) ) XPG, a partnership v. C & M, 2017 ONSC 2598

CITATION : XPG v. Royal Bank, 2017 ONSC 2598 COURT FILE NO.: 457/10 DATE: 20170427 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) XPG, a partnership and C & M Seeds Manufacturing Inc. Plaintiffs – and – Royal Bank of Canada Defendant ) ) ) ) ) ) ) ) ) Thomas J.

Corbett, for the Plaintiffs Markus Koehnen and Calie Adamson, for the Defendant ) ) ) HEARD: May 16, 17, 18, 19, 20, 24, 25, 26, 27, 30, 31, June 1, 2, 3, 8, 9, 10, 13, 14, 15, 16, November 14, 15, 16, 24 and 25, 2016 Raikes J. [ 1 ] On February 26, 2008, the defendant bank notified Palmerston Grain, its long-time customer, that the bank would no longer advance funds to pay margin calls on grain hedges held by the plaintiff grain elevator.

Those hedges were an essential and prudent component of the plaintiff’s risk management. [ 2 ] The refusal of the bank to permit its credit to be used for that payment had an immediate impact on the plaintiff which liquidated all its hedges at a significant loss. [ 3 ] On February 28, 2008, only two days after its refusal to advance the funds, the Bank agreed to provide new financing so that the plaintiff could re-enter the futures market to re-hedge in part. [ 4 ] The central issues in this case are whether the defendant bank was required to give reasonable notice or any notice to the plaintiff debtor that the bank would no longer advance credit for this payable; whether, in fact, such notice was given; and whether the Bank was obliged to extend credit.

The determination of these issues, among others, requires a detailed consideration of the history of the parties’ banking arrangements, the terms of their agreements and their course of dealing. [ 5 ] I pause at the outset to note that this case involved many witnesses and documents and extensive case law. Both sides were represented by skilled counsel who presented their clients’ positions in a thorough, capable and organized fashion in keeping with the best traditions of the Bar. The Plaintiffs [ 6 ] The plaintiff, XPG, was previously named Palmerston Grain (hereafter “PG”).

PG is a partnership of three privately held companies: The Kjeba Corporation, J & K Agro Services Inc. and BJ & S Enterprises. Each of the three companies is owned by one of three siblings: Anne Schneider, Jim McLaughlin and John McLaughlin. [ 7 ] In 2007 and 2008, PG owned and operated one of the largest inland grain terminals in Ontario. PG was in the business of buying, drying, storing, cleaning, selling and transporting grains to customers in Canada and the United States. PG bought and sold wheat (spring and winter), corn, soybeans and canola. Wheat was by far PG’s principal commodity.

PG’s competitors included industry giants like Cargill, Thompson and Parrish. [ 8 ] C & M Seeds Manufacturing Inc. (hereafter “C & M”) operated a seed business. It researched, developed and marketed varieties of seeds to farmers. C & M is a separate but related business to that carried on by PG. The Defendant [ 9 ] The defendant, Royal Bank of Canada (hereafter either “RBC” or “the Bank”), is one of Canada’s big national banks, with operations across Canada and internationally.

Both PG and C & M were long-standing customers of RBC going back to 1990. [ 10 ] In this trial, various bank employees from different departments or units in the bank testified.

PG’s Business Operations [ 11 ] PG was in the grain elevator business. It purchased grains from producers (farmers), smaller grain companies and independent elevators. It had approximately 1000 farmers and 10-15 elevators from whom it purchased grain. [ 12 ] PG received the harvested grain at a number of locations including the Palmerston facility, two satellite facilities and some independent facilities from whom PG rented storage space. [ 13 ] In addition to purchasing grains, PG also stored grain for farmers, including grain it had not yet agreed to purchase.

PG charged a fee for storage which would be credited against the purchase price payable to the farmer if he or she later agreed to sell that grain to PG. There was an expectation that if PG stored the grain, it would purchase that grain if the farmer asked PG to do so. [ 14 ] The different grains had the following general planting/harvest cycle: a. Winter wheat – planted in September/October and harvested in July/August of the following year; b. Spring wheat – planted in April – June and harvested after winter wheat was planted; c. Corn – planted in May and harvested in late October; d.

Soybeans – planted in May and harvested in September – November; and e. Canola – planted in April and harvested in August – September before the corn harvest. [ 15 ] Farmers who harvested a crop could sell or store all or part of the crop. The timing and quantity of grain delivered to PG for sale by farmers varied as did the quality. [ 16 ] When PG contracted with a farmer, there were various options available: a. PG could purchase the grain immediately as it was delivered; b. PG could agree to store the grain with a future date(

s) fixed for purchase of the grain stored; c. PG could agree to purchase the grain for later delivery and the grain would be stored by the farmer on the farm until then; d. PG could simply agree to store the grain in one of its facilities with no contracted obligation to purchase; and e. PG could contract to buy future crop not yet harvested; in fact, that crop might not yet be planted (“new crop”). [ 17 ] During the trial, counsel and the witnesses distinguished between “old crop” and “new crop”. As its moniker implies, “old crop” is crop already planted and harvested.

It may have been held in storage at a farm, another elevator, a PG facility or just freshly harvested from the field. [ 18 ] By contrast, “new crop” is crop that has not yet been harvested. The purchase of “new crop” is referred to in the evidence as “forward contracting”. In that case, the farmer is agreeing to sell and PG is agreeing to buy a portion of the farmer’s future crop for a price fixed at the time of the contract. Typically, a farmer will forward contract no more than 30-40 % of their anticipated crop. Both Mr. Wilson and Mr.

Omland of PG testified that in their experience over many years, it was extremely rare that a farmer would default on a forward contract for new crop. That evidence was not contradicted. [ 19 ] According to Mr.

Wilson, PG engaged in forward contracts for new crop for two reasons: 1) Doing so secured a source of inventory for future crops for its long-term flour mill customers; and 2) If PG did not forward contract when farmers wanted to sell new crop, PG risked that farmers would go to a competitor which could undermine its producer base for old crop purchases. [ 20 ] A forward contract specified the quantity of grain, the place for delivery, the timeframe for delivery, the specifications for quality and type of grain, and the price to be paid when delivered.

No advance payments were made to the farmer on forward contracts; viz. payment to the farmer for the grain was made on delivery of that crop. [ 21 ] For “old crop”, the price was quoted based on delivery to a particular location or FOB; viz. the price quoted included the cost of transportation by PG from the farm to PG’s facility. PG advertised or quoted to farmers on its website or over the phone if a farmer called for that information.

For other elevators from whom it purchased grain, PG also used bid sheets setting out the price per bushel. [ 22 ] The purchase price for a bushel of grain was comprised of two components: the futures price according to the applicable commodities exchange for that grain and PG’s “basis”. [ 23 ] Whether purchasing old or new crop, the price paid per bushel was tied to the current futures price for the most appropriate month for delivery of the grain. There are multiple commodities grain exchanges where the futures price for a particular type of grain is established by that exchange and publicly disseminated.

The two principle exchanges referred to in evidence during this trial were the Chicago Board of Trade (CBOT) and the Minneapolis Board of Trade (MBOT). Both Exchanges establish futures prices in U.S. dollars. [ 24 ] On any given day, trading on the exchanges establishes a price for a particular grain, say spring wheat, for various months since the actual date of delivery may vary. Choosing the appropriate month to use in fixing its price at the elevator was an essential part of PG’s day-to-day business.

[ 25 ] For example, if PG entered into a forward contract with a farmer on September 3, 2007 for delivery of spring wheat in October, 2008, the futures price would be tied to the price established by the Exchange on September 3, 2007 for October 2008. If the Exchange price for spring wheat went up or down between September 3, 2007 and October 2008 when the wheat was actually delivered to PG, that change had no effect on the price paid by PG to the farmer as the price per bushel was already set at the time of the contract. [ 26 ] The second component of the price paid by PG was its “basis”.

Unlike the futures price which was established by the Exchange, the basis was determined by PG. In broad terms, the basis was the difference between the futures price and the cash price paid to the farmer or elevator selling to PG. Each grain elevator buying grain sets its own basis which is what distinguishes competitors for the grain a farmer has available for sale. [ 27 ] While PG could not control the futures prices set by the Exchanges, it could and did control its own basis. In deciding what its basis should be, PG took into account, inter alia : a. Local supply and demand; b. Transportation costs; c.

