismiss the defendant's counterclaim. Besides the fact that the defendant's evidence does not support the claim of improvident sale, the defendant does not have standing to assert such as a claim.

Events giving rise to the claim and counterclaim

[4] Mimoza owned and operated a Second Cup franchise at 65 Front Street East in Toronto.

[5] The Bank made two loans to Mimoza that were guaranteed by Mr. Scholaert:

a. On August 14, 2013, pursuant to a Credit Agreement, the Bank granted a term loan to Mimoza in the principal amount of $160,425.00 with interest to accrue at the Bank's prime rate of interest plus 2.25% (the "Loan"). Mimoza was to make monthly principal payments on the Loan in the amount of $1,337.00. As security on the loan, Mr. Scholaert gave a personal guarantee limited to the amount of $40,106.00, with interest to accrue from the date of demand at the Bank's prime rate plus 2.25% per year; and

b. On August 14. 2013, the Bank also granted Mimoza a line of credit in the amount of $20,000.00 with interest to accrue at the Bank's prime rate of interest plus 1.25% per year payable on demand (the "Line of Credit"). Mr. Scholaert gave a personal guarantee on the Line of Credit with interest to accrue from the date of demand at the Bank's prime rate of interest plus 1.25%.

[6] As additional security on the Loan and the Line of Credit, Mimoza granted the Bank a security interest in all of Mimoza's present and future personal property, including inventory and equipment. The agreement with the Bank allowed the Bank to dispose of the assets as follows:

We are entitled to seize or foreclose and take the property which is the security for your indebtedness. If we do, we will consider the indebtedness to be repaid to the extent required by law.

We can choose how to deal with the property once we can realize. We are entitled to realize at any time after you default on any requirements of the agreement or we have demanded payment and you have failed to pay in full. We are only required to give you the notice required by law.

We can sell the property in any way we choose, including private sales and auctions. We may purchase the property for ourselves in any sale process and we can accept deferred payments terms in any sale.

If we sell the property, we may apply the proceeds of the sale to the costs and expenses including without limitation receivership costs and legal fees on a solicitor and his/her own client basis, and then to repay our obligation to us as we determine. After that, we will pay you any remaining amount as required by law.

You must pay any remaining amount if the proceeds from the sale or the value of the property seized is not enough to repay your entire obligation to us. We are only required to be reasonable in the sale, seizure or foreclosure process. We are not required to get the best price or wait to sell if the market is not good. (emphasis added)

[7] In mid-October 2015, The Second Cup Ltd. (the "Franchisor") terminated its franchise agreement with Mimoza, and advised the Bank of the termination.

[8] By November 2015, Mimoza was in default on the Loan and Line of credit. At that time, Mimoza owed the Bank $127,807.62 on the Loan and $21,094.01 on the Line of Credit. On November 12, 2015, the Bank made a demand to Mr. Scholaert pursuant to his personal guarantees, but Mr. Scholaert did not make the payments requested.

[9] The Bank then engaged the services of an accredited appraiser, Adam Burnett of Corporate & General Liquidators and Auctioneers Inc., to attend Mimoza's business location at 65 Front Street East in order to conduct an inventory and appraisal of Mimoza's assets. The inventory was completed on December 1, 2015. In a report dated December 2, 2015, the appraiser listed the assets, and indicated that the "distress value" of the assets was $7,200.00 and $21,600.00 if the assets were sold as a "going concern".

[10] The Bank then entered into negotiations with the Franchisor, and, on December 10, 2015, the Bank sold its interest in the assets to the Franchisor for $30,000.00.

[11] Ultimately, the Bank did not receive any proceeds from the sale of the assets as the Canada Revenue Agency had a priority charge of more than $30,000.

Position of the parties

[12] The plaintiff commenced this action on December 8, 2015, seeking payment of the amounts guaranteed by Mr. Scholaert pursuant to the Loan and Line of Credit.

[13] The defendant disputes that the plaintiff is entitled to payment arguing that the plaintiff made an improvident sale of Mimoza's assets. The defendant also asserts a counterclaim to seek recovery of the amounts he claims were lost due to the improvident sale. In support of his position that the asset sale was improvident, Ms. Scholaert relies on the following:

a. He claims that Mimoza entered into an "Asset Purchase Agreement" in the amount of $149,000 in the month prior to its default on the loan, which he says demonstrates that the assets sold by the Bank were worth far more than $30,000;

b. He relies on an appraisal dated July 12, 2016, that values Mimoza's assets at $124,250.00; and

c. He argues that the Bank allowed the Franchisor to use some of Mimoza's assets before they were appraised, which means that there were fewer assets available by the time they appraised and sold than when Mimoza defaulted on the Loan and Line of Credit.

