COURT FILE NO.: CV-17-588646

DATE: 20200310

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Madison Joe Holdings Inc.

Plaintiff

– and –

Mill Street & Co. Inc., All Source Security Container MFG. Corp., Roy Murad and Noah Murad

Defendants

AND BETWEEN:

Mill Street & Co. Inc., All Source Security Container MFG. Corp., Roy Murad and Noah Murad

Plaintiffs by Counterclaim

– and –

Madison Joe Holdings Inc.

Defendant by Counterclaim

Jason M. Berall, for the Plaintiff (Defendant by Counterclaim)/Moving Party

Micheal Simaan, for the Defendants (Plaintiffs by Counterclaim)/Responding Parties

HEARD: September 17, 2019

Kimmel J.

Reasons for decision

Overview and Summary of Outcome

[1] Between July 2014 and December 2016, Mill Street & Co. Inc. (“Mill Street”) acquired 100% of All Source Security Container Mfg. Corp. from Madison Joe Holdings Inc. (“MJH”).[^1] Mill Street did this through two share purchase transactions. The first share purchase agreement was for a 50% interest in All Source. It was completed in July 2014. The second share purchase, for the remaining 50% interest, was completed in December 2016.

[2] Part of the purchase price was to be satisfied through three promissory notes given by All Source to MJH. These promissory notes were guaranteed by Mill Street and its two principals, Noah and Roy Murad (the “Guarantors”). The Toronto-Dominion Bank financed the balance of the purchase and provided an operating loan to All Source. As part of this financing, TD Bank, MJH and All Source entered into an Inter-Creditor and Subordination Agreement dated December 16, 2016 by which they agreed to certain limitations being placed on when All Source could make, and MJH could receive, payments on the promissory notes without the consent of TD Bank.

[3] When this action was commenced, there was a dispute about whether there had been a default under two of the promissory notes (and a resulting cross-default under the third, Note B). The parties agree that, after the action was commenced, All Source stopped paying interest under the third promissory note. The defendants contend that the interest default under Note B is not pleaded and cannot be relied upon. In the meantime, the specified maturity dates of all three of the promissory notes expired. According to the defendants, the TD Bank advised them that it would not allow any of the payments requested by the plaintiff at the maturity of any of the promissory notes.

[4] The issues raised on this summary judgment motion depend upon the interpretation of the inter-related contracts: the share purchase agreement, the promissory notes, the guarantees and the Inter-Creditor Agreement.

[5] The first question that I must decide is what All Source’s obligations to MJH were upon the maturity of each of the promissory notes (whether in the ordinary course or as a result of acceleration of the principal amounts due upon default) in respect of the repayment of the principal amounts and/or payment of monthly interest while the principal remained unpaid. Related to that, I must decide whether All Source was restricted by the Inter-Creditor Agreement from making payments of principal and/or of monthly interest to MJH.

[6] The second question I must decide is whether, even if All Source is precluded by the Inter-Creditor Agreement from fulfilling any of its obligations in respect of the repayment of the principal amounts and/or payment of monthly interest under the promissory notes, the Guarantors are liable to pay those amounts.

[7] Other issues were raised in this action and counterclaim arising from Mill Street’s acquisition of All Source from MJH. However, the parties have agreed to have the court decide by summary judgment only the questions that will determine MJH’s entitlement to claim under the promissory notes and guarantees for the principal amounts representing the balance of the purchase price payable for that acquisition, and its entitlement to claim for the monthly interest on the outstanding balances. They have settled and agreed to the dismissal of all of the other claims between them. I am satisfied that this is an appropriate case in which to determine by summary judgment these remaining claims.

[8] For the reasons that follow, I find that the Inter-Creditor Agreement restricts All Source from repaying the principal but not the monthly interest under the promissory notes, which is payable both before and after the maturity of the notes. The Inter-Creditor Agreement does not shield the Guarantors from their joint and several obligations to pay the principal amounts and monthly interest payable under the promissory notes. Accordingly, the plaintiff is entitled to judgment against All Source and each of the Guarantors, Mill Street, Noah Murad and Roy Murad, for the monthly interest payments under the promissory notes from the date of last payment to present. The principal amount owing under each of the promissory notes is over-due. The plaintiff is entitled to judgment against the Guarantors, but not All Source, for the principal amount of each promissory note. The plaintiff’s claim for punitive damages is dismissed.

Summary Judgment Analysis

[9] Rule 20.04 directs that the court shall grant summary judgment if:

a. the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or a defence; or

b. the parties agree to have all or part of the claim determined by a summary judgment and the court is satisfied that it is appropriate to grant summary judgment.

[10] The framework for determining summary judgment motions comes from the Supreme Court of Canada in the case of Hryniak v. Mauldin (2014 SCC 7, [2014] 1 S.C.R. 87, at para. 7). It requires that the judge be confident that the court has the evidence to make the factual findings required to adjudicate the dispute (by applying the law to the facts) and to reach a fair and just determination on the merits. The question to ask is whether there is a genuine issue “requiring a trial” and whether it is in the interests of justice for the judge to use the fact-finding powers to decide that issue. This can be considered in light of the goals of timelines, affordability, and proportionality.

[11] The procedure to be followed on a motion for summary judgment prescribed by the Supreme Court in Hryniak is in two stages:

a. the judge should first determine if there is a genuine issue requiring a trial based only on the evidence before him or her without using the fact-finding powers in sub-rule 20.04(2.1).

b. 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, at para. 66.