The basis its competitors were offering; d. Its assessment of potential future profit; and e. Currency hedging considerations. [ 28 ] According to Mr. Wilson, if PG wanted to buy more grain, it increased its basis and thereby increased the price offered to the farmer. If PG wished to buy less grain or discourage farmers from offering to sell their grain to PG, it lowered its basis. Lowering its basis reduced its competitiveness. Sale of Grain [ 29 ] PG sold the wheat it purchased to flour mills. It sold corn to feed mills, and soybeans and canola to processors.

Soybeans and canola did not stay in storage long; those grains had a relatively quick turnover. [ 30 ] Wheat and corn were sold on a 12 month cycle; viz. buyers entered into supply agreements with PG for delivery of specified amounts of grain at fixed intervals over a period of months or a year.

Accounts receivable for PG were short-term with most customers paying within 10 days of delivery. [ 31 ] The price paid by buyers of grain from PG was also a function of the appropriate futures price and a “selling basis” established by PG through negotiation with each customer. [ 32 ] Where the purchase of grain took place for the most

part in and around the time of harvest, the sale of grain, especially wheat and corn, was more gradual, spreading out over the year. As a result, PG had the ongoing carrying cost for the grain waiting to be needed and delivered, as well as the risk of increased transportation costs and possible market downturns for its customers. [ 33 ] The biggest risk faced by PG was a decline in the futures price of grain between the date of purchase by PG and the date of sale to a customer. Even a modest decline in futures prices could have an enormous financial impact on a grain elevator.

PG used hedging to insure against that risk. Hedging by PG [ 34 ] When PG bought grain from a farmer or sold grain to a user, it did so in the “cash market”. If one could be sure that grain prices would always rise, there would no risk that the amount paid to the farmer would be more than what the elevator could get back for the same grain later. There is no such guarantee. Being unhedged is a huge risk.

It places the grain elevator in the position of a speculator. [ 35 ] To insure against the risk of a decline in the futures price between the date the grain was purchased and the date that grain was sold, PG purchased futures contracts on the applicable grain commodity exchange; viz. it roughly matched the cash market transactions on an aggregate basis by a transaction in the “futures market”. PG’s general manager, Archie Wilson, used the analogy of a teeter totter. [ 36 ] Commodities markets like CBOT and MBOT trade futures contracts, also called “hedges”.

Each futures contract is 5,000 bushels of grain. [ 37 ] The grain purchased by PG from each farmer varied in quantity. As a result, it is not possible to match a specific grain purchase to a specific futures contract. PG aggregated its purchases net of sales of grain each day. It then bought futures contracts to balance its net position. The goal was to be fully hedged if possible. [ 38 ] In broad strokes, the hedging program at PG worked as follows: 1) When PG purchased grain, it sold a roughly equivalent quantity of grain on the commodities exchange.

The purchase of grain in the cash market is referred to as “going long” in the cash market. To offset or match that position, PG purchased futures contracts to sell grain which is referred to as “going short” in the futures market; 2) For each futures contract, PG was required to pay an initial deposit called a “maintenance margin” in an amount set by the exchange. That maintenance margin could and did rise over time.

If there was an increase, the holder of the futures contract was required to pay the new price for purchases of new contracts and to pay the amount of the increase for each futures contract already in

place; 3) In addition, PG was required to pay margin calls on each futures contract if the futures price of grain rose. The amount of the margin call per contract is market driven and will correspond to the amount of increase in the grain price on that exchange; 4) If the price of grain declined on any given day, PG would receive a refund or rebate of monies previously advanced for margin calls.

Again, the amount of money returned depended on the extent of the decline in the grain price; 5) Each exchange set daily limits on the amount of increase or decrease in grain price it would tolerate as a means of controlling the market. After hours trading showed the next day’s trend; 6) PG purchased futures contracts through a broker, F.C. Stone; 7) At the beginning of each trading day, F.C. Stone sent a statement to PG setting out PG’s position and the amount refunded (if there was a decline in grain price that day) or the amount required to pay its margin call(s).

Margin calls were payable immediately by wire transfer to F.C. Stone’s broker account; 8) PG traded in various types of grain each of which had its own commodity price. Hence, PG could have a margin call for one type of wheat for which it held futures contracts and a refund for a different type of wheat. The F.C.

Stone account statements reflected those different futures accounts; 9) Failure to pay margin calls when due would result in the liquidation of PG’s hedge positions; viz. the sale of its futures contracts which would leave PG unhedged; 10) When PG sold grain from its inventory, it unwound hedges in the approximate same quantity as the grain sold in the cash market. It did so by “going long” in the futures market; viz. it purchased a contract to buy grain.

Doing so effectively balanced out the amount of grain it had sold short. [ 39 ] In practice, the purchase of futures contracts and ongoing payment of margin calls insured that when PG disposed of its inventory months after it was acquired, any decline in grain price would be covered by a payment from the futures market. Likewise, any increase in grain price in the cash market would be offset by a corresponding loss in the futures market. [ 40 ] PG made its profit largely on the difference between the “buying basis” and the “selling basis” which I have described above.

Basis was not hedged. [ 41 ] As is evident, both the CBOT and MBOT are based in the United States. The grain prices, maintenance margins and margin calls set on those exchanges are in U.S. dollars. PG also hedged currency fluctuations to insure against declines in the value of the Canadian dollar relative to its U.S. counterpart. [ 42 ] PG employed Dana Omland to manage its hedging program. Mr. Omland had considerable prior experience in that role and was very knowledgeable of the grain industry and hedging practices.

The hedging program in place at PG was examined by George Corneil of RBC Dominion at the request of RBC. He concluded that the hedging practices at PG were appropriate and prudent for its book of business. C & M’s Business Operations [ 43 ] C & M developed and sold seeds to farmers. It searched out seed varieties from around the globe and planted those seeds to compare performance. If a particular seed showed promise, C & M contracted with some farmers to “multiply” the seed.

Once sufficient stock was available, C & M then sold the seed commercially to farmers generally. [ 44 ] PG and C & M shared the same management personnel and structure. Archie Wilson was the general manager. Adele Gibbings did the financial reporting and Dana Omland was responsible for merchandising grain and managed the hedging programs for both companies. C & M’s Hedging [ 45 ] Although C & M hedged the cost of seed, particularly where it purchased that seed at a high price, hedging was less critical and somewhat looser for C & M than for PG. Hedging was used to insure against a reduction in seed price.

The goal was to ensure a good average cost of seed. [ 46 ] I note that the vast majority of the evidence focused on PG. Undoubtedly, some of that evidence applied to some degree to C & M without specific reference to C & M. For its part, RBC recognised that C & M was a separate company with its own lending facilities but tended to consider the two borrowers as a single customer in its administration of the banking relationship. Grain Prices 2007-2008 [ 47 ] It is undisputed that grain prices rose dramatically during the last 6 months of 2007 and until February 25, 2008.

Prices rose steadily but not in a linear fashion; viz. some days the price for a particular grain dropped only to rise to new never seen before heights. [ 48 ] The meteoric and historic rise in grain prices caught those like PG by surprise. There was a sense that the markets would correct themselves and return to normalcy but as time passed and grain prices soared, it became harder to know when or if that correction would happen. Was this merely a bubble or a move to a new price for grains that would eventually stabilize at the higher level?

This was uncharted territory. [ 49 ] The fast rise of grain prices on commodities exchanges had several consequences for PG including:

1) Farmers sought to take advantage of the higher grain prices by selling their crop inventory and by locking in the price for grain for future crops (new crop); 2) PG was required to fund ever increasing margin calls for its futures contracts; 3) PG was forced to pay increased maintenance margins when the exchanges unilaterally increased those expenses; and 4) PG needed a significant increase in cash to fund these ordinary business expenses over which it had little or no control. [ 50 ] Although adequately capitalized with sufficient bank financing to carry on business successfully in ordinary times, the rising tide of grain prices posed a new and significant challenge for PG.

RBC demanded that the principals of PG inject new capital or provide additional security to secure increased financing from the Bank but that was never provided. None of the principle owners of PG testified at trial so it remains unknown whether they were unable or merely unwilling to inject additional cash into PG or provide additional security to RBC. Banking Arrangements a.

April – September 2007 [ 51 ] As of April 2, 2007, PG had two credit facilities with RBC: 1) A $15 million revolving demand loan which was to reduce to $14 million by April 16, 2007 and to $10 million on June 30, 2007; and 2) A $1 million revolving term loan. [ 52 ] The availability of the revolving demand loan was subject to a margin formula. These facilities were also subject to reporting requirements and financial covenants.

