) ) Central 1 Credit Union Plaintiff (Moving Party) – v. –, 2010 ONSC 7218

CITATION : Central 1 Credit Union v. Stewart Restoration, 2010 ONSC 7218 COURT FILE NO.: 10-20993 DATE: 2010-12-31 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) Central 1 Credit Union Plaintiff (Moving Party) – and – John J. Stewart Restoration Services Inc. Defendant (Responding Party) ) ) ) ) ) ) ) ) ) David J. Jackson, for the Plaintiff (Moving Party) J. Alden Christian, for the Defendant (Responding Party) ) ) ) HEARD: December 2, 2010 THE HONOURABLE MR. JUSTICE G. E. Taylor REASONS FOR JUDGMENT Introduction [ 1 ] This is a motion by the plaintiff for

summary judgment against the defendant on a guarantee. There is a companion motion also for

summary judgment against John Joseph Stewart personally, also based on a guarantee. The parties are in agreement that the outcome of the motion for

summary judgment in the current action will also dictate the outcome in the companion action. Facts [ 2 ] The predecessor of the plaintiff (who I will refer to as the plaintiff) and Code's Mill Inn on Stewart Park Ltd. entered into a Commitment Letter dated September 28, 2006, pursuant to which the plaintiff agreed to lend a total of $6,300,000 to Code's Mill Inn for the purpose of constructing and operating an Inn and Spa in Perth, Ontario.

Pursuant to the Commitment Letter, the plaintiff agreed to advance to Code’s Mill Inn a $5,400,000 construction loan which would be converted to a mortgage at the completion of construction. The plaintiff agreed to advance a further $900,000 to permit Code’s Mill Inn to acquire equipment by way of a commercial lease.

Code's Mill Inn was required to make monthly payments of interest only on both the construction loan and the lease. [ 3 ] The defendant guaranteed repayment of $600,000 of the amount lent to Code’s Mill Inn and secured that guarantee by way of a collateral mortgage on property located at 2 Wilson Street, Perth, Ontario. [ 4 ] John Joseph Stewart is a shareholder, a director and the president of the defendant. He is also a shareholder, a director and the president of Code’s Mill Inn.

John Joseph Stewart guaranteed repayment of $2 million of the amount advanced to Code's Mill Inn by the plaintiff. [ 5 ] By way of an amendment to the Commitment Letter dated August 3, 2007, the plaintiff and Code's Mill Inn agreed to convert the lease into a demand loan with monthly payments of interest only. [ 6 ] The plaintiff began advancing the construction loan to Code's Mill Inn in December 2006 and by December 2007 had advanced the full amount of $5,400,000.

The plaintiff began advancing the demand loan to Code's Mill Inn in September 2007 and by June 2008 had advanced all but $181,211 of the commitment of $900,000. The total amount advanced by the plaintiff to Code's Mill Inn was $6,118,789. Code's Mill Inn defaulted on the payment of monthly interest on the construction loan in February and March 2008 and on the payment of monthly interest on the demand loan in January and March 2008.

From the final advance on the demand loan in June 2008, the amount of $122,276.70 was used to bring the interest payments owing on the construction loan into good standing and the amount of $8,816.72 was used to bring the interest payments on the demand loan into good standing. Code's Mill Inn has not made any interest payments to the plaintiff on either the construction loan or the demand loan since June 2008.

[ 7 ] In addition to failing to make monthly interest payments, Code's Mill Inn failed to make certain lease payments to the Corporation of the Town of Perth which also was an event of default pursuant to the Commitment Letter. [ 8 ] In February 2009, Code's Mill Inn requested that the plaintiff advance a further $1,100,000 to increase the total indebtedness of Code's Mill Inn to $7,400,000. The plaintiff agreed and the Commitment Letter was amended by an Agreement dated February 19, 2009.

Pursuant to the February 19, 2009 Agreement, the construction loan and the demand loan, together with the new advance, would be converted into a single mortgage of $7,400,000. The February 19, 2009 Agreement was further amended by an Agreement dated May 20, 2009 to increase the amount of the new advance to $1,200,000. The Agreements dated February 19, 2009 and May 20, 2009 contained certain conditions that were required to be met by Code's Mill Inn before further funds would be advanced by the plaintiff.

No additional funds were advanced pursuant to the February 19, 2009 or the May 20, 2009 Agreements because of the failure of Code's Mill Inn to satisfy the conditions. [ 9 ] By July 21, 2009, Code's Mill Inn was in default of its obligations to the plaintiff as a result of non payment of interest on the loans, failure to pay property taxes and other events of default as contained in the Commitment Letter. Code's Mill Inn requested that the plaintiff not take steps to enforce its security and to allow it time to satisfy the conditions in the Commitment Letter and the February and May 2009 Agreements.

