Court File and Parties

COURT FILE NO.: CV-18-00606390-0000 DATE: 20240415 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

BANK OF MONTREAL Plaintiff – and – 9310088 CANADA INC. operating as RONCESVALLES BQM and LEONARDO MAURO and TATJANA DJUKOVIC-MAURO also known as TATJANA DJUKOVIC also known as TATJANA DJUKOVI Defendant

Counsel: Randy Schliemann, for the Plaintiff Tarunjeet Gujral, for the Defendant

HEARD: April 12, 2024

Papageorgiou J.

Overview

[1] The defendant 9310088 Canada Inc. operating as Roncesvalles BQM (the “Company”) purchased a restaurant located at 369 Roncesvalles Ave, which they leased (the “Premises”).

[2] Bank of Montreal (“BMO”) loaned $159,120.00 to the Company in accordance with the provisions of the Canada Small Business Financing Act with an interest rate of prime plus 2.5 % (the “Loan”). The monthly payments were $1,925.93.

[3] The Loan was secured by a General Security Agreement dated October 7, 2015 (the “GSA”) which was duly registered in accordance with the provisions of the Personal Property Security Act, thereby granting the Bank a security interest in all of the Company’s assets (the “Assets”) and entitling BMO to immediate possession of the Assets upon default of the Company’s obligations.

[4] The defendants Leonardo Mauro (“Leonardo”) and Tatjana Djukovic-Mauro (“Tatjana) are married (the “Guarantors”). Tatjana and Leonardo were Directors and co-owners of the Company and signed a guarantee in respect of the Loan, limited to the amount of $39,780 with interest at the rate of prime plus 3 % per annum (the “Guarantee”).

[5] In or around April 2018 there was a flood that caused damage and after which a dispute arose between the landlord and the Company.

[6] The landlord locked the Company out and in or around August 1, 2018, the Company ceased operating. BMO took the position that the Company was therefore in default of its obligations to BMO. As of August 24, 2018, there was $102,898.85 outstanding on the Loan, exposing the Guarantors to their personal obligations.

[7] BMO made demands for payment on August 24, 2018, and issued a Notice of Intention to Enforce Security pursuant to s. 244 of the Bankruptcy and Insolvency Act.

[8] However, BMO’s certified valuator determined that the assets had no value and so BMO determined that it would not seek to realize upon them as any recovery would exceed the value of the assets.

[9] The Defendants have failed or refused to pay any further amounts due and owing to BMO pursuant to the Loan.

[10] BMO sued the Defendants who then issued a third-party claim against their landlord.

[11] BMO moves for summary judgment against the Company and Guarantors.

Decision

[12] For the reasons that follow I award BMO summary judgment as follows:

a) judgment against the Company in the amount of $102,898.85 with pre and post judgment interest at the contract rate of prime plus 2.50 % from August 24, 2018, with post judgment interest also at this rate.

b) as against Leonardo and Tatjana, judgment in the amount of $39,780 from August 24, 2018, with pre and post judgment interest at the rate of prime plus 3 %.

Issues

[13] In arriving at my decision, I have considered the following issues:

Issue 1: Was the Company in default? Issue 2: Was BMO contractually required to sell the Company’s assets before making a demand on the Guarantors? Issue 3: Did the Company act negligently or in breach of a duty of good faith performance? Issue 4: Can the Defendants rely on the doctrine of non es factum?

Analysis

[14] Before addressing the issues, it is important to set out a brief recitation of the summary judgment test as follows.

[15] In accordance with r. 20.04(2) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”), 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 defence.

[16] In determining whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and a judge may exercise any of the following powers under r. 20.04(2.1): (1) weighing the evidence; (2) evaluating the credibility of a deponent; and (3) drawing any reasonable inference from the evidence.

[17] The Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 49, explained:

There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion for summary judgment. This will be 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] In order to defeat a motion for summary judgment, the responding party must put forward some evidence to show that there is a genuine issue requiring a trial. A responding party cannot rest solely on allegations in a pleading. Each side must “put their best foot forward” with respect to the existence or non-existence of material issues to be tried: Mazza v. Ornge Corporate Services Inc., 2016 ONCA 753, at para. 9. Furthermore, “a summary judgment motion cannot be defeated by vague references as to what may be adduced if the matter is allowed to proceed to trial”: Diao v. Zhao, 2017 ONSC 5511, at para. 18.