[12] The parties have agreed in this case to have the plaintiff’s claims on the promissory notes and on the guarantees determined by summary judgment. Their starting premise is that there are no material facts in dispute but, to the extent necessary, they want me to use the fact-finding powers in Rule 20.04(2.1) to make any necessary findings of fact in order to do so. Having considered their detailed written and oral submissions, I am satisfied that it is appropriate to do so.

[13] Where I consider it to be necessary, I have utilized the expanded fact-finding powers available to me under Rule 20.04(2.1) and have determined that a trial can be avoided by the use of those powers, thereby leaving no genuine issue requiring a trial (See Trotter v. Trotter, 2014 ONCA 841, at paras. 72 and 74-75; see also 2212886 Ontario Inc. v. Obsidian Group Inc., 2018 ONCA 670, at para.34). It would not be in the interests of justice to defer the fact-finding exercise to a trial when I am able to make the necessary findings to make those determinations on the record before me now.

[14] In doing so, I am entitled to assume, and have assumed, that each side has put its best foot forward with respect to the evidence and that no other or additional or better evidence would be led at trial. See, for example, Sweda Farms Ltd. v. Egg Farmers of Ontario, 2015 ONSC 1200, at paras. 26-27, aff’d 2014 ONCA 878 and Da Silva v. Gomes, 2018 ONCA 610, at para. 18, cited recently by me in Lotin v. Gregor, 2019 ONSC 1510). The parties have reinforced this by their representations to the court that they are satisfied that all relevant materials have been placed before the court and that they consider this to be an appropriate case for summary judgment.

Relevant Contracts and their Factual Matrix

Mill Street’s Acquisition of All Source and the Governing Contracts

[15] The share purchase agreements, promissory notes and guarantees pursuant to which this acquisition was completed are commercial documents, that were negotiated with the assistance of counsel for both sides.

a) The Share Purchase and Financing Arrangements

[16] All Source is in the business of manufacturing and distributing document destruction containers. Mill Street acquired a 50% interest in All Source from MJH in July 2014 and acquired the remaining 50% interest of All Source from MJH in December 2016.

[17] Mill Street acquired the remaining 50% of All Source for $3 million, to be paid as follows:

a. $1.8 million by cash or certified cheque on closing;

b. $1 million by class B preferred shares in Mill Street issued to MJH; and

c. A vendor take-back promissory note from All Source to MJH in the amount of $200,000.00 that matured on December 16, 2016, with monthly interest at 6% and guaranteed by Mill Street and its principals, Roy and Noah (the “VTB Note”).

[18] When the remaining 50% interest was acquired in December of 2016, Mill Street had not fully paid for the acquisition of the initial 50% interest. The existing promissory notes that had been issued in connection with the initial purchase were replaced with two new promissory notes from All Source to MJH, as follows:

a. Promissory Note A in the amount of $400,000.000 that matured on December 15, 2017, with monthly interest at 6% and guaranteed by Mill Street, Roy and Noah (“Note A”); and

b. Promissory Note B in the amount of $508,588.70 that matured on December 15, 2018, with monthly interest at 6% and guaranteed by Mill Street, Roy and Noah (“Note B”).

[19] Each of the Notes contains a provision that confirms that “No forbearance or indulgence by the Promissee [MJH] shall constitute a waiver of any term, condition or provision to be performed or observed by the Guarantors or the Promissor [All Source].”

b) The TD Bank Loan and Inter-Creditor and Subordination Agreement

[20] Mill Street funded the acquisition of the remaining 50% interest in All Source through a loan from the TD Bank. Pursuant to that loan agreement, TD Bank gave All Source a term loan of $2 million to fund the cash component of the acquisition price, and an operating loan to support working capital requirements. The TD Bank Loan Agreement contains financial covenants that All Source must maintain. The TD Bank Loan Agreement provides that All Source must maintain a debt service coverage ratio of at least 1.20.

[21] TD Bank required, as part of the financing that it agreed to provide to All Source, that All Source and MJH enter into an Inter-Creditor and Subordination Agreement dated December 16, 2016 (the “Inter-Creditor Agreement”) with it. The Guarantors were not party to this Inter-Creditor Agreement.

[22] The first preamble to the Inter-Creditor Agreement defines the MJH Indebtedness to include “all obligations, debts, liabilities of [All Source] to MJH, now existing or hereafter incurred or arising, pursuant to or in connection with [the VTB Note and Note A and Note B]”. The third preamble to the Inter-Creditor Agreement records MJH’s agreement to subordinate and postpone the MJH Indebtedness and the MJH Security [later defined in s. 1.1 to include all security interests and other encumbrances of any nature or kind created by All Source in or over any of All Source’s property or assets that secures the payment of the Notes] to and in favour of the TD Indebtedness under its Loan Agreement with All Source, upon and subject to the terms of the Inter-Creditor Agreement.

[23] In section 3.1 of the Inter-Creditor Agreement, MJH postponed and subordinated the MJH Indebtedness to the TD Indebtedness and the MJH Security to the TD Security with respect to the Collateral (being all present and future undertaking, property and assets of All Source). MJH agreed that the TD Indebtedness would rank senior to its indebtedness and that the TD Indebtedness would be indefeasibly paid and satisfied in full before MJH would be entitled to be paid with respect to its indebtedness (including with respect to principal, interest, fees or other amounts). The mechanics of this are contained in section 4.1 of the Inter-Creditor Agreement, which provides that All Source cannot make, and MJH cannot accept, payments of principal or interest on the Notes until the TD Indebtedness has been indefeasibly paid and satisfied in full, “[e]xcept as expressly provided in Section 5.2 hereof”.

