Guarantee Company of North America v. Pashley Farms Limited, 2012 ABQB 598

Court of Queen ’ s Bench of Alberta Citation: Guarantee Company of North America v. Pashley Farms Limited, 2012 ABQB 598 Date: 20121001 Docket: 1201 04162, 1101 09717 Registry: Calgary Between: Docket: 1201 04162 The Guarantee Company of North America Plaintiff - and - Pashley Farms Limited, Robert H. Zmurchyk and Karen P. Zmurchyk Defendants Between: Docket: 1101 09717 The Guarantee Company of North America Plaintiff - and - Robert H. Zmurchyk also known as Robert Zmurchyk, Karen P. Zmurchyk also known as Karen Zmurchyk, B.Y.Z. Construction Inc., 4YZ Holdings Ltd., Pashley Farms Ltd., Michael J.

Zmurchyk, Katherine K. Zmurchyk and Mathew R. Zmurchyk Defendants _______________________________________________________ Reasons for Judgment

of the Honourable Mr. Justice A.D. Macleod _______________________________________________________ [ 1 ] The Plaintiff creditor seeks

summary enforcement of two mortgages held as security against loans made to two family operated construction businesses. The Defendant guarantors and debtors oppose

summary judgment on the grounds that a triable issue exists. They cross-apply for a consolidation of this foreclosure action with a separate action to recover other amounts owed under the loan arrangements. I. Background to the application [ 2 ] The construction company, BYZ Construction Inc, has had a business relationship with the Guarantee Company of North America (“GCNA”) commencing from approximately 1991.

BYZ and 4YZ, a related company, were operating as a going concern construction business until the early months of 2010 when BYZ experienced a cash restriction due in part to the inability to collect receivables. The companies requested GCNA to provide interim funding to allow for completion of certain contracts and avoid defaults under certain bonds. The companies were indebted to GCNA for several million dollars. GCNA was provided with the company’s work in progress reports and cash flow forecasts, analysis of work in hand, and interim financial statements.

GNCA prepared and presented to the companies and the Defendant debtors - BYZ, 4YZ, Robert Zmurchyk, and Karen Zmurchyk - a Surety Support Agreement (the “Agreement”) pursuant to which the Defendant guarantors - Pashley Farms, Robert Zmurchyk, and Karen Zmurchyk - executed individual Guarantee and Indemnity Agreements (the “Guarantees”) for past and future indebtedness of the companies. As a result of this, GCNA provided further funds in the amount of nearly $2.9 million and current indebtedness totals nearly $7 million.

As security for the Guarantees given by the Defendants, mortgages were given on two parcels of land which constitute the Zmurchyks’ homestead in southern Alberta near Medicine Hat. The Pashley Farms mortgage relates to parts of the SE 1/4 and SW 1/4 of

Section 11, Township 12 and the Zmurchyk’s mortgage deals with a 160 acre portion of the SE 1/4 of

Section 11. [ 3 ] The Agreement and the Guarantees were executed on 8 June 2010. [ 4 ] In March 2011 GCNA commenced an action against the Zmurchyks, the construction companies, other members of the family and the farm company seeking a number of remedies with respect to the indebtedness and payment in excess of $8 million alleging, among other things, a breach of the Agreement. [ 5 ] A Statement of Defence was filed on behalf of the Defendants alleging that the failure of the construction company was a result of a series of wrongful acts by GCNA which were contrary to the reasonable expectations of the Defendants and contrary to the Agreement.

The Defendants point to clause 45 of the Agreement under the heading “Control” which reads as follows: It is not the intention of the surety to take any control or direction over the business operations or affairs of any of the B.Y.Z. parties and nothing herein shall be construed as indicating any such intention.

The rights given to the surety hereunder and under the other surety agreements are intended solely to protect the position as surety on the bonds. [ 6 ] There are numerous allegations by the Defendants that GCNA did take control and direction over the business operation and affairs of the construction companies and in doing so, ignored the interest of the Defendants and drove the company out of business. [ 7 ] A Counterclaim was issued by Mr. and Mrs. Zmurchyk and the construction companies against GCNA seeking on behalf of Mr. and Mrs.

Zmurchyk $1.2 million and on behalf of the construction companys nearly $13 million and punitive damages for all Plaintiffs by counterclaim in the amount of $5 million. GCNA has filed a Statement of Defence to that claim.

[ 8 ] In August 2011, GCNA commenced a foreclosure action in the Judicial District of Medicine Hat alleging default on the Guarantees and seeking enforcement of the mortgage. The Defendants Pashley Farms and Mr. and Mrs. Zmurchyk are seeking to consolidate that action with the earlier action and they have brought a cross-application to that effect. All actions have been transferred to Calgary. [ 9 ] GCNA seeks

summary enforcement of the mortgage and requests that this Court issue an Order for Sale to the Plaintiff approving a sale of the lands to the Plaintiff for $420,000.00 which it alleges is the evidence as to the value of the mortgaged lands. II. GCNA ’s position [ 10 ] GCNA says that there can be no question but that the guarantors owe the liquidated amount of approximately $6.9 million. The construction companies received additional monies after the signing of the guarantees. It also points out that the value of the lands at issue is small compared to the overall amount.