Issue 1: Was the Company in default?

[19] The Company committed a number of events of default.

[20] Under the GSA, an event of default included:

a) the Company defaulting under any obligation. b) the Company defaulting in the due observation of performance of any covenant, undertaking or agreement. c) a distress or analogous process leveled on the Company’s property. d) the Company ceasing to carry on business.

[21] Upon any default under the GSA, “the Bank may declare any or all of the Obligations to be immediately due and payable.”

The landlord’s distress.

[22] The Landlord had locked the Company out of the Property in August 2018 which was the beginning of the Landlord’s distress. This was an event of default.

Stopped carrying on business.

[23] The Company stopped carrying on business as of August 1, 2018. This was an event of default.

Failure to pay monthly amounts.

[24] The Company failed to deliver its monthly loan payment to BMO in July and August 2018 in the amount of $1,925.93. Leonardo gave evidence that he understood at the time he signed the Loan Agreement on behalf of the Company that failing to deliver the monthly payments of $1,925.93 is a default of the Company’s obligations under the Loan.

[25] Nevertheless, the Defendants argue that their failure to make monthly payments was BMO’s fault.

[26] First, they say that the default occurred because BMO failed to withdraw the monthly pre-authorized payments. However, the bank statements for July 2018 and August 2018 show negative balances or balances that would not have covered the payment throughout majority of those months. The balances at the end of the month for July and August, when funds were to automatically be withdrawn, all show that there were insufficient funds.

[27] The Defendants tried to argue that since there is no notation on the bank statements of any attempt to withdraw the funds, this means BMO did not try. However, BMO explained that no such notation would appear as it would not attempt to withdraw funds that it knew were not there. In any event, this does not put the Defendants in a better position. Even if there was such notation showing that they tried to withdraw the payment, there would have still been insufficient funds on the date the payments were required to be made.

[28] Second, the Defendants also assert that they had overdraft coverage on the Withdrawal Account that would cover the monthly payment. However, there is no documentation to support this, and the bank statements do not support this assertion. In fact, they prove the opposite.

[29] The bank statements unmistakably show all cheques and other transfers leaving the balance at less than $0 being returned as NSF. This confirms that the Withdrawal Account did not have overdraft protection. If it did, none of these cheques would have been returned NSF. Leonardo admitted that he saw a returned NSF check and provided no evidence of any communications he made to BMO regarding the NSF checks which one expects they would have done had the Company had overdraft protection. I find that they did not have such protection.

[30] BMO explained that there was a standing order that it needed to debit an account on a certain day and then credit the loan on the same day. This would be done automatically. Sometimes, there would be communications between BMO and the borrower who would advise that they had money at a different time and at that time, BMO would do a manual debit. She said that “this all depends if the borrowers, if the customer is saying that I have the money, would you please debit my account.”

[31] The Defendants say that BMO’s failure to contact them to advise there were insufficient funds was a breach. However, in my view, it is the borrower’s obligation to ensure that they have sufficient funds on the day payment is required. The Loan agreement clearly states that the Company agreed to pay the Loan in accordance with its terms. It did not place any obligation on BMO to chase the Company around.

[32] The fact that BMO sometimes had discussions with customers which resulted in the injection of funds does not mean that this was a requirement of the contract or that it waived the Company’s obligation to make the payment on the required date.

[33] The duty of good faith performance does not assist the Defendants here. It requires that parties act honestly in their contractual performance, e.g. that they do not lie or otherwise mislead each other about matters related to the performance of the contract. It does not impose a duty of loyalty or disclosure. It does not require a company to give up a contractual right to payment on a certain date: Bhasin v. Hrynew, 2014 SCC 71 at para 73.

[34] Even if BMO had called the Company about the need to replenish the bank account, it would not have changed the fact that the landlord had locked the Company out and as such the Company was unable to operate thereafter. The monthly payments would still have been due, and the Company still failed to pay them.

[35] There is no evidence that the Company offered to or was able to continue paying the amounts after the landlord locked it out at anytime between August 2018 and the argument before me.

[36] Further, even if all issues related to the missed payments were persuasively in favor of the Defendants on this motion, it would still not change the fact that the other events of default had occurred and as such the Loan was due.

Issue 2: Was BMO contractually required to sell the Company’s assets before making a demand on the Guarantors?

[37] I conclude that BMO was not contractually required to realize on the assets before making a demand on the Guarantors.