[24] Section 5.2 of the Inter-Creditor Agreement sets out the circumstances in which All Source may make, and MJH may accept, “Permitted Payments”. These are defined as principal and interest payments payable pursuant to the Notes. In particular, section 5.2 provides that All Source may make payments on the promissory notes (without TD Bank’s consent) if those payments would not put All Source offside its financial covenants in the Loan Agreement.

5.2 Notwithstanding any other provision of this Agreement, Borrower [i.e. All Source] may make and MJH may accept, collect and receive, Permitted Payments [defined to be principal and interest payable pursuant to the Notes], provided:

(1) (a) no Default shall have occurred under the TD Loan Agreement which has not been cured or waived by TD, at the time of any such payment; and (b) the making of any such payment will not result in a Default under the TD Loan Agreement; or

(2) such payment is made with the proceeds of any injected equity into the Borrower [All Source] on a dollar for dollar basis; or

(3) TD shall have provided its written consent to such payment, which consent shall not be unreasonably withheld.

c) The Promissory Notes

[25] The VTB Note and Note A and Note B are virtually identical, except for their principal amounts and maturity dates.

[26] The preambles to each Note acknowledge the Inter-Creditor Agreement and its restrictions on All Source making certain payments under the Note without the prior written consent of TD Bank. The preambles to each Note also refer to the agreement by the Guarantors to guarantee the obligations of All Source to MJH as contained in the Note.

[27] Section 1 of each Note contains All Source’s promise to pay the principal amount and All Source’s agreement that “[t]he unpaid Principal Amount remaining from time to time outstanding shall bear interest at the rate of six per cent (6.00%) per annum, calculated and payable interest only monthly.” Section 3 of each Note requires the repayment of the Principal Amount, together with all accrued and unpaid interest, on the Maturity Date [as specified for each note].

[28] Section 4(a) of each Note provides that it is an “Event of Default” for All Source to fail to make any payment of interest or principal when due unless All Source is prevented by reason of the refusal of any required consent of TD Bank. Using the VTB Note as an example, it provides:

4. Events of Default. The outstanding Principal Amount and all accrued and unpaid interest thereon shall, at the option of the Holder, be immediately due and payable without notice upon the occurrence of any of the following events of default (each, an “Event of Default”):

(a) [All Source] fails to make any payment of interest or of the Principal Amount when due under the VTB Note or fails to make any payment of interest or of the principal amount when due under Note A or Note B and such failure is not remedied within thirty (30) days (provided, however, that if the Debtor is prevented by reason of the refusal of any required consent by The Toronto-Dominion Bank from making such payment of Principal or interest when due hereunder or under Note A or Note B pursuant to the [Inter-Creditor Agreement], then such failure shall not be considered an Event of Default hereunder or under Note A or Note B for the purpose of permitting the holders of any of either this VTB Note or Note A or Note B to demand cash payment in full …

[29] As set out above, pursuant to section 5.2 of the Inter-Creditor Agreement, except in a situation of a flow through of new equity, TD Bank’s consent is required for All Source to make any payments to MJH that would put All Source offside the financial covenants in the Loan Agreement. Accordingly, it is an Event of Default under the Notes for All Source to fail to make any payment of principal or interest that would not put All Source offside its covenants. Conversely, it is not an Event of Default under the Notes if the payment requires TD Bank’s consent because it would put All Source offside of its financial covenants.

[30] Section 5 of each Note contains a cross-default provision, which provides that an Event of Default in the payment of interest or principal under any of the Notes that continues for ten days entitles MJH to demand payment under each of the Notes. Sections 4 and 5 also provide that MJH has the option to require Mill Street to issue class B preferred shares in lieu of payment on the Notes if there is any failure by All Source to make a payment when due.

d) The Guarantees

[31] The guarantees were each signed by Noah and Roy personally, and by Noah on behalf of Mill Street. They all contain substantially similar language and are appended to the Notes.

[32] Section 1 of the guarantees contains the unconditional guarantee of the Guarantors to MJH. The Guarantors jointly and severally and in the same manner and with the same recourse against the Guarantors as if they were the Debtor [All Source] guaranteed a) the payment of the Note in accordance with its terms and b) the fulfillment of All Source’s covenants and obligations to MJH contained in the Note [together defined as the “Obligations”].

[33] Section 3 of the guarantees provides that:

If, as a result of [All Source’s] default in making payments due under the [VTB Note/Note A or Note B] in accordance with its terms, [All Source] shall owe monies to [MJH], the due payment of such monies is hereby jointly and severally guaranteed by the Guarantors. The Guarantors will render any payment guaranteed hereunder upon demand if [All Source] fails or refuses punctually to make such payment and such liability shall not be contingent or conditioned upon the pursuit of any remedies against [All Source] or any other person and such liability shall not be diminished, relieved or otherwise affected by the extension of time, credit or any other indulgence which [MJH] may from time to time grant to [All Source] or to any other person, including without limitation, the acceptance of any partial payment or performance or the compromise or release of any claims, none of which shall in any way modify or amend this Guarantee which shall be continuing and irrevocable.

The Payments Made and Not Made by All Source Under the Promissory Notes

[34] All payments of interest were made on the Notes up until the VTB Note and Note A matured in mid-December of 2017. The last interest payment that All Source made under the VTB Note and Note A was on December 1, 2017.

[35] Mill Street took the position that TD Bank’s consent was required for payment of the principal owing under the VTB Note and Note A. MJH took the position that TD Bank’s consent was only required if the payments due would put All Source offside of its financial covenants under its loan agreement with the TD Bank. MJH commenced this action on December 18, 2017.