It is unnecessary to go into more detail regarding the terms of these loan facilities because they were superseded and replaced by new lending arrangements which I will set out in more detail below. However, I observe that some of the terms and covenants found in the subsequent loan agreements are the same as those in place in April 2007. [ 53 ] The revolving demand loan did not reduce in April and June 2007 as contemplated by the April 2, 2007 loan agreement. By then, the effects of rising grain prices were being felt.

PG needed more credit to meet its buying commitments to farmers selling existing crop (old crop) and to fund margin calls. By the early summer of 2007, it was evident to PG that additional bank financing was needed and it initiated discussions with its bank, RBC, for that purpose. [ 54 ] On July 10, 2007, Mr. Omland of PG provided income, cash-flow and balance sheet projections to Terri Lang of RBC. Ms. Lang was a senior account manager in the Agribusiness unit of RBC in Guelph, Ontario. She was the account manager at RBC for PG and C & M until PG’s accounts were moved to Special Loans in 2008. Ms.

Lang worked closely with Ms. Paddock who was then Vice President of Commercial and Agribusiness, and Colin Marson of the Risk Management unit in Calgary in managing the PG accounts in 2007 and early 2008. Agribusiness was part of the Bank’s commercial lending operations. [ 55 ] In his email of July 10, 2007, Mr. Omland projected an increase of 11.5% in total tonnes handled over the previous year. He reminded Ms.

Lang of an earlier conversation held at PG’s offices in which she was advised that the “historic rise in grain prices…will result in a doubling of our cash-flow funding requirements for the upcoming year.” [ 56 ] On July 26, 2007, Ms. Lang wrote an email to Ms. Gibbings, the Controller at PG and C & M, seeking a current list of futures contracts and a short explanation of the hedging strategy. Ms. Gibbings responded the same day. She explained that PG hedged all of its inventory and futures contracts which were lifted as sales were made; they had “no commodity at risk”. [ 57 ] On July 31, 2007, Ms.

Lang with input and approval by Ms. Paddock made a submission to increase the credit limits for PG to help PG deal with their increased cash-flow needs. No new formal loan agreement came from that submission but increased credit was permitted.

In the meantime, there were ongoing discussions between the Bank and PG to better understand the underlying causes for the increased financing needs, how to mitigate risk for the Bank and how to best address PG’s anticipated financing going forward. [ 58 ] To that end, the Bank requested and PG provided information as to accounts receivable, operating costs, the cost and value of inventory, contractual commitments for the purchase of grain yet to be delivered as well as various forecasts. b. September 2007 Financing Steps [ 59 ] On September 5, 2007, Mr. Wilson spoke with Ms. Lang and Ms.

Paddock about new financing and the Bank’s suggestion that PG secure additional financing from Farm Credit Corporation (FCC). By then, PG was well beyond the $15 million loan limit set out in the April 2, 2007 agreement. [ 60 ] The following day, Cal Whewell of F.C. Stone (PG’s broker) wrote to Ms. Lang to provide an explanation of PG’s “disciplined approach” to hedging. In doing so, he outlined some of the challenges commercial grain elevators faced with all-time high grain prices. [ 61 ] Thus, by early September 2007, Ms.

Lang of RBC was alive to the following: 1) How and why commercial grain elevators hedged in the futures market; 2) The benefit to the elevator of being hedged as a means to protect inventory against falling grain prices; 3) The need to fund ongoing margin calls for hedges; and

4) The failure to hedge would put PG in the position of “speculating” in the grain market. [ 62 ] On September 7, 2007, Ms. Lang emailed Mr. Wilson to advise that the Bank was prepared to increase the total operating loan facilities to $24 million “very temporarily”, with the operating loan to be reduced to $19 million as quickly as possible. Ms. Lang indicated that the Bank wanted to transfer PG’s account to its Asset-Based Lending department (ABL) because ABL could offer a higher operating loan limit using different loan ratios than those required by conventional financing. [ 63 ] In her email, Ms.

Lang indicated that until the operating loan was reduced to $19 million or the business was transferred to ABL, the Bank required: 1) A weekly cash-flow budget to be discussed every Monday morning. “We will decide on a weekly basis what activity we will support for that week”; 2) No further purchases or purchase contracts were to be entered into beyond those the Bank was made aware of and authorized during the weekly budget reviews; 3) The partners’ personal guarantees were to be increased to $1 million; 4) The Bank would charge a weekly “monitoring fee” of $500 and an arrangement fee of $10,000. [ 64 ] The requirements expressed by Ms.

Lang flowed from instructions received from Kent Peters by email on September 6, 2007. Mr. Peters was the Director of the Risk Management unit to whom Mr. Marson reported. [ 65 ] On September 7, 2007, Ms. Lang completed and submitted a request to authorize new or expanded credit to PG. This request is referred to as a BBTR. [ 66 ] In that request, Ms. Lang sought to increase direct credit facilities by $9 million from the $15 million authorized in April to $24 million.

The purpose of the additional credit was stated to be “to assist with cash flow requirements during their time frame of heavy grain purchases”. [ 67 ] In the proposal outline

section of the BBTR, Ms. Lang indicated: 1) They were exploring moving the operating loan to RBC’s ABL unit. A meeting with ABL was arranged for September 10; 2) PG had stepped up marketing efforts to sell more wheat sooner to bring in cash as quickly as possible; 3) To reduce cash outflow, PG had lowered its basis to deter farmers selling their wheat; 4) PG had existing forward purchase contracts in place with farmers that needed to be honoured when that wheat was delivered; 5) High wheat prices at harvest resulted in more farmers wanting to sell at harvest.

As a result, PG was buying wheat at harvest that they would normally purchase over a longer timeframe; 6) Increases in wheat prices created large margin calls on PG’s futures contracts resulting from “their prudent hedging strategy”; 7) Hedging is “an important part of their risk management strategy to mitigate the risk of prices decreasing between the time they make forward contracts with producers and when they secure a sale to an end user”; 8) PG projected purchasing 262,000 metric tonnes of grain in fiscal 2008 which was a 40,000 metric tonne increase over 2007; 9) PG projected being able to sell all of their purchases to long-time customers who were reputable companies.

They had already secured contracts with some of these companies for as much or more than they had projected to sell to them; and 10) The increased operating loan requirements were mainly due to higher commodity prices with less than 20% of the increase due to higher purchase volumes. [ 68 ] In the

summary of the BBTR, Ms. Lang wrote: “We recommend as outlined, on a temporary basis, until this account can be moved to asset – based lending. The nature of the business warrants this level of operating loan. The present cash crunch is in large part due to their prudent hedging strategy. The borrower has a proven history of managing and growing this profitable business. Were it not for the high debt:equity level, which will be approx. 5:1 with $24 MM outstanding, this would represent good conventional financing business. With the client’s growth agenda, ABL is better suited to their needs.

This account could potentially return to conventional financing if they improve their equity position.” [ 69 ] The financing request was approved on September 10, 2007 by Doug Hickey, Risk Manager. In the approval comments, Mr. Hickey indicated his understanding that Ms.

Lang had already communicated to PG the need to do everything within its control to limit further purchases of grain beyond that already contracted to stay within approved limits, while recognizing that the uncontrollable variable will be wheat futures prices which may require further margin calls. [ 70 ] As the BBTR indicated, PG was a well-managed company with a history of profitable growth. Its cash-flow challenges were directly related to the ongoing dramatic increases in the price of grain over which PG had no control.

As early as September 2007, PG attempted to slow down or dampen the enthusiasm of farmers wishing to sell when grain prices were high by reducing its basis, the second component in the price paid for grain. PG also tried throughout the remainder of 2007 and early 2008 to sell more grain inventory sooner to end users, even at discounted prices.

c.

