Court File and Parties

COURT FILE NO.: CV-17-71415 MOTION HEARD: 20190822 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: BISHARA ELIAS and NEHME HAGE ELIAS, Plaintiffs AND: PERCY JOHN VAN ZANTEN and PANAMA STAR PETROLEUM and GISELE FRIEDRICH, Defendants

BEFORE: Master Kaufman COUNSEL: James Katz, Counsel, for the Plaintiffs Richard P. Bowles Counsel, for the Defendants Percy John Van Zanten and Panama Star Petroleum HEARD: August 22, 2019

REASONS FOR DECISION

[1] Mr. Van Zanten founded Panama Star Petroleum Corporation (Panama Star), a corporation that was intended to trade and sell oil. He invested heavily in that company and he convinced many business associates, friends and family to invest large sums of money. By August 2015, Panama Star was under significant pressure from its joint venture partners to raise more money. The plaintiffs offered to loan Panama Star $300,000 US if Mr. Van Zanten’s personally guaranteed the loan.

[2] Mr. Van Zanten felt enormous pressure to provide the guarantee in order to salvage the business and safeguard all investors’ investments. Unfortunately, Panama Star could not repay the loan. The plaintiffs commenced an action against Panama Star and Mr. Van Zanten, jointly and severally, to recover the money loaned.

[3] Mr. Van Zanten raises the defence of economic duress. The first issue in this summary judgment motion is whether Mr. Van Zanten’s defence raises a genuine issue requiring a trial. The second issue is whether the plaintiffs are entitled to pre and post-judgment interest when the personal guarantee covered the principal amount of the loan and not the interest.

Principles applying to motions for partial summary judgment

[4] This action was commenced by statement of claim on January 26, 2017. The claim was amended on August 1, 2017 to add Giselle Friedrich as a defendant. The claim against Ms. Friedrich concerns a transfer of a matrimonial home, which the plaintiff’s claim is a fraudulent conveyance. Accordingly, this motion is for partial summary judgment.

[5] A party may seek summary judgment on all or part of a claim, and the court shall grant the motion if it is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence.[^1] There will be no genuine issue requiring a trial when the Court is able to reach a fair and just determination on the merits of a motion for summary judgment. This will be the case when the process allows the Court to make the necessary findings of fact, allows the judge to apply the law to the facts, and is a proportionate, more expeditious and less expensive means to achieve a just result.[^2]

[6] Motions for partial summary judgment can undermine the Court’s objective of ensuring access to justice. They delay the resolution of the main action, may be used tactically to wage a war of attrition, are expensive, may be appealed, and they add to judges and masters’ workloads on matters that do not dispose of the action. Because the record on such motions is not likely to be as expansive as the record at trial, there is a danger of inconsistent findings. As a result, motions for partial summary judgment should be reserved for matters that can readily be bifurcated from those remaining issues in the main action, and can be dealt with expeditiously and in a cost effective manner.[^3]

Does Mr. Van Zanten’s defence raise a genuine issue requiring a trial?

[7] The defendants do not dispute that the plaintiffs collectively advanced Panama Star the sum of US $300,000 minus $6,000 Canadian dollars which were used to purchase shares in Panama Star. The defendants also concede that Mr. Van Zanten executed a convertible debenture agreement which contained a personal guarantee for the repayment of the principal amount. They also admit that Panama Star has defaulted on its obligations to the plaintiffs, and that the plaintiffs have made demand on the indebtedness.

Background to Mr. Van Zanten’s personal guarantee

[8] The only defence that the defendants raise with respect to the personal guarantee is that of economic duress. Mr. Van Zanten’s evidence is that he joined a joint venture which provided him an opportunity to participate in the trading and sale of oil by investing substantial sums in a Cypriot corporation called Hanse Oil Holding Limited. The main architects of this business opportunity were Mr. Mehmet Colak and the Nault brothers. Four other companies had been incorporated to join the venture, and each one had to raise funds to secure its access to Hanse Oil.

[9] Mr. Van Zanten joined the venture in April 2015. He invested $750,000 into the venture secured in part by a $494,000 mortgage against the matrimonial home. Mr. Van Zanten also received large sums from his family members and business associates. Mr. Van Zanten says that despite these large investments, the Naults and Mr. Colak repeatedly told him by the summer of 2015 that further funds were required, failing which all the investments made by the joint venture members risked being lost.

[10] In May 2015, Mr. Colak told Mr. Van Zanten that the plaintiffs had US $300,000 available to invest. Mr. Van Zanten says that in the months of May and June 2015, Mr. Colak had frequent conversations with him about the plaintiffs and the need to get them to invest. In June 2015, the plaintiffs told Mr. Van Zanten that they were interested in investing but they requested a personal guarantee from Mr. Van Zanten. No other investors received personal guarantees.

[11] On August 5, 2015 the plaintiffs purchased shares in Panama Star. Mr. Van Zanten says that after the share purchase, Mr. Colak contacted him almost daily to press upon him the need to raise more funds for the joint venture, and to have these funds secured through a personal guarantee. Mr. Van Zanten says that he initially rejected that option, but eventually capitulated under pressure from Mr. Colak, the Naults and the plaintiffs.