[36] MJH also demanded immediate payment of Note B on December 27, 2017 pursuant to the cross-default provisions contained in section 5 of the Notes. The last interest payment that All Source made under Note B was on January 26, 2018. No payments of principal or interest have been made under any of the Notes since the interest payments on the VTB Note and Note A made in December of 2017 and the last interest payment on Note B made in January of 2018. MJH did not make another demand for payment under Note B until January 2019, after its specified maturity date (that was in December 2018). MJH also did not exercise its option to receive class B preferred shares in lieu of payment on the Notes when it gave notice of the payment defaults under the Notes.

[37] Noah attests in his affidavit on the summary judgment motion that if MJH had not asserted the cross-default under Note B and demanded payment in full of the entire principal amount, All Source would have continued to pay the monthly interest payments of $2,542.94 until Note B matured in December of 2018. Noah explained in his affidavit that the interest payments were stopped because MJH invoked the cross-default provisions under Note B and demanded the immediate payment of the principal owing under Note B. The defendants contend that the monthly interest was only payable prior to, and not after, the maturity of each Note.

[38] Noah gave a different explanation on discovery about why they stopped paying the interest, which amounted to an estimated $75,000.00 annually. He testified that they stopped paying the interest because they did not want to risk being put offside of their banking covenants by making the estimated $6,000.00 per month in interest payments to someone who was suing them. When cross-examined on this prior evidence, the explanation that Noah offered in an attempt to reconcile these different rationales for not paying the monthly interest was that he equated being sued with the demand for payment in full of all principal owing under all three Notes that was precluded by the Inter-Creditor Agreement.

The Status of the TD Bank Financial Covenants

[39] Noah admitted on cross-examination, when confronted with certain financial statements that had been produced by All Source, that All Source was onside of its financial covenants under the TD Bank Loan agreement as at January 31, 2018.

[40] The financial information that has been produced by All Source indicates that it continued to be onside its financial covenants through to July of 2018, when the debt service coverage ratio was 1.69, well above the 1.20 minimum. Noah attested in his affidavit on the summary judgment motion that “[a]t no time since the promissory notes have matured has All Source maintained a combined Debt Service Coverage ratio of less than 1.20x”.

[41] Noah admitted on cross-examination that All Source had a buffer that would have allowed it to make interest payments to MJH under the VTB Note after January 2018 and still keep the debt service coverage ratio above the minimum 1.20 required under the TD Bank Loan Agreement. In fact, All Source paid the monthly interest under all three Notes until December 2017. There is no evidence that All Source’s financial circumstances deteriorated after that to such an extent that the continuation of the payment of monthly interest under all of the Notes from and after December 2017 would have put All Source offside of its financial covenants to the TD Bank. Nor has All Source or TD Bank said that payment of the interest amounts owing under the Notes from and after December 2017 (in the case of the VTB Note and Note A) and from and after January 2018 (in the case of Note B) would have put All Source offside of its financial covenants under the TD Bank Loan Agreement. I infer from all of this that the continuation of the interest payments under the Notes would not have required the TD Bank’s consent. Despite this, All Source made no such monthly interest payments.

[42] With respect to the repayment of the principal amounts of the Notes, Noah’s evidence in his affidavit on the summary judgment motion was that “I made inquiries of our account representatives at the Bank from time to time who confirmed that they would not allow any of the payments requested by the plaintiff at maturity of any of the promissory notes.”[^2] Noah also attested in his affidavit that “Any significant payment to the plaintiff would put All Source offside of the financial covenants section of the loan agreement.” Significant is not defined, but I infer that it would be in the order of magnitude of the principal amounts owing. I consider this to be, in the aggregate, significant having regard to the amounts involved in the share purchase transaction and financing arrangements at issue. In the absence of evidence that the repayment of the principal amounts would not put All Source offside of its financial covenants with TD Bank and having regard to the available financial information and Noah’s evidence about the company’s inability to make significant payments, I find that the TD Bank’s consent would be required for All Source to repay the principal amounts due on maturity under the Notes (whether upon the specified maturity date or as a result of the acceleration of the principal amounts due upon an Event of Default).

Analysis

Principles of Contract Interpretation

[43] The acquisition of All Source by Mill Street was a commercial transaction. Each of the Notes contains an acknowledgment by the parties that they are made for business purposes and the Inter-Creditor Agreement is clearly a commercial business contract.

[44] The applicable principals of contract interpretation are well established. The case that the plaintiff has relied upon outlines the following principles to be considered in the interpretation of commercial contracts (which also have been applied in more recent cases). Commercial contracts are to be interpreted:

a. As a whole, in a manner that gives meaning to all of their terms and avoids an interpretation that would render one of their terms ineffective.

b. By determining the intention of the parties in accordance with the language they have used in written documentation based upon the “cardinal assumption” that they have intended what they have said.

c. With regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties; and

d. In a fashion that accords with sound commercial principles and good business sense, and that avoids a commercial absurdity.

(See Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, at para. 24).

[45] Where there is more than one agreement, the court will consider the words in the context of the other related agreements and will read and try to make sense of them together, as a whole (See 3869130 Canada Inc. v. I.C.B. Distribution Inc., 2008 ONCA 396, at paras. 33-34; Sankar v. Bell Mobility, 2016 ONCA 242, at para. 23).