[38] Leonardo says that it was his understanding the BMO was required to first take over the assets of the Company and sell them before recourse to the Guarantees. Contractual interpretation requires a court to give effect to the parties’ objective intentions at the time of contract formation; Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para 56. Leonardo’s subjective understanding is not admissible to assist the court with the exercise of interpreting the agreements.

[39] The Guarantee clearly and unambiguously states that BMO is not required to realize on the Company’s assets before being entitled to payment pursuant to the Guarantee:

The Bank shall not be obliged to seek recourse against the Customer or any other person or realize upon any security it may hold before being entitled to payment from the undersigned of all debts and liabilities hereby guaranteed.

[40] There is similar wording in the GSA:

15. The security hereof is in addition to and not in substitution for any other security now or hereafter held by the Bank and shall be general and continuing security notwithstanding that the Obligations of the Debtor shall at any time or from time to time be fully satisfied or paid.

[41] The Loan agreement assists here too as it says that BMO is “authorized” to sell the secured assets after default, not that BMO is required to.

[42] Additionally, the Guarantee provides that:

THE UNDERSIGNED represents and warrants that (i) it fully understands the provisions of this Guarantee and its obligations hereunder; ii) it has been afforded the opportunity to engage independent legal counsel, at its own expense, to explain the provisions of this Guarantee and its obligations hereunder; and (iii) it has either engaged counsel in connection with its execution of this Guarantee or has decided, at is sole discretion, not to do so.

[43] Reading these agreements as a whole, in a commercially reasonable manner, in accordance with good business sense, and also giving the words used their ordinary meaning, BMO was not required to realize on the security prior to moving on the Guarantee. There is no basis to interpret these agreements in any other way.

Issue 3: Did BMO act negligently or in breach of a duty of good faith performance by deciding not to realize on the Company’s assets?

Negligence

[44] The argument that BMO is liable in negligence must fail for failing to realize on the assets must fail.

[45] There is an established duty of care on a secured creditor to not realize on assets improvidently. This involves the analysis of whether the secured creditor has taken reasonable precautions to obtain the true market value of the property as of the date of the sale: Bank of Nova Scotia v. Scholaert, 2017 ONSC 5960 at para 23 citing Centurion Farms Ltd. v. Citifinancial Canada Inc., 2013 ONCA 79 at para 4.

[46] The Defendants provided no case authority for a duty of care requiring a secured creditor to realize on assets before suing on the debt or pursuing the guarantors. Any such duty of care in this case would be inconsistent with the express agreements that permitted BMO to pursue the Guarantors prior to attempting to realize on any security. The Defendants provided no argument as to why a new duty of care should be recognized requiring this.

[47] In any event, I would not have recognized any such new duty of care.

[48] While there can be concurrent liability in contract and tort, “a concurrent or alternative liability in tort will not be permitted if its effect would be to permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort.” Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147 at p 206.

[49] While there is no express exclusion clause in the Guarantee, the policy underlying Central Trust is applicable here. A party should not be liable in negligence for not doing the very thing that the contract expressly does not require. If such a duty were created, parties could circumvent commercial agreements entered into by them freely by imposing tort duties inconsistent with these agreements.

[50] The Guarantee specifically directed that “The Bank shall not be obliged to seek recourse against the Customer or any other person or realize upon any security it may hold before being entitled to payment from the undersigned of all debts and liabilities hereby guaranteed.”

[51] The omission permitted under the Guarantee is this very same omission that the Defendants seek to use as the omission that would constitute the tort of negligence. This cannot ground a duty of care.

Good faith

[52] I also reject the argument that BMO breached the contractual duty of good faith by failing to first realize on the assets. The implicit argument being made here is that the obligation on contracting parties to perform in good faith means that they have to abandon contractual entitlements because insisting on their strict legal rights would be disadvantageous to the other party. The duty of good faith does not require this: Bhasin v. Hrynew, 2014 SCC 71 at para 73.

[53] In any event, BMO made reasonable good faith efforts to assess whether the assets had value with the intention of selling them to apply to the outstanding indebtedness.

[54] In August 2018 BMO directed an appraisal by an accredited appraiser, Tony Burnett, completed on August 28, 2018. This appraisal determined that the value of the Company’s assets was approximately $3,215.00.

[55] Due to the filthy condition and low value of the assets, Mr. Burnett recommended that BMO abandon the Assets because any attempt to liquidate the Assets was likely to cost more money than would be realized from a sale.