September 2007 Agreement [ 71 ] On September 13, 2007, PG and RBC entered into a new loan agreement that expressly superseded and cancelled the previous loan agreement dated April 2, 2007. [ 72 ] By this agreement, RBC extended the following credit facilities to PG: 1) A $19 million revolving demand facility reducing to $10 million on February 1, 2008; and 2) A $5 million non-revolving term facility repayable in full on November 30, 2007. [ 73 ] The availability of the $19 million facility (Facility #1) was subject to the following: 1) A borrowing limits formula which comprised the aggregate of 75% of good accounts receivable and 75% of the lesser of cost (including inventory hedging costs) or net realizable value of unencumbered inventory; and 2) The Bank could, in its discretion, “cancel or restrict the availability of any unutilized portion at any time and from time to time”. [ 74 ] Thus, while the loan limits on their face totalled $24 million, PG’s right to borrow to that limit depended on whether the application of the margin formula permitted access to that amount and whether the Bank exercised its discretion to refuse access to any of the monies available and not yet advanced under the facility. [ 75 ] The margin formula in the loan agreement included the cost of hedging but only in respect of inventory on hand; viz. hedging costs on new crop could not be taken into account. [ 76 ] The loan agreement expressly stated that the loans were repayable on demand whether or not the term of the loans had matured or expired. [ 77 ] The loan agreement included financial covenants, reporting requirements as well as certain standard terms and conditions that were appended.

The Bank relies upon these covenants, requirements and terms and conditions; in particular, the Bank asserts that despite its best efforts to get PG to abide by the terms of these agreements and its good faith efforts to help its customer through a difficult period, these terms continued to apply and were not met by PG. [ 78 ] Under the heading “Financial Covenants”, the agreement stated: “Without affecting or limiting the right of the Bank to terminate or demand payment of, or cancel or restrict availability of any unutilized portion of any demand or other discretionary facility, the Borrower covenants and agrees with the Bank that the borrower will: …

b) not, without the prior written consent of the Bank: i. make any purchase or purchase contracts for grain until Facility #2 is repaid in full.

c) ensure that additional working capital of $1,500,000 is injected in the Borrower’s operations from the refinancing of the Borrower’s properties by no later than November 30, 2007.” [ 79 ] The additional capital injection of $1.5 million was never made. [ 80 ] Mr. Wilson acknowledged in his evidence that the representatives of the Bank repeatedly urged PG not to enter into new contracts for the purchase of new crop. While no money is payable to the farmer unless and until he or she delivers that crop, PG nevertheless hedged that transaction.

By hedging contracts of new crop, PG was required to pay the initial maintenance margin as well as any margin calls on that futures contract. [ 81 ] By the September 13, 2007 loan agreement, PG agreed to provide the following reporting to the Bank: 1) Weekly forecasted balance sheets, and income and cash-flow statements for that week by 11 a.m. on the first business day of the week; 2) Weekly actual balance sheets, and income and cash-flow statements with comparison to the forecasted financial statement for the previous week; 3) Monthly company-prepared financial statements within 20 days of each month end; 4) Monthly activity statements for F.C.

Stone within 30 days of each month end; 5) Quarterly company prepared financial statements with comparisons to budget and commentary on variances within 30 days of each fiscal quarter end; 6) Annual audited financial statements within 90 days of each fiscal year end; 7) Annual forecasted balance sheet and income and cash flow statements prepared on a quarterly basis for the next following fiscal year within 90 days of each fiscal year end; and 8) Any other financial or operating statements and reports as and when the bank reasonably required same. [ 82 ] These reporting requirements were intended to serve a number of purposes: to keep the Bank informed and better positioned

to deal with its risk; to focus PG on its cash flow management; to promote compliance by PG with the terms of the loan agreement; and to permit the Bank to better monitor compliance by PG. [ 83 ] It quickly became apparent that there was insufficient time to prepare the weekly reports for the Bank by 11 a.m. on the Monday of each week. Despite Ms. Gibbings’ best efforts, she was unable to meet that deadline on a regular basis. She simply provided those reports as and when she could at the earliest opportunity. For its part, the Bank reluctantly accepted Ms.

Gibbings’ explanations for the late delivery of the weekly reports. [ 84 ] The fiscal year end for PG was June 30. PG did not provide its audited financial statements to RBC for the fiscal year ended June 30, 2007 at any time before February 26, 2008.

Follow-up requests for these audited financial statements were made by the Bank in 2007 and early 2008 without success. [ 85 ] According to the terms and conditions appended to and forming part of the loan agreement, PG was subject to the following general covenants: 1) To pay monies when due under the terms of the agreement; 2) To immediately advise the Bank of any event that constitutes “an event of default” (a defined term); 3) To deliver to the Bank such financial and other information as the Bank reasonably requested from time to time, including but not limited to the reports and information set out in the reporting requirements; and 4) To advise the Bank immediately of any unfavourable change in its financial position that may adversely affect its ability to pay or perform its obligations in accordance with the terms of the agreement. [ 86 ] The agreement also contained the usual clause that no amendment or waiver of any of the provisions of the agreement was effective unless in writing, signed by both parties, and that no failure or delay on the part of the Bank in exercising any right or power under the agreement operated as a waiver thereof.

There is a separate clause by which the parties agreed that the agreement constituted the whole and entire agreement between them with respect to the credit facilities. [ 87 ] As mentioned, “an event of default” is a defined term which entitled the Bank, in its sole discretion, to cancel any credit facilities, demand immediate repayment in full of any monies owing on any facility and to realize on security if, 1) There was a failure by the borrower to pay any amount when due pursuant to the agreement; and 2) There was a failure by the borrower to observe any covenant, condition or provision of the agreement.

There are other defaults/failures set out which may constitute an event of default but they are not relevant to this case. [ 88 ] The ink on the agreement was barely dry when it was apparent to RBC that PG was offside its loan margin formula and was continuing to enter into contracts to buy grain, both old crop and new crop, despite repeated admonitions from the Bank and the covenant in the loan agreement. d. September – October 19, 2007 [ 89 ] On September 17, 2007, Ms. Lang emailed Mr. Peters in Risk Management seeking approval for credit for PG beyond the limits just agreed to.

She noted that the account was at $23.450 million after a margin deposit from F.C. Stone that day and that PG expected to pay out margin calls of approximately $1.127 million that day and the next. In addition, she estimated that PG had another $3 million of inventory to pay for with no firm commitment for sales to match. [ 90 ] By September 19, 2007, PG was $2.394 million dollars over its $24 million authorized credit limits, a fact Ms. Lang duly brought to the attention of Mr. Peters, Mr. Marson and Ms. Paddock. Mr.

Peters confirmed the excess and in doing so, he brought the matter to the attention of Bruce Campbell, Senior Vice-President. [ 91 ] Mr. Campbell had previous experience in risk management at the Bank. His opinions carried significant weight. It was Mr. Campbell’s view that the company was living beyond its means. It was not doing enough to stay within its established credit limits and the formula for accessing that credit. He wrote to Mr. Peters, Ms. Paddock, Ms. Lang, Mr.

Marson and others on September 19: “While the companies [sic] hedging strategy mitigates the price risk for the client it has placed significant pressure on the companies [sic] balance sheet. Rather than continuing to back into the bank, the shareholders and company should be required to cover the margin calls to the hedging company and should be escalating their efforts to move current inventory to bring the line back to within the approved limit. Please ensure they refrain from purchasing additional inventory that will place a further pressure on the $24 mm approved.” [ 92 ] Mr.

Campbell’s views as expressed in this email reflect the view and approach taken by the Bank going forward in its dealings with PG. Regardless what efforts PG made to discourage farmers from selling grain to PG or to fast-track sales to end-users, PG’s inability to stay within its borrowing limits was seen to be a by-product of its own making: whatever it was doing, it was not doing enough. [ 93 ] The ongoing steady climb in grain prices coincided with the harvest cycle in 2007. PG had long-established relationships with hundreds of farmers which Mr. Wilson and Mr.

Omland believed would be imperilled if PG simply stopped buying the grain those farmers produced and wanted to sell to PG. Likewise, if PG refused to enter into forward contracts for 2008 crops, it risked losing those customers that wished to do so to competitors which may have had long term implications for PG’s business. [ 94 ] There was an unmistakable tension between doing what was necessary to keep the Bank on side and carrying on business as a

going concern while riding the tsunami of rising grain prices. PG tried to do both. By reducing its basis, it tried to dissuade farmers from selling as much product as they might otherwise sell. Nevertheless, PG continued to buy not only existing harvested grain but continued to enter into contracts for future crops; viz. forward contracts. It feared that ceasing grain purchases would send the wrong message: that it was in financial trouble and possibly going out of business altogether. [ 95 ] However valid the business reasons behind this strategy, it had implications from a cash-flow perspective.