[46] Consistent with the general principles of contract interpretation, “[a]s a general principle, the courts have always interpreted a guarantee so that the protection or security which it affords to a creditor is rendered real rather than illusory.” (Warren D. Beamish Enterprises Inc. v. Innocan Inc, [1994] O.J. No. 1460, at para. 34 (Gen. Div.)). “It is necessary to give a guarantee instrument an interpretation which is fully consistent with its apparent purpose.” McGuiness, The Law of Guarantee, Third Edition (Toronto: LexisNexis Canada Inc., 2014) at pp. 281-282.

Was All Source Obligated to pay Principal and/or Interest Under the Notes to MJH After December 2017?

[47] The first question that I must decide is what All Source’s obligations to MJH were upon the maturity of each of the promissory notes (whether in the ordinary course or as a result of acceleration of the principal amounts due upon default) in respect of the repayment of the principal amounts and/or payment of monthly interest while the principal remained unpaid. Related to that, I must decide whether All Source was restricted by the Inter-Creditor Agreement from making payments of principal and/or of monthly interest to MJH.

a) Monthly Interest Payment Obligations

[48] The defendants contend that because the Notes do not explicitly state that the interest continues to be payable after maturity, that I should find that monthly interest was no longer payable on the Notes after maturity even if the principal amounts could not be repaid on maturity due to the restrictions under the Inter-Creditor Agreement.

[49] The defendants contend that, after maturity, if the Inter-Creditor Agreement prevented repayment of the principal amounts of the Notes, the “deal” was that MJH either had to exercise its option to convert its debt into Class B preferred shares, or receive nothing for so long as the repayment of the principal amounts owing were not Permitted Payments under the Inter-Creditor Agreement. MJH argued that this is not what the contracts say and that to interpret them this way would fundamentally alter the consideration that it negotiated for the sale of its shares and the loans that it granted. I agree with MJH.

[50] The Notes all state as follows: “The unpaid Principal amount remaining from time to time outstanding shall bear interest at the rate of six per cent (6.00%) per annum, calculated and payable only monthly.” I find that, on a plain reading of the words of these Notes, interest continued to be payable monthly on the unpaid principal amounts outstanding, even after maturity. That is what the Notes say and, pursuant to the “cardinal rule” of contract interpretation, I am entitled to assume that the parties meant what they said (See Ventas at para. 24).

[51] There is nothing in the factual matrix of this share purchase transaction that would support the defendants’ interpretation, which is contrary to the express provision that interest is payable monthly on the unpaid principal amount remaining from time to time. The Notes do not limit the provision for the payment of interest to the period before their respective maturity dates. I find, on an objective view of the transaction and the inter-related contracts, that interest continued to be payable monthly, calculated on the principal amounts remaining outstanding from time to time under each of the Notes, both before and after maturity.

[52] The Inter-Creditor Agreement restricts payments during the pendency of the TD Bank Indebtedness, which had a four-year term that does not expire until November of 2020 (according to the loan agreement). It is commercially reasonable for All Source to have agreed to continue to pay interest under the Notes in the event that its ability to repay the principal amounts was restricted by the Inter-Creditor Agreement while the TD Bank loan remained outstanding.

b) Obligations in Respect of the Repayment of Principal

[53] On the Maturity Date of the VTB Note, December 16, 2017, All Source was obligated pursuant to the terms of the Note to repay the principal amount of $200,000.00 together with all accrued and unpaid interest (of which there was none). All Source was obligated pursuant to the terms of Note A (that was for the same principal amount) to repay the principal when it matured on December 15, 2017 (all interest having been paid up to the date of maturity). Note B contained the same repayment obligations upon its maturity a year later.

[54] MJH took the position that All Source’s refusal to pay the principal amounts upon maturity was an Event of Default under the VTB Note and Note A. Subsequently, pursuant to the cross-default provisions of Note B (that did not, on its terms, mature until a year later in December of 2018), notice was sent by MJH on December 27, 2017 demanding payment in full of all outstanding amounts of principal and interest under Note B.

[55] It is only a payment by the debtor (All Source) that is “prevented by reason of the refusal of any required consent from The Toronto-Dominion Bank” that is excluded from the definition of an “Event of Default” under the Notes. There is no evidence that TD Bank had been asked and refused to provide its consent to the repayment of the principal amounts due on maturity of the VTB Note and Note A in mid-December of 2017. Even the challenged hearsay evidence of Noah about this is non-specific as to timing and would not satisfy this requirement.

[56] However, the Inter-Creditor Agreement prevents All Source from making, and prevents MJH from receiving, any payment of principal or interest under the Notes while the TD Indebtedness is outstanding, unless it can be demonstrated that the making of the payment will not result in a default under the TD Loan Agreement or TD has provided written consent to such payment (these are among the defined “Permitted Payments”). The defendants took the position that the payment of the outstanding principal under these notes would put All Source offside of its financial covenants with the TD Bank and refused to repay the principal at maturity. It has not been demonstrated that the repayment of the principal amounts of these Notes were Permitted Payments.