[56] Mr. Burnett provided a sworn affidavit.

[57] The Defendants admit that they never obtained an appraisal of the Assets from an accredited appraiser with respect to their value as of July or August 2018.

[58] Instead, the Defendants argued that the value of the assets as of August 2018 was approximately $232,000 based upon the Defendants and their accountant’s views, none of whom are accredited appraisers for personal property. This was based upon used removable equipment they purchased in 2015 for approximately $50,000 and new purchases also in 2015.

[59] These would have depreciated by the time the landlord locked the Company out, even if all of these items were still there at that time. Further, there is no evidence from the Defendants that all of the same removable assets were on the Premises at the time of the lockout.

[60] Mr. Burnett states in his affidavit that the Defendants’ estimate is “grossly inaccurate and cannot be supported.”

[61] The Defendants also rely on an MLS listing of theirs where they tried to sell the entire business as a going concern for $245,000 based upon the evaluation of a realtor, Stephen Murphy, who used other restaurant businesses in the neighborhood as comparators. I agree with BMO that a realtor’s business valuation is not the same as a distress valuation as the two types of valuations include vastly different components. Furthermore, a listing price can be manipulated to take advantage of market trends or set off a bidding war. Until sold, a listing price is not a true reflection of the value of the business, and certainly not a true reflection of the value of the assets that can be removed and resold by BMO.

[62] In Bank of Nova Scotia v. Scholaert, 2017 ONSC 5960, the defendant relied on an “Asset Purchase Agreement” to support the position that the Bank improvidently sold the Assets. However, the Court noted that the “Asset Purchase Agreement” relied on is not an expert report and was therefore not admissible. The Bank, in that case, also relied on an appraisal by an accredited appraiser who determined the distress value of the assets.

[63] Furthermore, the MLS listing relied on by the Defendants is attached to the plaintiff's own affidavit and does not qualify as an expert report even if one could assume it was based on the real estate agent’s valuation. As was held by this Court in Toronto Dominion Bank v. Schrage, 2009 ONSC 45444, [2009] O.J. No. 3636 (Sup. Ct.), also a motion for summary judgment, in the case of experts, sworn evidence is required and should not be filtered through the hearsay evidence of a party.

[64] The Defendants also reference some of Mr. Burnett’s evidence given on cross examination where he admitted that he did not go to the basement of the Premises and that his evaluation was based upon those assets on the first floor.

[65] Although the Defendants argue that this completely undermines Mr. Burnett’s appraisal, they did not provide any evidence of what they say was in the basement at the time or what specifically was on the Premises that Mr. Burnett did not include in his assessment. If they felt that there were specific items missing from Mr. Burnett’s assessment that should have been taken into account, they could have sworn an affidavit as to what these were and then provided a valuation of them.

[66] In any event, the Defendants main complaint here with respect to what happened to the assets is not against BMO. It is against the landlord.

[67] They say that the landlord owed the Company money for utilities in the amount of $13,740, that it manipulated the circumstances along with rent checks which led them into a default of rent, the closure of the restaurant and a series of events thereafter. After the lockout, the landlord refused to give them any access to anything at the Premises including their personal items and cash. They further say that they believe that the landlord sold their assets and/or released the Premises to another business that is using the Company’s assets. They have provided pictures of the new enterprise operating there and using the same assets.

[68] If the landlord engaged in unlawful conduct like manipulating the Company into default, hiding assets in the basement, improperly locking the Defendants out, purporting to throw valuable assets out but then selling them for value, this is an issue as between the landlord and the Company.

[69] The Defendants allegation that there was some “connivance” by BMO with the landlord is not supported on this record. The only evidence offered are emails between the landlord and BMO commencing August 23, 2023, where they discuss BMO’s wish to conduct an inspection and appraisal with the hope that BMO could sell the assets to the landlord or a new tenant, with subsequent discussions relating to the fact that BMO would not be selling the assets.

Issue 4: Can the Defendants rely on the doctrine of non es factum?

[70] It is clear that this is not a case that attracts this doctrine.

[71] To succeed on a non es factum defence, must establish: (1) the contract signed is fundamentally different from what they intended to sign; (2) the mistake was a result of misrepresentation; and (3) they did not sign the contract due to their own carelessness. Bulut v. Carter, 2014 ONCA 424, para. 18.