They say that the Defendants may continue to litigate the merits of the Counterclaim, which is an unliquidated claim, and if they are successful there is no issue that GCNA cannot pay any judgment against it. [ 11 ] In addition, GCNA relies on Clause 4.2 of the Guarantees which, they say, constitutes a waiver of rights and precludes the defences raised by the Defendants.

They deny the allegations of misrepresentation. [ 12 ] With respect to the Defendants’ position that there was no compliance with the Guarantees Acknowledgement Act , RSA 2000, c G-11 , GCNA cites a number of cases which say that contracts governed by the law of Ontario need not comply with that Act. III. The position of the Defendants [ 13 ] Mr. and Mrs. Zmurchyk and Pashley Farms argue that the obligation under the Guarantees are very much an issue. The Guarantees were given pursuant to the over-arching Agreement which they say was breached by GCNA.

The Guarantees were given on the representation that the construction company’s business would not be interfered with by GCNA and it was only because of this interference that the business failed. It was the wrongdoing of GCNA which triggered the need to call on the Guarantees in the first place. [ 14 ] The Defendants claim that they would not have signed these Agreements but for the representations made by GCNA. They further say that basic principles of the law of guarantees render the Guarantees unenforceable. Finally, Mr. and Mrs.

Zmurchyk say that the non-compliance of the Guarantees Acknowledgement Act is fatal to the claim as against them. Otherwise, they say, the purpose of that Act is thwarted. IV. Issues before this Court [ 15 ] The main issue really comes down to whether GCNA is entitled to a

summary judgment under its foreclosure action. In other words, are the defences to the Guarantees bound to fail?: Murphy Oil Co v Predator Corp , 2006 ABCA 69 , [2006] 384 AR 251. [ 16 ] If the answer to the above question is yes, the cross-application is moot. If no, should all matters be tried together? V. The issue of

summary judgment [ 17 ] GCNA argues the wording of the guarantee precludes any defence. Clause 4.2 reads:

The liabilities of the Guarantor under this Agreement are absolute and unconditional, and will not be affected by any act, omission, matter or thing that, but for this Section, would reduce, release or prejudice any of its liabilities under this Agreement, or that might constitute a legal or equitable defence to or a discharge, limitation or reduction of the Guarantor’s liabilities under this Agreement, including the following, whether or not known to it or the Guaranteed Party or consented to by it or the Guaranteed Party: ... (

b) any amendment, supplement or restatement (however fundamental) or replacement of any documents relating to the Obligations; ... (

c) any unenforceability, illegality or invalidity of any obligation of any person under or in connection with any documents relating to the Obligations, including any bar to recovery under any statute of limitations; ... (

j) the existence of any claim, set-off or other right that the Guarantor may have against the Debtor, the Guaranteed Party or any other person, whether in connection with the documents relating to the Obligations or otherwise. Each of the defences mentioned above is waived by the Guarantor to the fullest extent permitted under applicable law. [ 18 ] But as explained by Kevin P McGuinness in The Law of Guarantees , 2nd ed (Scarborough, ON: Carswell, 1996) at para 10.134: As noted above, in general, the law permits parties to modify their rights by contract.

However, a guarantee is no more than a type of contract, and in order to be enforceable it is necessary that it be a valid and binding contract. Although a person may agree to waive his rights by contract, the law does not permit a person to contract out of the law of contract. Every contract must possess the essential ingredients required to create a binding contract at law. [ 19 ] These essential ingredients include consensus ad idem . Without a proper meeting of the minds at formation, no contract can be found to exist.

The Defendants claim that the Guarantees would not have been signed if GCNA had not represented and agreed to advance funds in a timely matter and to not interfere with the operation of their business. I am not persuaded at this stage that the Defendants are bound to fail. [ 20 ] The proper forum for assessing the quality and weight of the evidence is a trial: De Shazo v Nations Energy Co , 2005 ABCA 241 at para 17 , [2005] 367 AR 267. I find that GCNA has not met its burden of showing no genuine issue for trial and GCNA’s application for

summary judgment under the foreclosure action is denied. This leaves the question of whether the two actions should be consolidated. VI. The issue of consolidation [ 21 ] Both actions arise out of the same factual matrix. The Defendants raise the same arguments in both actions. Neither action is beyond the pret-trial stage. It makes sense to order the actions either consolidated or to order that they proceed on the basis that production and questioning in one are applicable to the other and that they be tried together.

The parties may choose which option or come back if they can’t agree. [ 22 ] The Defendants’ are entitled to costs. Heard on the 23 rd day of August, 2012. Dated at the City of Calgary, Alberta this 1 st day of October, 2012.

A.D. Macleod J.C.Q.B.A. Appearances: Andrew K. Maciag, Q.C. Borden Ladner Gervais LLP for the Plaintiff Peter S. Jull, Q.C. Davis LLP Stephen Carter-Edwards Gowling Lafleur Henderson LLP for the Defendants