[57] The definition of an Event of Default under the Notes appears to put the onus on All Source to establish that the required consent from TD Bank had been refused, whereas the Inter-Creditor Agreement appears to put the onus of MJH to establish that these repayments of principal amounts were Permitted Payments. Reading the definition of Event of Default under the Notes together with the restrictions under the Inter-Creditor Agreement, the commercially reasonable interpretation of these related contractual provisions is that it is a failure by All Source to make a Permitted Payment that is an Event of Default. (See Ventas, I.C.B. Distribution and Sankar)

[58] Applying this interpretation to the circumstances of this case, MJH could only establish that All Source had committed an Event of Default in December of 2017 if it could prove that the repayment of the VTB Note and Note A would not put All Source offside of its financial covenants with TD Bank (such that it would have been a Permitted Payment under the Inter-Creditor Agreement). This has not been established.

c) Events of Default

[59] I find that the repayments of the principal amounts owing under the VTB Note and Note A were restricted under the Inter-Creditor Agreement since they have not been demonstrated to be Permitted Payments. I find that All Source did not commit an Event of Default in December 2017 under the VTB Note or Note A when it failed to repay the principal amounts owing under those Notes. Since I have found that there was no Event of Default under the VTB Note or Note A in December of 2017, there also was no cross-default under Note B in December 2017.

[60] However, I have found that the interest payments under Note B were a Permitted Payment for which TD Bank’s consent was not required, and they were not restricted by the Inter-Creditor Agreement. Interest continued to be due under Note B, in accordance with its terms, at the rate of 6% per annum, calculated and payable monthly. Monthly interest was paid under Note B in January 2018, but nothing further has been paid or repaid since then.

[61] I find that an Event of Default occurred under Note B in February 2018 upon the failure of All Source to pay the monthly interest. MJH had already declared the principal under Note B to be due in December 2017 based on the alleged cross-default, albeit prematurely based on my findings herein. The defendants argued that it is not open to MJH to claim that there was a default under Note B for the failure to pay interest because MJH’s pleaded claim under Note B was based on the alleged cross-defaults under the VTB Note and Note A. I disagree. The statement of claim pleads the failure to pay the monthly interest owing. The pleading is broad enough to cover my findings and decision herein, even though it pleaded a different date on which the principal amount under Note B came due. I have found that the monthly interest would have continued to be payable even if the due date for payment of the principal amount had been accelerated under Note B due to the cross-default. Either way, interest was payable on Note B after January of 2018 and All Source committed an Event of Default by its failure to pay those monthly interest amounts.

[62] I also find that Events of Default occurred under the VTB Note and Note A as a result of the failure of All Source to continue to pay the monthly interest under those Notes after they matured in December 2017. The failure to pay the monthly interest is a continuing Event of Default under each of the Notes.

[63] The fact that MJH had commenced this lawsuit claiming that the principal was due and owing under all three Notes does not excuse All Source from paying the interest that was due, even if it disputed that the principal was due under Note B (and even if it claimed that the payment of principal amounts due upon maturity of the VTB Note or Note A were restricted by the Inter-Creditor Agreement). Furthermore, the Notes all contain a provision that forbearance is not a waiver, so the fact that no further demands were made by MJH after the commencement of this litigation for payments under Note B until January 2019 (or under the other Notes) also does not excuse All Source from its monthly interest payment obligations under the Notes.

Are the Guarantors Liable to Pay to MJH Amounts Due Under the Promissory Notes that All Source is Not Permitted to Pay to MJH Under the Inter-Creditor Agreement?

[64] The second question I must decide is whether, even if All Source is precluded by the Inter-Creditor Agreement from fulfilling any of its obligations in respect of the repayment of the principal amounts and/or payment of monthly interest under the promissory notes, the Guarantors are liable to pay those amounts.

[65] In accordance with the terms of each Note, repayment of the principal amount was required to be made on their respective maturity dates. The principal amounts were not repaid by All Source to MJH on the maturity dates of the Notes because of the restrictions agreed to by All Source and MJH with the TD Bank contained in the Inter-Creditor Agreement. Section 4(a) of the Notes excludes this failure to pay from the definition of an Event of Default under the Note. All Source cannot be compelled to pay the outstanding principal amounts to MJH because of the restrictions contained in the Inter-Creditor Agreement that all three of those parties, TD Bank, All Source and MJH, agreed to. The question is whether the Guarantors are liable to pay these outstanding principal amounts under their guarantees.

[66] Each Guarantor unconditionally, jointly and severally guaranteed to MJH the payment of each Note in accordance with its terms and the fulfillment of the covenants and obligations of All Source to MJH contained in the Note (the “Guaranteed Obligations”). Those Guaranteed Obligations can be found in sections 1 and 2 of the Notes and include the payment of monthly interest and the repayment of the principal amount of each Note, and any accrued and unpaid interest, upon the specified maturity date. The operative provision of section 3 of the guarantees requires the Guarantors to render payment to MJH upon demand if, as a result of All Source’s default in making payments due under the Note in accordance with its terms, All Source owes monies to MJH.

[67] The guarantees, which are effectively appended to the Notes, do not reference the defined term “Events of Default” contained in the Notes. Instead, the guarantees refer to All Source’s “default” in making payments due under the Note in accordance with its terms, resulting in monies owing to MJH. A “default” can be a failure to pay. I find that the trigger for the guarantee in section 3 occurred is when All Source failed to pay monies due to be paid to MJH under the terms of the Notes. This respects the choice of words and the use of the generic term “default” in the guarantees, rather than the defined term, “Event of Default” and it also gives meaning to the conceptual framework of the agreement.

[68] The covenants and obligations of All Source to MJH are defined in a separate section of each Note from the sections dealing with Events of Default and cross defaults. The sections dealing with Events of Default and cross default are directed to the rights of MJH. The exceptions to the Events of Default for payments restricted under the Inter-Creditor Agreement impose limitations on the rights of MJH to receive (or demand) payments from All Source. MJH’s rights and the exceptions do not, on an objective reading of the Notes, purport to alter or limit the covenants and obligations of All Source contained in different sections of the Notes.