Unless PG was prepared to be a speculator, i.e. gamble that the price of grain would not decline, forward contracts were hedged in the futures market. They attracted maintenance margins and margin calls but, because the grain had not yet been harvested or in some cases not yet even planted, it could not be considered inventory against which the Bank was prepared to lend. [ 96 ] I note that PG later did take a limited speculative position to try to stay within its borrowing limits until new financing could be placed; a fact which was not disclosed to the Bank. [ 97 ] According to an email by Ms.

Lang to Colin Marson and Mr. Peters in Risk dated September 21, 2007, PG’s credit lines were at $25.784 million with another $4.1 million in cheques written but not issued. In addition, PG expected to have a margin call that day and had over $1 million in issued cheques outstanding. In simple terms, PG was spending more money than it had available to spend unless the Bank authorized these excesses, which it did. [ 98 ] These daily excesses required Ms. Lang to seek and obtain daily approvals from Risk. She and Ms.

Paddock told management at PG that they lacked the authority to approve both the new loan facilities granted on September 13, 2007 and the ongoing daily excesses. They made clear to PG that they had to seek approvals elsewhere in the Bank. [ 99 ] An informal protocol developed between Ms. Lang and Ms. Gibbings. Ms. Gibbings would call and/or email Ms. Lang each morning to advise what cheques were outstanding, the amount of any margin calls payable, monies received or expected and provide updates on efforts made to sell grain in inventory. For her part, Ms.

Lang constantly pressured PG to get back within its loan margins and used the information from Ms. Gibbings to seek authorization from Risk for the excesses. e. October 19, 2007 Amending Agreement [ 100 ] In September 2007, it was evident that the new credit facilities were inadequate to meet PG’s ongoing needs for financing. Ms. Paddock and Ms. Lang were convinced that their unit lacked the tools to finance in the amount and manner necessary to meet PG’s needs in the volatile market at that time.

They recommended that PG meet with and consider moving its financing from the Agribusiness group to ABL. [ 101 ] ABL was a separate lending division within the Bank. Asset-based lending was relatively new. Mr. Boyer was part of the ABL team in Toronto. He described it as “frontier lending” because the approach, while well-developed in the United States, was still in its infancy in Canada. [ 102 ] Starting in September 2007, Mr. Boyer had discussions with Mr.

Wilson and others at PG to better understand the business PG operated, how hedging worked, and what level and kind of financing would work best for PG going forward. Ms. Paddock referred to ABL as “the light at the end of the tunnel”. There was an expectation that new financing would be placed through ABL which would pay out the financing in place through the branch in Guelph. [ 103 ] It is against that backdrop that RBC agreed to amend the September 13, 2007 loan agreement to increase the Facility #2 loan limit to $14 million.

The amending agreement is dated October 19, 2007 and was signed by the principals of PG on October 30, 2007. By its terms, PG agreed to repay that facility in full on December 31, 2007. The availability of the unutilized portion of the facility was subject to the same Bank discretion already in place for Facility #1 described above. [ 104 ] PG was eager to proceed with ABL financing. They met with and spoke to Mr. Boyer several times and provided to him all of the information requested. As part of his due diligence, Mr.

Boyer asked for an external field examination by Fuller Landau of PG’s accounts receivable, inventory, accounts payable and other matters including its books. PG agreed to this examination and paid for it. [ 105 ] On November 2, 2007, Fuller Landau provided its draft report which disclosed no concerns. [ 106 ] Mr. Boyer also engaged Hilco Appraisal Services to provide an evaluation of PG’s inventory and an appraisal of that inventory on the basis of current market conditions and on a net orderly liquidation value. Hilco produced its report for Mr. Boyer on November 16, 2007.

Again, PG cooperated and paid for that report. At page 13 of its report, the author wrote the following in relation to hedging: “Hedging is similar to insurance, in that the Company is protecting itself against a potentially negative future event. A reduction in risk translates to a reduction in potential profits. Therefore, hedging is not as much about making money as it is about reducing potential loss. Palmerston’s objective in its hedging activities is to lock-in future margin for inventory agreed to be purchased in advance of delivery.” [ 107 ] In addition, in early December, 2007, Mr.

Boyer contacted George Corneil of RBC Dominion to seek his advice concerning PG’s hedging practices. Mr. Corneil was then Vice President and Director of commodity futures with extensive experience in grain commodity hedging. He had no role or position in ABL or the approval of financing. He was asked by Mr. Boyer to look at PG’s books to confirm there was a balanced book in terms of commodity and currency. As a related company to RBC, there was potential that PG’s hedging book of business would move to RBC Dominion if ABL financed. [ 108 ] Mr. Corneil and Mr. Boyer met with Mr. Wilson and Mr.

Omland from PG to discuss PG’s hedging program. Mr. Corneil reviewed PG’s books from a hedging perspective. He advised Mr. Boyer that: 1) PG’s book was balanced and there was no speculation on the futures position; and 2) Maintenance monies are returned to PG once the hedge is lifted.

[ 109 ] Mr. Boyer prepared a loan submission for PG on December 18, 2007. He submitted that document to Mark Horrock in the Risk department with which ABL dealt. Mr. Boyer was the underwriter of the loan submission but the decision to lend ultimately rested with Risk. Mr. Boyer testified to his frustration with the lack of response from Risk and the narrow approach taken to the assessment of risk for this application. FCC Term Sheet [ 110 ] On October 19, 2007, the same day the Bank agreed to increase Facility #2, PG engaged Ernst & Young to find alternate financing.

Its ongoing struggles with RBC and the lack of meaningful progress on the ABL side were factors. PG wanted a significantly increased credit facility and to explore the financing options available to it. [ 111 ] Meanwhile, the Bank grew increasingly frustrated with PG’s inability to consistently operate within the loan margin limits; viz. the amount of credit used by PG exceeded the amount it was entitled to borrow based on the formula set out in the September 13, 2007 loan agreement. [ 112 ] On November 26, 2007, Ms. Lang recommended to Mr.

Marson that a default letter be issued requiring PG to rectify the excess not later than December 3, 2007. PG was then $418,000 over its loan margin limit with an expectation of a margin call that day that would increase its excess position to near $1 million. [ 113 ] Later on the same day, Ms. Paddock advised Mr. Marson that the Bank had been in touch with FCC who indicated that FCC hoped to have a term sheet by the next day. FCC financing was expected to be $5 million. Ms. Paddock recommended that they continue to tolerate the excess position given a surplus value on a mortgage held on property.

She wrote: “Resolution of this situation will come from approval & advance of FCC funds and eventually advance of ABL funding.” [ 114 ] Mr. Marson wrote on November 27, 2007 to Ms. Lang and Ms. Paddock to confirm the excess requested.

He asked that PG be reminded again during the weekly call of their prior agreement that no inventory purchases beyond those contracted at that point in time were to be undertaken and that they expected management’s full cooperation on their buying decisions and strategies until such time as FCC and ABL financing were in place. [ 115 ] PG received a draft term sheet proposal from FCC dated November 30, 2007. FCC proposed to provide $5 million in financing, $700,000 of which would be used to retire term loans at RBC.

The balance of $4.3 million was to provide working capital for PG. [ 116 ] The term sheet was conditional on PG providing confirmation prior to disbursement that it had a provider of a revolving operating credit of not less than $25 million. The letter noted that if RBC was to provide that funding, it would have to amend Facility #1 so that it no longer reduced to $10 million by December 31, 2007 or remove the “permanently reduced” terminology from Facility #2. First Forbearance Letter [ 117 ] On December 5, 2007, Ms.

Lang of RBC prepared a forbearance letter addressed to the principals of the three companies that comprised PG. In that letter, Ms. Lang itemized PG’s non-compliance with the financial covenants in the September 13, 2007 loan agreement and with the various reporting requirements in the same agreement. Ms. Lang indicated that the Bank was prepared to forbear taking steps to enforce its rights under the loan agreement upon the terms and conditions that were set out (9).

The terms included: 1) A reduction in aggregate borrowings by December 12, 2017 to within loan margin limits; 2) PG was to provide a copy of a term sheet from FCC confirming approval of $5 million in new credit facilities with no outstanding conditions by December 10, 2007; 3) PG was to provide a tangible plan of how it would reduce the aggregate borrowings under Facilities (1) and (2) not later than December 10, 2007; 4) PG was to have a commitment to alternate financing to pay out Facilities (1) and (2) not later than December 12, 2007; and 5) The Bank’s forbearance would end on December 12, 2007. [ 118 ] Ms.