[14] In response to the defendant's position that the sale was improvident, the Bank asserts that:

a. The Bank's conduct was commercially reasonable;

b. The defendant's evidence on the value of the assets is inadmissible, and the evidence the Bank has put forward is the only admissible evidence regarding the value of the assets; and

c. Even if I were to accept the defendant's evidence on the value of the assets, the defendant's debt to the Bank would be unaffected because Mimoza's indebtedness to the Bank would still exceed the amount of Mr. Scholaert's guarantees under the Loan and the Line of Credit.

Analysis

[15] Given that the defendant concedes that Mimoza defaulted on the loan, the only issue between the parties is whether the sale of Mimoza's assets was an improvident sale. For the purposes of summary judgment, I must determine whether this issue can be justly and fairly decided without a trial.

Test on motion for summary judgment

[16] Under subrule 20.04(2) of the Rules of Civil Procedure, summary judgment is to be granted if the Court is satisfied that there is no genuine issue requiring a trial.

[17] As set out by the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7, at para. 49, there will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits using the summary judgment process. This is the case when the process: "(1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result."

[18] On a motion for summary judgment, the judge should first determine if there is a genuine issue requiring a trial based on the evidence before him or her without using the fact-finding powers in subrule 20.04(2.1). If there appears to be a genuine issue requiring a trial, Rule 20.04(2.1) permits the motion judge, at his or her discretion, to: (1) weigh the evidence, (2) evaluate the credibility of a deponent, or (3) draw any reasonable inference from the evidence unless it is in the "interest of justice" for these powers to be exercised only at trial: Hryniak v. Mauldin, supra, at para. 66. The summary judgment motion judge is also permitted to use the expanded powers under Rule 20(2.2) to direct a procedure such as a mini-trial, rather than a full trial.

[19] On a motion for summary judgment, the parties may not rely on the prospect that additional evidence may be tendered at trial; parties must put their best foot forward: Sweda Farms Ltd. V. Egg Farmers of Ontario, 2014 ONSC 1200 (Ont. S.C.J.), at para. 26, aff'd 2014 ONCA 878 (Ont. C.A.), leave to appeal to SCC refused, [2015] S.C.C.A. No. 97 (S.C.C.)

[20] As held by Perell J. in Levac v. James, 2016 ONSC 7727, at para. 132:

Hryniak v. Mauldin does not alter the principle that the court will assume that the parties have placed before it, in some form, all of the evidence that will be available for trial. The court is entitled to assume that the parties have advanced their best case and that the record contains all the evidence that the parties will present at trial: Dawson v. Rexcraft Storage & Warehouse Inc., 1998 CanLII 4831 (ON CA), [1998] O.J. No. 3240 (Ont. C.A.); Bluestone v. Enroute Restaurants Inc., (1994), 1994 CanLII 814 (ON CA), 18 O.R. (3d) 481 (Ont. C.A.); Papaschase Indian Band No. 136 v. Canada (Attorney General), 2008 SCC 14, [2008] 1 S.C.R. 372 (S.C.C.) at para. 11. The onus is on the moving party to show that there is no genuine issue requiring a trial, but the responding party must present its best case or risk losing: Pizza Pizza Ltd. V. Gillespie (1990), 75 O.R. (2d) (3d) 423 (Ont. Gen. Div.), aff'd [1007] O.J. No. 3754 (Ont. C.A.).

Was the sale of Mimoza's assets improvident

[21] In deciding whether to grant summary judgment in this case, I must be satisfied that a trial is not necessary to decide the issues raised by the defendant in support of his position that the sale was improvident.

[22] The agreement between Mimoza and Bank gave the Bank broad latitude in selling Mimoza’s assets, but required the Bank to be “reasonable in the sale”.

[23] The test developed by the Court of Appeal for Ontario for determining whether there has been an improvident sale is whether the party making the sale "has taken reasonable precautions to obtain the true market value of the property as of the date of the sale": Centurion Farms Ltd. v. Citifinancial Canada Inc., 2013 ONCA 79 at para. 4.

[24] In Bank of Montreal v. Zaffino, 2013 ONSC 3090 (Sup. Ct.) at para. 39, this Court confirmed that the defendant has the burden of demonstrating that there is a triable issue on a motion for summary judgment where a defence of improvident sale is raised:

A defendant who relies on a defence of improvident sale must place evidence before the court demonstrating that a triable issue as to whether the sale was improvident. It is not sufficient to criticize the receiver's marketing efforts (see Royal Bank of Canada v. 2021847 Ontario Limited, supra), or to simply advance a theory (see Arts v. Samu, 2004 CanLII 34584 (C.A.)).