[69] The restrictions on payments being made by All Source and received by MJH arise under the Inter-Creditor Agreement, which is directed to the timing of when those payments can be made by All Source. The Inter-Creditor Agreement does not purport in any way to alter or limit the covenants and obligations of All Source under the Notes, but rather it subordinates and postpones All Source’s obligations to make those payments to MJH in favour of the repayment of the TD Bank Indebtedness. Importantly, the Inter-Creditor Agreement does not include the guarantees in the definition of MJH Security that is also subordinated and postponed. Similarly, the guarantees make no reference to the Inter-Creditor Agreement and do not expressly provide for any exceptions to the obligations of the Guarantors that are tied to the restrictions contained in the Inter-Creditor Agreement. Further, the Guarantors were not party to the Inter-Creditor Agreement.

[70] There is some very broad language in the Inter-Creditor Agreement about restrictions on MJH’s receipt of payments in respect of its indebtedness. However, having regard to the entire agreement and reading it as a whole and together with the other inter-related agreements, I find that, the Inter-Creditor Agreement does not limit MJH’s ability to call on the guarantees to fulfill All Source’s obligations that All Source is not permitted to fulfill using its own assets over which the TD Bank has security. See I.C.B Distribution and Sankar. I find that these agreements do not restrict MJH’s receipt of payments from the Guarantors, just from All Source or its assets that stand as security for the TD Bank Indebtedness.

[71] The guarantees fairly and objectively read, operate independently of the Inter-Creditor Agreement and the restrictions contained in it. The guarantees do not depend on why the amounts due and owing have not been paid by All Source and are not excused by limitations on enforcement that exist against All Source. The fact that there was not an Event of Default under the Notes for the non-payment of the principal amounts due on maturity and that MJH was restricted in its ability to seek recourse against All Source for that non-payment does not relieve the Guarantors of their obligations under the guarantees for All Source’s default in the payment of these amounts.

[72] In addition to trying to equate the word “default” in the guarantees with the defined term “Event of Default” in the Notes (which I do not accept), the defendants also contend that the guarantees only allow for the same recourse against the Guarantors as against All Source because in section 1, the Guarantors grant to MJH the same recourse against them as if they were a “Debtor”. I do not read this as limiting the recourse against the Guarantors to the recourse available against All Source. That would be inconsistent with the later provision of the guarantees, in section 3, which provides that the liability of the Guarantors “…is not contingent or conditioned upon the pursuit of any remedies against the Debtor … and that such liability shall not be diminished, relieved or otherwise affected by the extension of time, credit or any other indulgence to the Debtor.”

[73] While the obligations of surety and principal debtor are often co-extensive, they are, nevertheless, separate and distinct obligations. See Meridian Developments Ltd. v. Nu-West Group Ltd., 1984 ABCA 75, at para. 19; See also Cleland Metal Products Ltd. v. Proctor, 2016 ONSC 1679, at paras 15-16 (Div. Ct.). Limitations on enforcement which may exist between the primary debtor and the creditor do not notionally wipe out the subject matter of the primary debt for purposes of the enforcement of the separate obligation of the Guarantor. See Seattle-First Holding Co. v. Western Crane Services Ltd. (1987), 1987 CanLII 3228 (AB KB), 82 A.R. 171, 44 D.L.R. (4th) 174, at paras. 7-9 (Q.B.) and HOOPP Realty Inc. v. Guarantee Co. of North America, 2018 ABQB 634 at para. 115.

[74] The guarantees are of monies due and owing pursuant to the terms of the Notes that have not been paid. That would include the principal amounts that were due on maturity and the monthly interest payments under the VTB Note and Note A from and after the last payment made in December of 2017 and under Note B from and after the last payment made in January 2018.

[75] There is no commercial absurdity in this interpretation, as the defendants contend. It reflects an agreement to delay the payment of the purchase price payable by Mill Street for the shares in All Source, and an agreement to allow the purchaser to structure the payments to come from All Source rather than from the purchaser, with the back stop that if the purchase monies could not be generated from the business of All Source itself, they would be paid by the purchaser (Mill Street, one of the Guarantors) and its principals (the other Guarantors). This interpretation gives effect to the purchase price and security that MJH contracted for and it respects the Inter-Creditor Agreement that was concerned with the TD Bank’s priority recourse to All Source and its assets (the Collateral).

[76] The alternative interpretation that the defendants urged upon the court would render the security of the guarantees illusory because it would mean that if All Source was not in a financial position to repay the Notes because of its other financial obligations, then the Guarantors would not have to pay either. Whereas a guarantee would ordinarily be called upon in precisely that circumstance. See Innocan Inc., at para. 34, citing McGuiness, The Law of Guarantee, First Edition (Toronto: Carswell, 1986) at p. 103; see also, McGuiness, The Law of Guarantee, Third Edition (Toronto: LexisNexis Canada Inc., 2013), at pp. 281-282). This interpretation would result in an effective purchase price adjustment that, if intended, should and could have been expressly provided for. Instead, the parties agreed to guarantees and a Class B preference share conversion “option” in favour of MJH. MJH has chosen to enforce the guarantees rather than take the shares, as it is entitled to do.

[77] I find that the covenants and obligations of All Source that were guaranteed included the payment of monthly interest on the Notes, before and after their respective dates of maturity, and the payment of the principal amounts of the Notes on maturity. I come to this interpretation by reading these contracts together and as a whole. I assume, as I am entitled to do, that the parties intended what they said, that they used defined terms when intended, and did not use them when they were not intended. I find that the Guarantors are jointly and severally liable for all such amounts due under the Notes that All Source has not paid or does not pay.