Lang also asked that PG and the guarantors acknowledge that Facilities #1 and #2 would “expire” on December 31, 2007 and that enforcement by the Bank may include cheques being returned for non-sufficient funds. [ 119 ] There is some dispute in the evidence as to whether this first forbearance letter was actually provided to PG. If it was, it was not signed back to the Bank. [ 120 ] Ms. Lang was cross-examined extensively on the reasonableness of these terms and conditions. I find that these terms were by and large unreasonable and incapable of performance by PG in the abbreviated time provided.

Further, the letter misstated the maturity date for repayment of Facility #1 which did not reduce until February 1, 2008 and then only to $10 million. [ 121 ] I note that the refusal of PG and its principals to execute either forbearance letter was perceived in some quarters of the Bank in a negative light. Mr. Campbell, for example, expressed that view. Frankly, it ought to have been readily apparent to Ms.

Lang and others at the Bank that no properly advised debtor would agree to or be able to carry out the terms the Bank sought to impose. [ 122 ] My finding in this regard should not be taken to mean that the Bank was not within its rights to issue a forbearance letter. The problem here was the manner of its execution. It was ill-conceived and unreasonable on its face. [ 123 ] On the same date the forbearance letter was issued, Ms. Lang prepared an internal “Watchlist Profile” for PG.

The purpose of the document was to enhance oversight of a borrower and to provide an overview of issues including the strategy to remedy the borrower’s non-compliance.

[ 124 ] Ms. Lang listed five key issues: 1) High leverage, over-trading; 2) Rapid, significant increase in wheat prices 3) Financial reporting – accuracy and timeliness 4) Current under-margin position created in part by margin calls on forward contracted wheat where there was no underlying asset to provide margin value 5) Lack of compliance with Bank covenants, especially as it relates to grain purchases. [ 125 ] Under the heading “Client Strategy”, Ms.

Lang wrote: “Although we put a covenant in place indicating that no purchase or forward purchase contracts for grain were to be made without the prior consent of the Bank when we agreed to an increase in credit facilities in September, the borrower continued to purchase grain and enter into forward purchase contracts for 2007, 2008, 2009, and 2010. They have committed with producers to purchase $27MM of grain in the next 3 years and have outstanding commitments for 2007 amounting to $14.4MM. They have forward contracts in place to hedge the price risk on these contracts.

As there is no physical inventory associated with these contracts, they can not margin a larger operating loan to help fund the associated margin calls.” [Note: “MM” means million.] [ 126 ] Under “Strategy”, Ms.

Lang indicated that PG was working with ABL to obtain an operating facility that better met its needs and was in possession of a discussion paper from ABL to provide a $25 million operating loan and $3 million temporary loan; however, no such discussion paper had been provided by ABL to PG by this date. [ 127 ] As early as September 2007, the commercial banking division hoped and expected that its lending position would be paid out by refinancing through ABL and FCC. Unfortunately, that process was neither timely nor effective as will be seen.

ABL did not actually present any proposal to PG until February, 2008 and then in an amount far less than PG needed; in fact, the amount was less than the financing in place through commercial banking. [ 128 ] There was a clear disconnect in the timing and expectations of commercial banking and ABL. If commercial banking had been better informed of the status of Mr. Boyer’s efforts in ABL, the commercial banking unit would have had a more realistic understanding of the timing of ABL financing. [ 129 ] For its part, PG cooperated fully with ABL. It provided whatever information was requested.

It attended whatever meetings were needed. It provided access to the Bank and its agents and waited for ABL to provide its proposal regarding financing. PG had no control over those steps and the time that process took. In the meantime, it awaited the search for financing by Ernst & Young which would yield fruit later in December, 2007. Second Forbearance Letter [ 130 ] On December 12, 2007, Ms. Lang provided to Mr. Marson and Ms. Paddock a weekly cash-flow projection from PG to the end of February 2008. Ms.

Lang noted that the cash-flow showed that PG would be out of margin by $5.14 million next week and would stay out of margin above $3 million for the following few weeks. PG projected grain purchases of almost $6 million over the next 11 weeks which did not take into account margin calls. In short, the cash-flow projection provided by PG to the Bank reflected more purchases of grain and continued borrowings in excess of available credit for a prolonged period. [ 131 ] Later the same day, Ms. Lang emailed Ms. Paddock regarding the updated cash-flow projection.

She indicated that PG did not have a tangible plan to get back within margin. She also indicated that she had spoken to Mr. Boyer to answer his questions but believed that he was having difficulty “selling his plan to Risk”. [ 132 ] On December 13, 2007, Ms. Lang wrote to Ms. Paddock regarding a telephone conversation she had with Mr. Marson. She advised Ms. Paddock that: “He [Mr.

Marson] doesn’t think we can bounce cheques until the operating loan limit exceeds $33MM (the limit approved).” [ 133 ] PG relies upon this email and that statement as part of its argument that the Bank had, in effect, agreed to a course of dealing pursuant to which PG was entitled to utilize funds from the Bank up to $33 million even if those funds were not available under the loan margin formula. [ 134 ] Ms. Lang also reported to Ms. Paddock in the same email that Mr. Marson advised that the Special Loans Group (SLG) did not have capacity to take on PG until December 31. She advised Ms.

Paddock that she would revise the forbearance letter to say that the Bank’s forbearance would end December 31. [ 135 ] Unbeknownst to the Bank, PG received an offer to finance from CIT through Ernst & Young on December 14, 2007. The offer to finance was for a credit facility of $45 million. The offer to finance was conditional.

The conditions included satisfactory completion of various due diligence requirements on the part of the CIT, final credit approval by CIT and a new term loan of $5 million to be closed before or coincident to the closing of this financing. [ 136 ] By this point, PG had in hand a term sheet from FCC to advance a loan of $5 million. That term sheet required a revolving credit facility of the sort contemplated by the CIT financing. FCC was not prepared to advance those funds unless that operating line was in place. [ 137 ] Ms. Lang spoke with FCC on December 14, 2007.

She was advised that FCC would not give final approval for the PG term

loan until they had approval of the $25 million operating loan from another lender such as RBC. [ 138 ] Thus, RBC could not access a cash injection by way of new lending from FCC unless it was prepared to provide funding of at least $25 million by way of a revolving operating line.

The commercial banking unit was not prepared to do so and had pinned its hopes for takeout financing on ABL from whom no commitment or proposal had yet been received by PG. [ 139 ] From the perspective of the commercial banking unit at RBC in early to mid-December, 2007, the situation was as follows: 1) RBC had advanced credit to PG beyond what it was strictly entitled to access based on the loan margin formula; 2) PG’s projections show that this was no short-term bulge but was likely to continue to the end of February at least; 3) PG had not complied with its reporting obligations; 4) PG continued to buy grain including entering into forward contracts despite clear direction from the Bank not to do so; 5) Grain prices continued to rise which necessitated likely ongoing substantial margin call payments to fund PG’s hedged position in the futures market; and 6) The so-called “light at the end of the tunnel”, ABL financing, remained a distant flicker. [ 140 ] On December 17, 2007, Ms.

Lang produced a second forbearance letter. Again, it was addressed to the principals of the three companies that comprised PG. It detailed the same breaches of covenant and reporting requirements. It contained essentially the same terms and conditions as the December 5, 2007 forbearance letter with minor changes to the dates by which those conditions were to be fulfilled. [ 141 ] The December 17, 2007 forbearance letter asked that the borrower and guarantors acknowledge that the two credit facilities would expire on December 31, 2007.

The letter contained a space for each of the guarantors and someone on behalf of PG to sign. [ 142 ] There is no dispute that this second forbearance letter was provided to PG and the guarantors. The December 17, 2007 forbearance letter was never signed back to the Bank. Mr. Wilson testified that it was not signed back because PG did not believe that it could fulfil its terms by the deadlines set; in particular, the credit facilities from ABL. Curiously, when faced with a clear signal from the Bank that its patience had worn thin, PG did not disclose the existence of the CIT offer letter.

Maturity of Facility #2 [ 143 ] On December 19, 2007, Mr. Boyer of ABL wrote to George Corneil to advise that the application “is into our Risk group”. He advised Mr. Corneil that Risk had some questions concerning monies held by F.C. Stone and asked Mr. Corneil to confirm the correctness of the information provided to Risk. Thus, the application to Risk by ABL was initially submitted for approval three months after Mr. Boyer was first introduced by Ms. Paddock to Mr. Wilson and PG. [ 144 ] The October 19, 2007 agreement contemplated repayment of Facility #2 ($14 million) on December 31, 2007.