[25] In Bank of Montreal v. Zaffino, supra, at paras. 36-37, this Court reviewed the duties imposed on a mortgagor when selling a property under a power of sale. Presumably, the same duties apply in a case such as this one, where assets over which a lender has security are sold:

Oak Orchard Developments Ltd. v. Iseman, [1987] O.J. No. 361 (H.C.); aff'd [1989] O.J. No. 2394 (C.A.) contains a helpful review of the authorities and summary of the mortgagee's duties.

Mr. Justice Saunders enumerated those duties as follows:

1. A mortgagee selling under a power of sale is under a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. This does not mean that the mortgagee must, in fact, obtain the true value;

2. The duty of the mortgagee is only to take reasonable precautions. Perfection is not required. Some latitude is allowed to a mortgagee;

3. In deciding whether a mortgagee has fallen short of his duty, the facts must be looked at broadly and he will not be adjudged to be in default of his duties unless he is plainly on the wrong side of the line;

4. The mortgagee is entitled to exercise an accrued power of sale for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting, a higher price could be obtained;

5. The mortgagee can accept the best price he can obtain in an adverse market provided that none of the adverse factors are due to fault on his part;

6. Even if the duty to take reasonable precautions is breached, the mortgagor must show that a higher price would have been obtained but for the breach in order to be compensated in damages.

[26] In HSCBC Bank Canada v. Kupritz, 2011 BCSC 788 (Sup. Ct.) at para 36, the British Columbia Supreme Court emphasized that the evidence of an expert in valuation is required to demonstrate that a sale has been improvident:

In practical terms, this onus of proof requires the debtor to establish both that the secured party departed from industry norms, and that a higher price would have been obtained if the secured party had done what is considered to be reasonable in that particular sector or industry. Generally, meeting that burden will require the debtor to provide expert evidence on the industry standard against which the debtor's allegation of substandard conduct can be measured. However, it will not always be the case that expert evidence is required; in some cases the conduct of a secured party may so obviously depart from commercial common sense that evidence of what was done alone will suffice. Although it is not clear from the reasons for judgment, Case Credit Ltd. v. Rhodan Contracting Ltd., 2004 BCSC 1783, may have been such a case. But I do not find, as the defendant suggests, that Case Credit stands for the proposition that the secured party has the burden of proving it acted in a commercially reasonable manner.

[27] In this case, I am satisfied that summary judgment is appropriate and Mr. Scholaert's defence of improvident sale does not raise a triable issue.

[28] The Bank acted reasonably in the circumstances. After being advised that Mimoza's franchise agreement with the Franchisor was terminated, the Bank retained an accredited appraiser to conduct an appraisal of the assets. The Bank was able to sell the assets for more than the amount at which they were appraised. As held in Bank of Montreal v. Zaffino, supra, the Bank is not held to a standard of perfection, but, rather, is only required to act reasonably.

[29] The defendant has not discharged its burden of demonstrating that the issue of improvident sale raises a triable issue. The requirement that the respondent on a motion for summary judgment put his or her best foot forward is clear. The defendant cannot defeat the motion through inadmissible or speculative evidence, or with the promise that issues raised can be fully canvased and decided at trial. Yet, that is precisely what the defendant has done in this case.

[30] In his first affidavit, Mr. Scholaert speculates "It is my position that the Bank improvidently sold the Assets", but he has failed to adduce admissible or persuasive evidence in support of that proposition:

a. The "Asset Purchase Agreement" he relies on is not an expert report. More importantly, it predates Mimoza's default on the Loan and Line of Credit, and there is no evidence as to what happened to the agreement or why it did not go through. In any event, on its face it encompasses far more than the assets available to the Bank and sold by the Bank to the Franchisor. Essentially, what was to be sold under this agreement was an operating business which is very different from the assets available after the franchise agreement was terminated. What was to be sold was described as follows and notably explicitly excluded Mimoza's debts:

Subject to the terms and conditions hereof, the Vendor agrees to sell, and the Purchaser agrees to purchase all of the franchise license rights, rights to the Premises, assets and other rights of the Business located at the premises. The premises shall specifically include all equipment, furniture, signage, store supplies, leasehold improvements, goodwill and any other assets of the Business (including those assets listed in Schedule A ), save and except for the cash float on hand and bank accounts. For avoidance of doubt, this sale expressly excludes any and all financial obligation incurred by the Vendor to banks, financial institutions, suppliers, vendors and public tax authorities.