Damages

[78] No updated calculation of the interest payments due under the Notes has been provided. I expect that this is a straightforward calculation that can be undertaken to determine the monthly interest amounts due to date from and after the last interest payment made under each Note (and that will continue to be due and payable until the principal amounts of the Notes have been repaid). All Source, Mill Street and Noah and Roy Murad are jointly and severally liable for these amounts.

[79] While I have found that these monthly interest payments, as they came due, would not have been prevented by the Inter-Creditor Agreement, there is no evidence before the court about the impact that making these monthly payments all at once now would have on All Source’s financial covenants with the TD Bank. Recognizing that this also implicates the contractual rights of a third party, TD Bank, who is not before the court, if there is an established impediment to All Source making some or all of these accumulated and continuing interest payments under the Inter-Creditor Agreement, this judgment is not to be taken to alter or derogate the contractual rights of TD Bank. I note as well that the TD Bank has some measure of protection in section 6 of the Inter-Creditor Agreement that provides that any payments made to MJH in contravention of that agreement are to be held in trust for TD Bank.

[80] Although All Source is restricted by the Inter-Creditor Agreement from making payments of the principal amount of each Note, the other defendants who are the Guarantors, Mill Street and Noah and Roy Murad, are jointly and severally liable to pay those principal amounts. Upon the repayment of the principal amounts, the monthly interest payments will cease.

[81] MJH has pursued its claim for punitive damages in the amount of $150,000.00 on this summary judgment motion. The case for punitive damages requires a demonstration of planned and deliberate misconduct that goes beyond the failure to pay the amounts for which judgment is sought in this action. See Whiten v. Pilot Insurance Co., 2002 SCC 18, at paras. 36, 79 and 82.

[82] MJH contends that Noah’s discovery evidence that once the litigation was started the defendants decided that they were not going to pay the contractual interest payments due under Note B to someone that was suing them establishes bad faith. Noah did say this, but he also testified (albeit later) that the notice of cross-default that roughly coincided with the issuance of the statement of claim purported to accelerate the principal under Note B and that payment of the principal amounts owing under the Notes would have put it offside of its financial covenants with the TD Bank. This does not directly address the interest payments, but counsel for the defendants argued that the refusal to pay interest was based on the position of the defendants that, after the demand under the loan was made December 27, 2017 that purported to accelerate the payment of the principal amount of Note B, interest payments after maturity simply accrued but were not payable.

[83] I have ruled against the defendants’ interpretation on the monthly interest payments obligations, but it is not a justification for punitive damages that the defendants might have misinterpreted their obligations with respect to monthly interest after the principal amounts came due. This does not rise to the level of bad faith or malicious, oppressive or high-handed conduct.

Disposition and Costs

[84] I grant summary judgment in favour of MJH:

a. For the monthly interest payments under the VTB Note and Note A from and after December 1, 2017 and under Note B from and after January 28, 2018, as against All Source (unless to pay these accrued amounts all at once now would offend the Inter-Creditor Agreement);

b. For the monthly interest payments under the VTB Note and Note A from and after December 1, 2017 and under Note B from and after January 28, 2018, as against the Guarantors, Mill Street and Noah and Roy Murad, on a joint and several basis; and

c. For the principal amounts of each of the Notes, totalling $1,108,588.70 as against the Guarantors, Mill Street and Noah and Roy Murad, on a joint and several basis.

[85] I encourage counsel to attempt to reach an agreement on costs. If they are able to do so, they should advise the court of such by March 20, 2020 and provide a draft order.

[86] If no agreement is reached on costs, then each side may make brief written submissions on costs (not to exceed 3 pages double spaced) to be delivered together with their respective costs outlines by March 31, 2020, and each may respond to the other’s in a brief reply submission on costs (not to exceed 1.5 pages double spaced) to be delivered by April 7, 2020. All costs submissions should be served on the opposing parties and delivered to my attention at Judges’ Administration, Superior Court of Justice at 361 University Avenue (Room 140), Toronto, Ontario M5G 1T3.

Kimmel J.

Released: March 10, 2020

COURT FILE NO.: CV-17-588646

DATE: 20200310

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Madison Joe Holdings Inc.

Plaintiff

– and –

Mill Street & Co. Inc., All Source Security Container MFG. Corp., Roy Murad and Noah Murad

Defendants

AND BETWEEN:

Mill Street & Co. Inc., All Source Security Container MFG. Corp., Roy Murad and Noah Murad

Plaintiffs by Counterclaim

– and –

Madison Joe Holdings Inc.

Defendant by Counterclaim

REASONS FOR decision

Kimmel J.

Released: March 10, 2020

[^1]: There were other affiliated entities on both the purchaser’s and vendor’s side of this transaction, but for purposes of this motion, Mill Street and MJH are the entities identified as the purchaser and the vendor, respectively.

[^2]: This is evidence given upon information and belief which the plaintiff objects to on the grounds that the source of the information is not properly identified as is required under Rule 39 for hearsay evidence such as this to be admitted and considered. Although not compliant with the requirements of Rule 39, this is consistent with Noah’s evidence about All Source’s inability to make any significant payments without going offside of its financial covenants to the TD Bank. Irrespective of whether the evidence of TD Bank having told Noah this is admissible, I still find that TD Bank’s consent was required and there is no evidence of it having been provided, which leads to the same result under the Inter-Creditor Agreement which requires proof of consent for a Permitted Payment that would otherwise put All Source offside of its financial covenants.