As a result, Code's Mill Inn, the plaintiff, the defendant and John J. Stewart entered into a Standstill Agreement dated August 18, 2009. The purpose of the Standstill Agreement was to allow Code's Mill Inn 30 days to comply with certain conditions and if it did, the plaintiff agreed to advance the additional sum of $1,200,000. [ 10 ] The Standstill Agreement contained the following recitals: And Whereas the Borrower and the Guarantor have committed several defaults under the Loan, including but not necessarily limited to: (

a) the amount of 362,549.30 is due and payable as of July 21, 2009 and remains unpaid as of the date hereof; (

b) failure to provide evidence of payment of property taxes, leaving arrears of approximately $260,000 plus interest and penalties; (

c) failure to pay debts generally as they come due; and (

d) failure to maintain Debt Service Coverage of 1.30:1 under the Commitment Letters and/or 1.1:1 under the 2009 Commitment Letter (the "Existing Default") And Whereas the Borrower has requested that the Lender forbear from initiating any enforcement proceedings and exercising certain rights and remedies in respect of the Existing Default for the Forbearance Period (as hereinafter defined) in order to allow the Borrower an opportunity to satisfy the Conditions And Whereas the Lender has agreed to so forbear, but only strictly on the terms and explicitly subject to all of the conditions set forth in this Standstill Agreement. [ 11 ] The Standstill Agreement also contained the following acknowledgments: 2.1 The Borrower the Guarantors[sic] certify, acknowledge and confirm that: (

i) the recitals to this Standstill Agreement are true and complete and describe all relevant facts and circumstances relating to the Loan and the Existing Default as of the date hereof; and (ii) there are no facts or circumstances known to the Borrower or the Guarantors that, if disclosed to the Lender, might reasonably be expected to adversely affect the Lender’s decision to forbear in the manner set forth in this Standstill Agreement. 2.2 (

a) The Borrower and the Guarantors hereby acknowledge that as at July 21, 2009 the total arrears of $362,549.30, all as more particularly described in

Schedule "B" (the "Loan Arrears"). 2.2 (

b) The Borrower and the Guarantors hereby and acknowledge[sic] that, as of the date hereof, they are validly indebted to the Lender for the payment in full of all the principal amounts owing under the Loan and the Loan Arrears, without defence, counterclaim, set off, cross-claims, claim or demand any kind or nature whatsoever, including, but not necessarily limited to, any defences the Borrower or Guarantors have or may have pursuant to the Limitations Act, 2002 , S.O. 2002, C-24,

Schedule B. [ 12 ] Code's Mill Inn failed to comply with all of the conditions in the Standstill Agreement within the specified time so the further $1,200,000 was never advanced. [ 13 ] On October 21, 2009, the plaintiff made demand on Code's Mill Inn and the defendant for payment of the indebtedness of Code's Mill Inn. On the same day, the plaintiff also made a demand on John J. Stewart for payment pursuant to his guarantee. [ 14 ] In early December 2009, Code's Mill Inn, through its solicitor, advised the plaintiff of its intention to pursue alternate financing.

In order to allow that financing to be put in place, Code's Mill Inn requested that the plaintiff refrain from taking any steps to enforce its security until February 28, 2010. On December 22, 2009, Code's Mill Inn, the defendant and John J. Stewart signed a Forbearance Agreement which granted Code's Mill Inn until February 15, 2010 to arrange for alternate financing. In the Forbearance Agreement it was acknowledged that the total amount owing to the plaintiff including principal, interest and fees was $6,653,808.45.

Code's Mill Inn and the guarantors acknowledged that the plaintiff had incurred and was continuing to incur legal expense for which they were responsible. The defendant acknowledged that it was liable to the plaintiff on its guarantee in the principal amount of $600,000 and John J.

Stewart acknowledged that he was liable on his guarantee in the principal amount of $2 million. [ 15 ] The Forbearance Agreement contained the following clause: 20.2 The Borrower and Guarantors confirm and acknowledge that no defence or objection to the enforcement of the payment of the Indebtedness, the Security, the Guarantees and the Restoration Mortgage exist at the date hereof or if such defence or objection exists, it is hereby withdrawn and waived by the Borrower and Guarantors. [ 16 ] Code's Mill Inn, the defendant and John J.