[72] At bar, there is no allegation, nor any evidence that the Bank misrepresented the nature of the agreements to the Defendants. If the Defendants were mistaken as to the import of any of these agreements, it was through their own carelessness.

[73] I add that:

a. Leonardo is sophisticated. English is his first language. He has a degree from York University in Administrative Studies and is currently working in software. He attended Sheridan College for business. Leonardo has also owned more than one business. b. Leonardo worked for the Bank of Montreal and ought to be comfortable with bank documents. c. The Guarantors signed both the Loan Agreement as “guarantor” and the Guarantee, which states “Guarantee for Indebtedness of an Incorporated company” plainly, right at the top. Any reasonable person, who took the care to read these documents, would realize what they were agreeing to. d. The Guarantors opted not to seek independent legal advice.

[74] Further, the Defendants admit the following facts:

a. The Loan Agreement was signed freely and voluntarily. b. The Company signed the GSA freely and voluntarily. c. Leonardo read the GSA before signing it. d. The Guarantee was signed freely and voluntarily. e. Leonardo read the Guarantee before signing it.

Costs

[75] Pursuant to s. 131(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43, costs are in the discretion of the court. Rule 57 of the Rules sets out the factors which courts should have regard to when awarding costs. The overall objective is “to fix an amount that is fair and reasonable for the unsuccessful party to pay in the particular proceeding, rather than an amount fixed by the actual costs incurred by the successful litigant”: Zesta Engineering Ltd. v. Cloutier (2002), 2002 ONCA 25577, 21 C.C.E.L. (3d) 161 (Ont. C.A.), at para. 4; Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 ONCA 14579, 71 O.R. (3d) 291 (C.A.), at para. 26; Clarington (Municipality) v. Blue Circle Canada Inc., 2009 ONCA 722, 100 O.R. (3d) 66, at para. 52; and G.C. v. Ontario (Attorney General), 2014 ONSC 1191, at para. 5.

[76] BMO claims full indemnity costs in the amount of $47,945.58 on the basis of wording in the Guarantee that states that BMO may recover “all costs, charges and expenses that the Bank may incur in enforcing or obtaining payment of amounts due.” The loan agreement has similar wording.

[77] As set out in Royal Bank of Canada v. Edna Granite & Marble Inc., 2014 ONSC 3377, these types of provisions are enforceable in the same manner as a loan or guarantee. See also Potentia Renewables Inc. v. Deltro Electronic Ltd., 2019 ONCA 779 at para 54.

[78] Although I agree that BMO is entitled to be paid full indemnity costs, in my view there is an implicit requirement in these agreements that the costs expended be reasonable. Here, the costs claimed are excessive and unreasonable compared to the Defendants’ full indemnity costs which are $15,129.49, particularly taking into account that BMO has expended more money than the actual debt it seeks to collect.

[79] I find that the reasonable full indemnity costs for which the Defendants should be liable is $25,000.

Conclusion

[80] Therefore, there is no genuine issue requiring a trial to determine whether the Bank was entitled demand repayment from the Guarantors in these circumstances or whether the Company is liable for the outstanding indebtedness.

[81] I have been able to find the necessary facts and proceeding by way of summary judgment is a fair and proportionate way to decide this matter.

[82] Order to go in accordance with paragraph 12 above together with costs payable to BMO by the Defendants in the amount of $25,000 within 30 days.

Papageorgiou J.

Released: April 15, 2024

Note on Contractual Interpretation

[1] The main principles of contractual interpretation are as follows: A court cannot consider evidence of the parties’ subjective intentions. With respect to written contracts, a court presumes that the parties have intended what they said. A court should interpret commercial agreements in accordance with good business sense and avoid commercial absurdity. Where there is an ambiguity, the court may resort to extrinsic evidence to clear up the ambiguity. The words of a contract must be given their ordinary and grammatical meaning; The contract must be read as a whole. The court should take into account surrounding circumstances known or reasonably known to the parties or which ought reasonably be known at the time of the contract: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633; Corner Brook (City) v. Bailey, 2021 SCC 29, [2021] 2 S.C.R. 540, at para. 20; Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, at para. 64; Alberta Union of Provincial Employees v. Alberta Health Services, 2020 ABCA 4, at paras. 25-26; Bellwoods Brewery Inc. v. 1896842 Ontario Limited, 2023 ONSC 2845, at paras. 13-1.