[12] The plaintiffs entered into convertible debenture agreements with Panama Star. Pursuant to paragraph 8.3 of the agreements, Mr. Van Zanten became personally liable for the principal amount of the loan (and not interest).

[13] Before entering into the convertible debenture agreement on August 28, 2015, Mr. Van Zanten provided the plaintiffs with a letter from Scotia Bank which stated that Mr. Van Zanten had the personal capacity to provide $400,000 should it be needed. Scotia Bank vouched without hesitation for his financial ability to back with personal guarantee funds in that amount.

[14] Mr. Van Zanten believes that Mr. Colak made the plaintiffs aware of his personal circumstances, his own investments and the investments of his friends and family, which made him vulnerable to pressure. He says that he later found out that the plaintiffs purchased shares in another joint-venture member without requiring any kind of additional security.

[15] Mr. Colak provided an affidavit in support of Mr. Van Zanten. Mr. Colak confirms that he has known the plaintiffs for a long time, that all the joint-venture corporations were trying to raise funds to move to joint-venture forward, that he arranged a fund-raising meeting with the plaintiffs and Mr. Van Zanten and that he pressed Mr. Van Zanten to provide a personal guarantee, without which the plaintiffs would not invest. Mr. Colak swears that after months of pressure from himself and the plaintiffs, Mr. Van Zanten gave in and signed the personal guarantee.

[16] In February 2016, the plaintiffs agreed to extend the loan’s maturity date to August 29, 2016. By April 2016, Mr. Van Zanten told the plaintiffs that Panama Star was not able to repay the loans. Mr. Van Zanten offered to increase the rate if interest in exchange for a further nine months’ extension. The plaintiffs declined.

[17] On November 29, 2016, the plaintiffs sent a demand letter through their counsel by which they requested repayment of their loan. On December 2, 2016, Mr. Van Zanten responded that Panama Star was at a crucial stage in development leading up to the commencement of trading. He said it was impossible for it to make any payments at this time without financially crippling the corporation and preventing further progress. He concluded by stating that although he wished to honour the personal guarantees, he had leveraged all his personal assets in order to keep the corporation viable and existing, such that there are no monies available at this time to make any sort of payment to the plaintiffs.

Elements of economic duress

[18] The law does not lightly set aside contracts reached by parties having contractual capacity.[^1] Duress can be a basis to render an otherwise valid contract unenforceable. To succeed in that defence, Mr. Van Zanten must show that (1) he faced a pressure which the law does not regard as legitimate and (2) the pressure was applied to such a degree as to amount to "a coercion of the will".[^2]

[19] The applicable factors to determine if Mr. Van Zanten’s will has been coerced are: (1) did he protest? (2) Was there an alternative course open to him? (3) Was he independently advised? and (4) After entering the contract did he take steps to avoid it?[^3]

[20] Finally, even where all these elements are present, when a defendant subsequently affirms the agreement, the defence of duress is no longer available.[^4]

Analysis

[21] I would have found that there were genuine issues requiring a trial on the question of whether Mr. Van Zanten’s will was coerced. Mr. Van Zanten admitted that he took no steps to avoid the personal guarantee until he filed his statement of defence. Although he is a lawyer himself, Mr. Van Zanten did not receive independent legal advice. On the other factors, the evidence was contested and the Court would not have been able to reach a fair and just determination on the merits on this record.

[22] However, Mr. Van Zanten must also demonstrate that the pressure was illegitimate, and I conclude that whatever pressure he felt to offer a personal guarantee was not illegitimate. Contrary to Mr. Van Zanten’s submissions, there are no credibility issues requiring a trial because I accept Mr. Van Zanten’s evidence with respect to the nature and the amount of the pressure he felt to sign the personal guarantee. Accepting his evidence, I find that there is no genuine issue requiring a trial because the pressure exerted was legitimate.

[23] Moreover, I find that the issue of whether Mr. Van Zanten’s liability for his personal guarantee can be readily severed from the other issue in this litigation (alleged fraudulent conveyance) such that there is no prospect for inconsistent findings.

The pressure was legitimate

[24] The requirement for illegitimacy is meant to differentiate between legitimate commercial pressure and illegitimate coercion. Pressure will be clearly illegitimate where a party threatens conduct that constitutes a crime or a tort. In some cases, a lawful act, such as threatening a breach of contract, may cross the line separating legitimate from illegitimate pressure. Another indicator of illegitimate pressure is where one party abuses its bargaining position to obtain disproportionately favourable terms.[^5]

[25] I find that the pressure Mr. Van Zanten felt was legitimate because it was the normal sort of commercial pressure that occurs in business. Mr. Van Zanten placed himself in a situation where he desperately required additional funds to safeguard Panama Star’s survival, his personal investment and those of his friends and family. The plaintiffs did not create this situation and were under no obligation to fix the problems Mr. Van Zanten created.