Stewart were represented by Paul Howard, a solicitor with the firm of Howard Ryan Telford Knott & Dixon, with respect to the negotiation and execution of the Forbearance Agreement. The request for a period of forbearance to allow Code's Mill Inn to arrange alternate financing was first made by Paul Howard in a letter dated December 7, 2009. At no time prior to the commencement of the current proceeding was any issue raised about John J. Stewart signing the Forbearance

Agreement on behalf of Code's Mill Inn, the defendant or himself personally as a result of economic duress. [17] In an affidavit sworn September 30, 2010 in response to the plaintiff's motion for

summary judgment, John J. Stewart allegesthat at the time of the execution of the Forbearance Agreement he was under extreme personal pressure, as a result of his father dying ofcancer and his mother-in-law being hospitalized as a result of dementia. His father passed away on December 25, 2009 and his mother-in-law died on December 28, 2009.

During this period of time he says he was completely depressed and exhausted from both personaland business crisis’ and accordingly did not realize that he could have and should have attended in court and opposed the appointment ofBDO as receiver of Code's Mill Inn. [18] Code's Mill Inn did not arrange new financing by the end of the forbearance period which was extended to February 23,2010. On February 24, 2010 the plaintiff appointed BDO Canada Ltd. as receiver of the business, undertaking and property of Code'sMill Inn. There was no objection to this appointment.

On March 10, 2010, the plaintiff commenced proceedings to have BDOappointed by the court as receiver and manager of Code's Mill Inn. On March 17, 2010 the Honourable Mr. Justice Wilton-Siegel of theOntario Superior Court appointed BDO receiver of all of the assets, undertakings and properties of Code's Mill Inn.

Paragraph 8 of theorder appointing BDO as receiver reads as follows: This Court Orders that no Proceeding against or in respect of the Debtor or the Property shall be commenced or continued except with thewritten consent of the Receiver or with leave of this Court and any and all Proceedings currently underway against or in respect of theDebtor or the Property are hereby stayed and suspended pending further Order of this Court.

The wording of the above paragraph 8 is from the Standard Form Template Receivership Order developed by the Commercial ListUsers’ Committee of the Ontario Superior Court of Justice. [19] The plaintiff did not obtain the consent of BDO or leave of the court to commence this action. [20] As of August 25, 2010, the total amount of the indebtedness of Code's Mill Inn to the plaintiff including professional fees was$6,976,204.01. Discussion and Analysis [21] Motions for

summary judgment are governed by rule 20 of the Rules of Civil Procedure. Rule 20 was amended, effectiveJanuary 1, 2010. The relevant portions of the amended rule read as follows: 20.01

(1) A plaintiff may, after the defendant has delivered a statement of defence or served a notice of motion, move with supportingaffidavit material or other evidence for

summary judgment on all or part of the claim in the statement of claim. 20.04

(2) 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; 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 togrant

summary judgment.

(2.1) In determining under clause (2) (

a) whether there is a genuine issue requiring a trial, the court shall consider the evidencesubmitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for thepurpose, unless it is in the interest of justice for such powers to be exercised only at a trial: 1. Weighing the evidence. 2. Evaluating the credibility of a deponent. 3. Drawing any reasonable inference from the evidence. [22] The effect of the amendments to Rule 20 has been discussed in a number of cases. [23] In Cuthbert v. TD Bank, 2010 ONSC 830 , [2010] O.J.

No. 630, Karakatsanis J. (as she then was) stated atparagraphs 10, 11 and 12: The change in the Rules from "no genuine issue for trial" to "no genuine issue requiring a trial," together with the explicit powers of themotions judge to make evidentiary determinations permits a more meaningful review of the paper record and expressly overrulesjurisprudence that prevented motions judge from making evidentiary determinations. As a result, consistent as well with the newprinciple of proportionality in Rule 1.04 (1.1), cases or issues need not proceed to trial unless it is genuinely required.

The decision itself or the test for

summary judgment - whether there is a genuine issue of material fact that requires a trial for itsresolution as first articulated in Irving Ungerman Ltd. v. Galanis (ON CA), 1991, 4 O.R. (3d) 545 (C.A.) - has notchanged. However, the cases that have since restricted a motions judge in assessing credibility, weighing evidence or drawing factualinferences have been superseded by the powers set out in the new Rule. Both the analytical review and the availability of oral evidencehave considerably broadened the motions judge's tools in a

summary judgment motion. Nonetheless, although a motions judge mayweigh the evidence, evaluate the credibility and draw reasonable inferences from the evidence, it is not the role of the motions judge tomake findings of fact for the purpose of deciding the action on the basis of the evidence presented on a motion for

summary judgment.This change in the Rule does substitute a

summary trial for a

summary judgment motion. Although a

summary judgment motion may, ifthe motions judge so directs, resemble a

summary trial, the test and the decision are different (See Dawson v. Rexcraft Storage andWarehouse Inc. (1998), (ON CA), 164 D.L.R. (4th) 257 (Ont. C.A.)) The motions judge must take "a hard look" atthe evidence to determine whether it raises a genuine issue requiring a trial. (See Rozin v. Ilitchev (2003), (ON CA),