b. The July 12, 2016 appraisal relied on by the defendant is attached to the plaintiff's own affidavit and does not qualify as an expert report. As was held by this Court in Toronto Dominion Bank v. Schrage, 2009 CanLII 45444 (ON SC), [2009] O.J. No. 3636 (Sup. Ct.), wherein the Court was dealing with a motion for summary judgment in which the issue of improvident sale was raised "[o]n a motion for summary judgment the court is entitled to insist on sworn evidence and, in the case of experts, that the evidence be given by the expert and not filtered through the hearsay evidence of the party." Even if I were to accept that the document appended to Mr. Scholaert's is properly before the Court, it would fail to establish that the Bank undervalued Mimosa's assets. The document at issue is a one page letter dated July 12, 2016, from a chartered accountant stating "In May of 2016 I provided you with a book valuation … of $131,257 for the assets of Mimosa International Inc. I am revising this value to $124.450 as my original calculation included additions of a previous year in error". The letter goes on to state that the "undepreciated capital cost" for the "Leasehold Improvements" is $87,806 and the "Café Equipment" is $36,644. There is no information about the purpose for which the document was prepared, the source of the information on which the accountant based these numbers or whether the assets at issue (especially the leasehold improvements) would have been available to the Bank for resale.

c. In a second affidavit, the defendant claims that "it is my position that some of the assets had been disposed of prior to the valuation obtained by the Plaintiff". The only supporting evidence for this statement is the defendant's further speculation that the Bank permitted the Franchisor "to use and potentially re-deploy or transfer assets belonging to Mimoza International Inc. to other Second Cup Ltd. Locations" and that "the Plaintiff failed to take an inventory with serial numbers of the assets of Mimoza International Inc. at the time of default". However, the defendant does not identify the source of his belief nor does he identify which assets he claims the Franchisor was improperly allowed to take prior to the inventory. As was held in Toronto Dominion Bank v. Schrage, supra, para. 35:

A self-serving affidavit is not sufficient to create a triable issue in the absence of detailed facts and supporting evidence: Guarantee Company of North America v. Gordon Capital Corporation, above; Vine Hotels Inc. v. Frumcor Investments Ltd. (2004), 2004 CanLII 45966 (ON SCDC), 73 O.R. (3d) 374, [2004] O.J. No. 4997 (Div. Ct.). Self-serving affidavits that merely assert defences without providing some detail or supporting evidence are not sufficient to create a genuine issue for trial: Rozin v. Ilitchev (2003), 2003 CanLII 21313 (ON CA), 66 O.R. (3d) 410, [2003] O.J. No. 3158 (C.A.).

[31] Accordingly, in my view, the defendant has not met his burden of demonstrating that the defence of improvident sale raises a triable issue.

[32] Even if this were a viable defence, I accept the plaintiff's argument that such a defence would still not relieve the plaintiff of his debt to the Bank. The total amount of Mimoza's debt at the time the motion was heard was approximately $160,000. The amount owed to the Canadian Revenue Agency was over $30,000, and the Bank's legal and professional expenses associated with sale were approximately $10,000. Therefore, even if the assets could have been sold for approximately $120,000 based on the July 12, 2016 valauation, only approximately $80,000 would have been available to reduce Mimoza's debt. This would still leave around $80,000 owed by Mimoza to the Bank, which is more than the amount guaranteed by Mr. Scholaert which is $61,200.01.

Counterclaim

[33] The defendant advances a counterclaim based on the allegation of improvident sale. As found above, the defendant has not put forward evidence that supports a finding that the allegations of improvident sale raise a triable issue. Even if he had done so, any losses suffered due to an improvident sale would be Mimoza's losses, and not Ms. Scholaert's losses, and therefore Mr. Scholaert does not have standing to assert this claim. Accordingly, there is no basis for the counterclaim.

Conclusion

[34] I am satisfied that I can make a just and fair determination of this matter based on the evidence available on the motion and the submissions of counsel. Given that the defendant acknowledges that Mimoza defaulted on its obligations under the Loan and Line of Credit, the only issue in dispute is whether the sale of Mimoza's assets was improvident. The defendant has not met its evidentiary burden and has failed to demonstrate that the sale was improvident. Accordingly, there is no genuine issue for trial and there is no need for me to exercise my powers under Rule 20.04(2.1) and Rule 20(2.2) of the Rules of Civil Procedure.

[35] The plaintiff is entitled to judgment as follows:

a. Payment in respect of the guarantee on the Loan in the amount of $40,106.00;

b. Pre-judgment interest on the sum of $40,106.00 from November 12, 2015, to today's date at the Bank's prime rate of interest in effect from time to time plus 2.25% per annum, and post-judgment interest at the prime rate of interest in effect from time to time plus 2.25% per annum.

c. Payment in respect of the guarantee on the Line of Credit in the amount of $21,094.01; and

d. Pre-judgment interest on the sum of $21,094.01 from November 12, 2015, to today's date at the Bank's prime rate of interest in effect from time to time plus 1.25% per annum, and post-judgment interest at the prime rate of interest in effect from time to time plus 1.25% per annum.

[36] The defendant's counterclaim is dismissed.

[37] The plaintiff is entitled to its costs in the amount of $7,000.

FAVREAU J.

Date: October 6, 2017