[26] Mr. Van Zanten alleges that the plaintiffs had received confidential information from Mr. Colak to the effect that Mr. Van Zanten was so heavily invested in the company that he could not afford to turn down their proposed investment. That evidence is based on conjecture, and I note that Mr. Colak, who provided an affidavit in support, does not confirm it. But even if that was true, the fact remains that the plaintiffs were under no obligation to loan $300,000 US to Panama Star and they could have easily walked away to look for another investment opportunity. It is common for lenders to request personal guarantees, and generally borrowers only provide them when they have no other options. Moreover, there is nothing unconscionable about the terms of the guarantee, which only covered the principal amount of the loan and not the interest.

[27] The plaintiffs did not obtain a disproportionate benefit from the transaction. In fact, Panama Star received something of great value from the plaintiffs: an investment expected to enable Panama Star to meet its financial obligations to the other joint venture members. As Mr. Van Zanten states in his affidavit, he had been led to believe that Panama Star “was on the cusp of finalizing the entire venture which would have seen the money start to flow into the venture rather than flow out”.

Confirmation of the agreement

[28] In the event I am wrong in concluding that the pressure was legitimate and that there is no genuine issue requiring a trial on this point, I would have allowed the motion on the additional basis that Mr. Van Zanten confirmed the personal guarantee on December 1, 2016.

[29] Where a party subsequently confirms an agreement, the defence of economic duress is no longer available. In Stott v. Merit Investment Corp.[^6], the plaintiff was a salesperson who had been pressured by his superiors to absorb losses sustained by one of his clients. The losses had been caused by one of the plaintiff’s supervisors. The plaintiff’s position was that he should not be liable for these losses, but he signed an agreement accepting responsibility under pressure from his supervisors, who threatened him with dismissal from the firm and told him that it would be difficult for him to find other employment. The Court of Appeal for Ontario agreed that the elements of economic duress had been met as his will was coerced and the pressure was illegitimate. Nonetheless, because the plaintiff’s subsequent conduct essentially affirmed the agreement, the defence of economic duress was no longer available.

[30] When the plaintiffs’ counsel demanded the repayment of loan, Mr. Van Zanten replied: “although I wish to honour the personal guarantee given to your clients, I have leveraged all my personal assets in order to keep the Corporation alive and existing”. I conclude that Mr. Van Zanten thereby affirmed and approved the personal guarantee given to the plaintiffs.

Are the plaintiffs entitled to pre or post-judgment interest?

[31] Mr. Van Zanten argues that, because Mr. Van Zanten only guaranteed the principal amount of the loan, pre and post-judgment interest is not payable. He relies on paragraph 128(1)(g) and subsection 129(5) of the Courts of Justice Act[^7], which provide that interest shall not be awarded where “interest is payable by a right other than under this section”. Mr. Van Zanten argues that the debenture agreement provided that the personal guarantee did not cover interest and that therefore the plaintiffs’ right to interest is zero under that agreement.

[32] I am not persuaded by this submission. Paragraph 128(1)(g) and subsection 129(5) contemplate a situation where another rate of interest is applicable, either pursuant to contract or legislation. In this case, the plaintiffs agreed that Mr. Van Zanten would be responsible for the principal portion of the loan, which would be repaid upon maturity. At maturity, the plaintiffs were entitled to repayment of their loan. Had it been repaid, they would have been able to invest that money and generate interest.

[33] Under subsection 128(1) of the Courts of Justice Act, a person entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest thereon at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order. Accepting Mr. Van Zanten’s argument would have the effect of depriving the plaintiffs of the interest they could have earned had the loan been repaid as agreed. It would have the perverse effect of rewarding borrowers who fail to repay interest free loans at maturity because there would be no consequence for the late payment.

[34] I conclude that the plaintiffs are entitled to pre and post-judgment interest in accordance with the Courts of Justice Act.

Order

[35] The plaintiffs’ motion is granted. They are entitled to an Order for payment of an amount sufficient to purchase $200,000 USD (Bishara Elias) and $100,000 USD (Nehme Elias) at a bank in Ontario listed in Schedule 1 to the Bank Act (Canada) at the close of business on the first day on which the bank quotes a Canadian dollar rate for the purchase of foreign currency before the day payment of the obligation is received, minus $4,000 Canadian dollars (for Bishara Elias) and $2,000 Canadian dollars (Nehme Elias) on account of share certificates that were purchased in Panama Star, together with pre and post-judgment interest calculated in accordance with the Courts of Justice Act.

[36] The plaintiffs are entitled to costs of the motion, which I fix in the amount of $10,000 including HST and disbursements.

Master Kaufman Date: September 10, 2019

[^1]: S.A. v. A.A., 2017 ONCA 243, at para 26. [^2]: Gordon v. Roebuck, 1992 CanLII 7443 (ON CA), 9 O.R. (3d) 1,|[1992] O.J. No. 1499 (ONCA). [^3]: Ibid. [^4]: Stott v. Merit Investment Corp., 1988 CanLII 192, 63 O.R. (2d) 545, [1988] O.J. No. 134 (ONCA). [^5]: S.A. v. A.A., 2017 ONCA 243, at para 30. [^6]: Stott v. Merit Investment Corp., 1988 CanLII 192, 63 O.R. (2d) 545, [1988] O.J. No. 134 (ONCA). [^7]: R.S.O. 1990 Chap. C-43.