66 O.R. (3d) 410 at para. 8 (C.A.)) New Rule 20.04 provides the judge with more tools to do so. The new Rule does not change the burden of a party in a

summary judgment motion. Rule 20.01 provides that a party who seekssummary judgment must move with supporting affidavit material or other evidence to support its motion.

Pursuant to Rule 20.02(2), aresponding party "may not rest solely on the allegations or denial in the party's pleadings but must set out in affidavit material or otherevidence, specific facts showing there is a genuine issue requiring a trial." In other words, consistent with existing jurisprudence, eachside must "put its best foot forward." The court is entitled to assume that the record contains all the evidence which the parties willpresent if there is a trial, although in some circumstances the interests of justice may require that a material issue should be determined attrial, upon a full evidentiary record. [24] The effect of the amendments was also discussed by Brown J. in the case of Lawless v.

Anderson, 2010 ONSC 2723 ,[2010] O.J. No. 2017. At paragraph 19 he explained: The radical change introduced by the New Rule 20 was to arm judges with greater powers in performing their review of the evidence. Nolonger is the motion judge confined to identifying whether disputed material facts exists. Rule 20.04(2.1) enables the judge to resolvedisputed facts by weighing evidence, evaluating credibility and drawing reasonable inferences from the evidence. In a very real senseRule 20.04(2.1) vests in a motion judge the powers typically exercised by a trial judge. [25] In Healey v.

Lakeridge Health Corp., 2010 ONSC 725 , [2010] O.J. No. 417, Perell J. stated at paragraph 23: Placed in the context of the other amendments to Rule 20, the purposes of the change from "no genuine issue for trial" to "no genuineissue requiring a trial" in the test for a

summary judgment are: (1) to make

summary judgment more readily available; and (2) torecognize that with the court's expanded forensic powers, although there may be issues appropriate for trial, these issues may not requirea trial because the court has the power to weigh evidence on a motion for

summary judgment. [26] Accordingly,

summary judgment in favour of the plaintiff is appropriate if there is no genuine issue requiring a trial unless itis in the interests of justice that the matter proceed to trial. For the reasons that follow I have concluded that there is no genuine issue asbetween the plaintiff and defendant which requires a trial to be resolved. [27] I am satisfied that the amount owing by Code's Mill Inn to the plaintiff was $6,976,204.01 as at August 25, 2010. Thatamount far exceeds the amount of the defendant’s guarantee or the guarantee given by John J Stewart. [28] Mr.

Christian, counsel for the defendant, argues that the wording of the order appointing the receiver requires court approvalor the consent of the receiver before this action can proceed. He submits that current action is "in respect of the Debtor or the Property". He provided no case law in support of his position. In my view the order appointing BDO as receiver of Code's Mill Inn does notinterfere with the plaintiff's rights to pursue the guarantors of Code's Mill Inn.

The purpose of the paragraph in the TemplateReceivership Order is to assure no interference with the receiver fulfilling its obligations to the court and the affected parties. It is notintended to interfere with a creditor's legitimate attempts to enforce its security by pursuing guarantors. Accordingly I find that this is notan issue that requires a trial. [29] As I understand the position of the defendant it is that John J. Stewart was under duress at the time he signed the ForbearanceAgreement. Firstly, the only evidence that the plaintiff was aware of the personal and family circumstances of John J.

Stewart inDecember 2009 is found in the cross-examination of Suzanne Fisher, the plaintiff's Manager of Credit Risk Management on heraffidavits sworn August 30, 2010 and October 12, 2010. She testified that the extent of her knowledge was based on informationprovided by John J. Stewart that his father and mother-in-law were both ill. Secondly, John J. Stewart, Code's Mill Inn and thedefendant were all represented by a solicitor during the course of negotiating and excusing the Forbearance Agreement. Thirdly, even ifI were to find that there is a triable issue with respect to John J.

Stewart's personal and family circumstances at the time when theForbearance Agreement was executed (which I do not), that does not have any bearing on the amount of the indebtedness of Code's MillInn to the plaintiff. As I have stated previously, the amount of the debt far exceeds the amount of either guarantee. [30] In support of the allegation of economic duress, the defendant relies on the decision of the Ontario Court of Appeal in Gordonv. Roebuck (ON CA), [1992] O.J. No. 1499.