That did not happen. [ 145 ] The December 17, 2007 forbearance letter contemplated the expiry of both credit facilities on December 31, 2007 even though credit Facility #1 was not supposed to reduce until February 1, 2007. Regardless, PG did not repay and the Bank took no steps to make demand for payment or to enforce its security when the calendar pushed into 2008. Instead, both parties continued to deal with one another and with the existing credit facilities as before.

ABL Delay [ 146 ] In early 2008, both PG and the commercial banking unit were waiting on a discussion paper from ABL; viz. a draft financing proposal. On January 8, 2008, Ms. Paddock wrote to Frank McAuley of RBC to express her concern that “things may be going off the rails with Palmerston Elevators, Asset Based Lending and Risk (Colin).” She noted the delay in getting a discussion paper in front of the clients and her frustration as nothing could happen with the FCC funding until PG could demonstrate that they had an operating line of credit. [ 147 ] On January 9, 2008, Mr. Marson submitted a request to Mr.

Peters for approval to extend the existing credit facilities to January 31, 2008. Mr. Marson reported that: 1) The total borrowings remained within the total authorized amount of $33 million; 2) PG remained out of loan margins up to $5.2 million largely as a result of margin calls and forward contracts for which there was no real inventory to underpin the borrowings; 3) The amount needed to bring the account within borrowing margins would be paid from monies advanced from FCC; 4) Risk management was waiting for a final version of ABL’s proposal which was expected January 10.

If approved, a term sheet could be provided to the borrower by January 12; 5) Risk had weekly conference calls with management to review progress; 6) PG continued to be advised of daily margin positions; and,

7) Mr. Chang and Mr. Hall of Special Loans continued to be apprised of the situation on a weekly basis. [ 148 ] Although the file had not yet been transferred to Special Loans to be administered, Mr. Hall had previously been assigned to shadow the activities of the commercial banking unit. He was copied on some but not all earlier email correspondence. [ 149 ] Mr. Marson recommended to Mr. Peters that if ABL did not present a term sheet by the end of the week, a letter should be sent to PG providing 60 to 90 days to find alternate financing arrangements. [ 150 ] Mr. Peters forwarded Mr.

Marson’s submission to Bruce Campbell for his approval. Mr. Peters supported Mr. Marson’s approach. [ 151 ] Mr. Campbell inquired as to what controls were in place to ensure the margin deficit did not increase. Mr. Marson advised that the Bank received daily margin reports and weekly cheque runs which were matched to the weekly cash flows. He also noted that PG had removed their bid for new wheat from their website and were no longer bidding or contracting for new crop (forward contracting).

He indicated that the only reason the margin deficit would increase would be margin calls against hedged positions that were already in place. Every $.30 increase in the price of wheat represented approximately $1 million by way of margin call. [ 152 ] Mr. Campbell instructed that the proposed extension of credit to January 31 was approved. He also indicated that if the ABL facility was not approved by January 31, he supported “demarcating the connection” which he testified meant ending the relationship with the customer. [ 153 ] On January 24 and 25, 2008, Mr. Boyer and Mr.

Horrock of Risk exchanged emails dealing with concerns held by Risk with respect to futures contracts and security for the Bank’s position. Mr. Boyer advocated for the submission that he had underwritten and attempted to address the concerns expressed by Mr. Horrock. Suffice to say, Risk did not share Mr. Boyer’s enthusiasm. [ 154 ] The extension of credit to January 31, 2008 was an internal process at RBC. No amending agreement was signed even though according to the October 19, 2007 loan agreement, repayment of the entirety of Facility #2 was due December 31, 2007.

Commercial banking did not advise PG that credit had been extended to the end of January; rather, the parties merely continued to deal with PG’s ongoing credit needs on the same basis as before. CIT Financing [ 155 ] While the ABL proposal wound its way slowly through the Bank’s approval process, PG had ongoing discussions with CIT regarding its term sheet. On January 11 and January 28, 2008, CIT issued further signed term sheets to provide $45 million in credit including a $40 million revolving line of credit. These term sheets came to PG through Ernst & Young. [ 156 ] On January 31, 2008, Mr.

Wilson signed and accepted the January 28, 2008 term sheet from CIT. Again, PG did not disclose to RBC the term sheets received from CIT nor that PG had accepted CIT’s financing proposal on January 28, 2008. Instead, PG continued to await ABL’s financing proposal and to deal with RBC under the existing credit facilities. [ 157 ]

Article 25 of the January 28, 2008 CIT term sheet provided that the parties would work toward closing the financing agreements by February 29, 2008 but in any event, closing of the financing arrangements would occur on or before March 31, 2008, failing which the lender’s commitment would expire. [ 158 ] The term sheet also contained the following clause in relation to the revolving line of credit: “After giving effect to all Revolving Advances and Ancillary Credit Products to be extended at closing, Credit Parties’ Excess Availability (“Excess Availability”) at closing only shall exceed $3.500,000.

Such excess revolving loan availability requirement contemplates that all of the Borrower’s debts, obligations and payables are then current in accordance with Borrower’s usual business practices. Excess Availability is defined as Availability (as defined in paragraph 1(b)), less the aggregate amount of Revolving Advances and Ancillary Credit Products.” [ 159 ] This clause contains a number of defined terms.

It is unnecessary to unpack that terminology; however, as will be seen, this clause took on significance when RBC later calculated whether PG could satisfy this condition to permit closing of the CIT financing. RBC concluded that it could not. RBC Extension to February 29, 2008 [ 160 ] On January 31, 2008, Mr. Marson made a further request to Mr. Campbell and Mr. Peters to extend the PG credit facilities to February 29, 2008. Mr. Campbell authorized that extension on that date.

That extension was not communicated to PG. [ 161 ] RBC did not send a letter to PG providing 60-90 days’ notice to find financing elsewhere as proposed in Mr. Marson’s January 9, 2008 request for credit authorization. By this date, no proposal for funding by ABL was yet in hand. [ 162 ] On February 1, 2008, Ms. Lang wrote an email to Mr. Marson and Ms. Paddock to provide an update on PG’s credit status. She noted that PG’s loan balances stood in aggregate at $30.102 million and that cheques processed the day before included monies advanced from PG to C & M. She suggested that the payment to C & M was “kiting”.

She also suggested that they return cheques as PG was out of margin by $6.095 million with an expected large margin call that day. She indicated that “they obviously aren’t getting the message about managing their cash flow, nor have they provided us with all the information that we have requested”. [ 163 ] Ms. Paddock replied as follows: “I don’t think we should be selectively returning cheques. We’ve told the clients that their limit is $33MM and that they needed to

manage their cash to stay under that limit. We have also set the precedent that we will tolerate a margin deficit . In the event there requirements go over $33MM, we definitely need to return items – even if it’s the margin payment.” [Emphasis added] She also indicated that she did not consider the advance made to C & M by PG to be kiting. [ 164 ] The plaintiffs rely on Ms. Paddock’s statement to confirm their understanding in 2008 that they were permitted to borrow against the credit facilities up to $33 million; the margin formula would not be strictly applied to limit the availability of that credit. Mr.

Wilson testified that he understood that as long as PG stayed under its $33 million loan limits, it could access credit in the ordinary course of business for payables including margin calls to F.C. Stone. [ 165 ] Ms. Paddock testified that she did not communicate to PG that the margin formula did not apply and the Bank would continue to lend so long as the aggregate of the loans stayed under $33 million. She and other bank witnesses, notably Ms. Lang and Mr. Marson, continued to push PG to reduce its indebtedness to bring it within the available credit under the margin formula. Further, Ms.

Lang communicated on an almost daily basis with Mr. Marson for authority to advance funds to PG including wire transfers for margin calls to F.C. Stone. [ 166 ] It is RBC’s position that none of that would have been necessary if RBC had indeed communicated to PG that so long as PG stayed under $33 million, everything was fine. [ 167 ] I find that the Bank did communicate to PG that it would not tolerate and would not permit any advance of credit beyond the $33 million borrowing limits.