In that case, the Court of Appeal approved the test for determination ofwhether there was economic duress in the following terms: To succeed on the ground of economic duress, the plaintiff must prove that his will was coerced and that the pressure exerted to do thatwas not legitimate. Lord Scarman (in Pao On v. Lau Yiu, [1979] 3 All E.R. 65, [1979] 3 W.L.R. 435 (P.C.), at p. 78 All E.R.) has set outfour factors to consider in determining if a party's will has been coerced. They are:

(1) Did he protest?

(2) Was there an alternative course open to him?

(3) Was he independently advised?

(4) After entering the contract did he take steps to avoid it? [31] In my view, the defendant has failed to adduce evidence that John J. Stewart's will was coerced and further that the pressurewhich it says was exerted by the plaintiff was not legitimate. At the time of entering into the Forbearance Agreement and indeed at thetime of entering into the Standstill Agreement, Code's Mill Inn had been in default of its obligations pursuant to the Commitment Letterfor a considerable period of time.

I find that the plaintiff was well within its rights to apply pressure to Code's Mill Inn to repay theamount owing to the plaintiff. [32] In any event, the defendant fails on each of the four factors which are suggested in Gordon v. Roebuck to be considered on theissue of coercion. Not only did Code's Mill Inn not protest the execution of the Forbearance Agreement, it was the party that requested a

period of forbearance to allow it to arrange alternate financing. The alternative course of action open to Code's Mill Inn was to repay the indebtedness or permit the plaintiff to take steps to realize on its security. Code's Mill Inn and the guarantors were independently advised during the negotiation and execution of the Forbearance Agreement.

Finally, no steps were taken to avoid the Forbearance Agreement and in fact Code's Mill Inn benefited from an extension of the forbearance period as contained in the Forbearance Agreement. [ 33 ] The defendant raises a number of other issues in its Statement of Defence and the affidavit of John J. Stewart which I categorize as complaints about the handling of the loan account by the plaintiff. These issues were not vigorously asserted in either the Factum of the defendant or in oral argument.

To the extent that there were representations made by the plaintiff prior to the execution of the Commitment Letter, I find that they did not amount to legally binding agreements. The starting point for the determination of the parties’ legal rights is the Commitment Letter. With respect to the complaints about the conduct of representatives of the plaintiff after the date of the Commitment Letter, those are answered by the clauses in both the Standstill Agreement and the Forbearance Agreement in which Code's Mill Inn, the defendant and John J.

Stewart acknowledged both the amount of the indebtedness to the plaintiff and that there was no objection or defence to the amount owing. [ 34 ] In

summary, I find that Code's Mill Inn was in default of its obligations to the plaintiff at all times from June 2008 onward. Accordingly, in my view, the plaintiff was entitled to take any and all steps available to it pursuant to the Commitment Letter, the February 19 and May 20, 2009 Agreements, the Standstill Agreement and the Forbearance Agreement to obtain repayment of the amount of the indebtedness of Code's Mill Inn.

If, as a result of taking steps to enforce payment of the debt, the plaintiff took steps which resulted in the business of Code's Mill Inn being adversely affected, those adverse effects arise out of the failure of Code's Mill Inn to honour its obligations to the plaintiff. Conclusion [ 35 ] For these reasons, I am satisfied that there is no genuine issue which requires a trial and therefore the plaintiff is entitled to judgment against the defendant for the principal amount of $600,000, plus interest.

The plaintiff is also entitled to judgment for possession of the property located at 2 Wilson Street, Perth, Ontario. [ 36 ] If the parties are unable to agree on the appropriate disposition as to costs, written submissions may be submitted. The written submissions of the plaintiff, not to exceed three pages in length, exclusive of a Bill of Costs and Costs

Summary, are to be delivered to my office in Kitchener on or before January 30, 2011. The written submissions of the defendant, not to exceed three pages in length, are to be delivered to my office in Kitchener no later than February 15, 2011. “G.E. Taylor” G.E. Taylor J. Released: December 31, 2010 CITATION : Central 1 Credit Union v. Stewart Restoration, 2010 ONSC 7218 COURT FILE NO.: 10-20993 DATE: 2010-12-31

ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: Central 1 Credit Union Plaintiff (Moving Party) – and – John J. Stewart Restoration Services Inc. Defendant (Responding Party) REASONS FOR JUDGMENT G.E.Taylor J. Released: December 31, 2010 /lr