I do not accept that the Bank effectively advised PG that the margin formula was no longer applicable or that PG need not concern itself with being within loan margins. [ 168 ] I am satisfied that the Bank continued to stress to PG and to press PG to do whatever it could to bring itself back within loan margins while recognizing that some of the expense being incurred by PG was entirely beyond its control. The Bank continued to seek regular credit approvals from Risk for advances/payments by PG for grain and margin calls.

That exercise would have been redundant if the only mile marker was the $33 million ceiling. [ 169 ] In short, the Bank repeatedly approved credit advances while PG was within it loan limits but outside its available credit according to the margin formula. In doing so, the Bank was waiving compliance with that requirement for that day’s advance.

Whether those repeated waivers beginning November 21, 2007 and continuing through February, 2008 represent a new agreement based on course of dealing or an amended agreement will be discussed below in the analysis. [ 170 ] I also observe that PG’s actions during this period were consistent with the premise that loan margins remained relevant. In this regard, I note the following: 1) Ms. Gibbings continued to provide detailed information on payables, margin calls, sales and margin refunds on an almost daily basis; 2) Ms.

Gibbings made inquiries whether margin calls would be paid; viz. whether RBC would advance funds and wire those funds to F.C.

Stone; 3) PG participated in regular telephone calls and/or meetings with Bank representatives in which compliance with the margin formula was a regular topic; 4) PG aggressively sold grain inventory including wheat at a discounted price to a key competitor of one of its long-term customers thereby risking that relationship; 5) PG reduced its selling basis and thereby its profit to entice flour mills to buy more grain sooner than they might otherwise do; 6) PG reduced its buying basis to discourage farmers looking to sell grain to PG; and 7) On February 11, 2008, PG withdrew from purchasing wheat and posted that position on its website. [ 171 ] PG understood that it faced a cash-flow crisis.

It depended on the Bank’s credit to meet that crisis, which at times was overwhelming. Its effort to sell grain and to manage its cash-flow to keep the Bank on side was a Herculean task given the market at that time. Its actions were, in part, in response to the Bank’s repeated reminder and demands that PG get back within loan margins. PG Discloses CIT Financing [ 172 ] On February 6, 2008, Mr. Marson reported to Mr.

Campbell as follows: 1) PG’s loan margin deficit was $8 million; 2) ABL was expected to present a final credit submission to Risk the next day; 3) He expected that an approved facility could be presented to PG by next week; 4) There was agreement in principle between Risk and ABL to provide a $25 million credit facility; 5) PG’s under-margin position was expected to continue for at least the next 90 – 120 days; 6) The ABL $25 million facility would effectively trigger FCC disbursement of $5 million which would reduce the margin shortfall to $3 million by the end of February;

7) If ABL did not grant the facilities, Risk would extend a $25 million facility to September 30, 2008 during which time commercial banking would continue to manage the account; and 8) The margin shortfall was expected to be fully absorbed by May – June, 2008 at which point the account could be “re-marketed”. [ 173 ] Mr. Marson testified in cross-examination that he believed that June 2008 was a reasonable timeframe to “de-market” the PG account based on the information at hand in February 2008. [ 174 ] Mr. Campbell testified that he did not agree with Mr.

Marson that RBC would continue to manage the account until the margin shortfall was absorbed but he did not respond to this email to convey that disagreement. [ 175 ] On February 6, 2008, Mr. Boyer emailed Mr. Wilson for financial forecasts for ABL. On the same date, Mr. Boyer spoke with Ms. Paddock to advise that he had just spoken to Ms. Gibbings who had promised to have the cash-flows that morning. Ms. Paddock offered to “light a fire under them [PG]” if the cash flows were not received as promised. She advised Mr. Boyer by later email that she had spoken to Mr. Wilson who assured her that Mr.

Boyer would have their full attention and cooperation that afternoon. [ 176 ] Mr. Boyer indicated in his testimony that PG had provided everything required as of January 29; he was probably seeking additional information to satisfy Mr. Marson and Mr. Horrock of Risk. [ 177 ] On February 8, 2008, Mr. Wilson had a telephone call with Stephen Lewis of Ernst & Young. Mr. Lewis wanted to provide to CIT the Fuller Landau report for which he needed RBC approval. He expected that he would have to disclose the CIT commitment to get that approval. [ 178 ] Mr.

Wilson’s notes from that telephone call contain the following entry: “If Royal bank – doesn’t fund margin call – will Steve and Tim Lowes to discuss options” [ 179 ] In cross-examination, Mr. Wilson indicated that he was concerned about what would happen when PG notified RBC of the CIT financing. He did not know what to expect as, from his perspective, RBC was “acting funny”. He agreed that it was fair to say that he contemplated the possibility that RBC would not fund margin calls. [ 180 ] On February 11, 2008, Mr. Boyer and Mr. Wilson spoke by telephone. Mr.

Boyer indicated that he had removed an impasse which Mr. Wilson understood was a reference to senior people at the Bank who did not support his efforts. Mr. Boyer indicated that he thought he had a $25 million ABL facility for PG and hoped to have an answer from Risk by Wednesday. He also indicated to Mr. Wilson that Risk was not supportive of ABL and did not trust Mr. Boyer or PG. [ 181 ] In cross-examination, Mr. Wilson testified that he did not believe the $25 million facility was enough money; however, he did not communicate to Mr.

Boyer that he already had a commitment from CIT for $45 million or that a facility of $25 million was a non- starter. Instead, Mr. Wilson merely accepted the information provided. [ 182 ] On February 12, 2008, Mr. Boyer submitted an ETR report (Recommendation for ABL financing) with the support of Mr. Horrock and others in Risk. The proposed financing included a $7 million bridge loan, $4.4 million of which would be retired by the funds to be received from FCC not later than March 31 with the balance to be retired by April 30, 2008.

The $7 million was to pay down the loan margin shortfall which was then more than $7 million. [ 183 ] On the same day, Mr. Wilson spoke to Ms. Paddock to advise that the commodities exchanges had increased their maintenance margins. That resulted in increased margin calls from F.C. Stone in order to keep PG’s margin positions. [ 184 ] On February 13, 2008, Mr. Marson emailed Ms. Lang to advise that “there needs to be some discussion with management about margin calls as we will not continue to support the [loan] margin shortfall”. Ms.

Lang responded that she would call him to discuss before the scheduled conference call with PG that day. [ 185 ] The February 13, 2008 conference call was cancelled because Ms. Gibbings and Anne Schneider, one of the principals of PG, were not available. [ 186 ] In answer to an undertaking from the examination for discovery of the Bank, Ms. Paddock indicated that there was a conference call with PG on February 13, 2008 during which PG was advised that no further margin calls would be honoured; viz. RBC was not prepared to extend further credit for margin calls when its loan margins were in deficit. [ 187 ] Ms.

Paddock in cross-examination at trial conceded that the February 13 conference call was cancelled and re-scheduled to February 19. Her answer to the undertaking was wrong. In point of fact, it was a blatant falsehood and the excuse offered for that misstatement lacks any credibility. [ 188 ] The same undertaking applied to Ms. Lang. Like Ms. Paddock, she indicated that the conference call was held on February 13 and that PG would have been advised in that call that any further deterioration in margin limit would not be supported.

She also indicated that PG was told that margin calls made while PG was in a margin deficit would not funded. [ 189 ] In cross-examination, Ms. Lang also conceded that the February 13 conference call did not occur. Her answer to the undertaking was wrong. She suggested that she must have seen it in her calendar and that “no one is going to remember exactly what was said on any specific date almost 8 years ago”. Her rationale for providing false information in answer to the undertaking and her apparent lack of concern that she did so is disturbing. [ 190 ] Plaintiffs’ counsel invites me to find that Ms.

Lang and Ms. Paddock must have discussed their respective answers to the undertakings; that there is a corporate hymnbook from which both are singing. I am not prepared to go that far. I have noted this

inconsistency and have taken it into account in making findings of fact herein. [ 191 ] At long last, ABL provided a written financing proposal to PG, albeit in draft

summary form, late on February 15, 2008. The proposal was for $32 million as follows: 1) $20 million operating loan; 2) $5 million seasonal bulge available between August 1, 2008 and February 29, 2009; and 3) $7 million bridge loan which would reduce to $2.6 million by March 31, 2008 and to zero by April 30, 2008. [ 192 ] The margin formula offered no consideration or leverage for equity in the F.C. Stone accounts. While the percentages for receivables etc. were higher than the margin formula in the September 13, 2008 loan agreement, the proposal w

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