


COURT OF APPEAL FOR ONTARIO

CITATION:
The
    Equitable Trust Company v. The Rose Corporation, 2012 ONCA 44

DATE: 20120124

DOCKET: C54172

Rosenberg and Hoy JJ.A. and Swinton J. (
Ad
    Hoc
)

BETWEEN

The Equitable Trust Company

Applicant (Respondent)

and

The Rose Corporation

Respondent (Appellant)

James M. Wortzman and Karey Anne Dhirani, for the
    appellant

Daniel S. Murdoch and Kathryn Esaw, for the respondent

Heard: January 17, 2012

On appeal from the order of Justice David M. Brown of the
    Superior Court of Justice, dated July 12, 2011.

ENDORSEMENT

[1]

The Rose Corporation appeals the order of the application judge dated
    July 11, 2012, ordering and declaring that the  Covenant and Postponement of
    Claim (the Covenant) sought to be enforced by the respondent, The Equitable
    Trust Company, is valid and enforceable against the appellant.

[2]

Pursuant to the Covenant, the appellant merchant bank agreed  as
    principal debtor, and not as a surety, as guarantor, and as indemnitor  to
    be liable for $1.5 million of loans advanced by the respondent to three
    corporations (collectively, the Borrower), and secured by first mortgages on
    three hotels owned by a subsidiary of the appellant.  The hotels were sold
    twice with the appellants consent.  Two of the Borrowers remained on the loan
    covenant.  The mortgages fell into arrears.  A Binding Term Sheet Regarding
    Forbearance Agreement was signed by, among others, the appellant.  The respondent
    ultimately appointed a receiver and manager.  Thereafter, the appellant took
    the position that the Covenant was unenforceable.

[3]

The appellant argues that the application
    judge erred in finding that the Covenant is valid and enforceable against the
    appellant and, in the alternative, erred in finding that there were no material
    facts in dispute which require a trial.

[4]

With one exception, the appellant
    advances arguments made before, and fully and ably addressed by, the
    application judge in his reasons.  On this appeal, the appellant relies on
Montreal
    Trust Co. of Canada v. Birmingham Lodge Ltd.
(1995), 24 O.R. (3d) 97 (C.A.),

which
    appears not to have been argued before the application judge.

[5]

We therefore focus our analysis on the argument arising out of
Montreal
    Trust
.

[6]

In
Montreal Trust
,
the mortgaged property was sold with the defendant
    guarantors consent, but the mortgage was subsequently renewed, at an increased
    interest rate, without their consent. It is long established that a surety will
    be discharged if the principal contract which he guaranteed is materially
    varied without his consent.

[7]

Laskin J.A. held that the guarantors were
    released from liability by the renewal agreement; the no prejudice clause in
    the debenture containing the guarantee covenant provided that the guarantors
    were not released from liability if the terms of the mortgage were varied by
    the Corporation or any successor.  The variation was effected by an assignee,
    not a successor.  He also rejected the argument that the effect of the phrase
    the guarantors shall be primarily liable was to convert the guarantee into a
    contract of indemnity and make the defendants liable as primary debtors, even
    if released from liability as guarantors.

[8]

He noted, at para. 21:

All these cases turn on the specific language of the document
    being considered.  The mere inclusion of a phrase such as the guarantors shall
    be considered as primarily liable is not determinative.  The court should
    examine the entire document to ascertain the parties intention.  If the court
    is uncertain about the correct interpretation, it may resort to extrinsic
    evidence to assist it.

[9]

In
Montreal Trust
, the defendants
    were referred to as guarantors throughout the debenture and signed as
    guarantors; Laskin J.A. therefore construed the covenant at issue as a contract
    of guarantee.  His conclusion was buttressed by the parties subsequent
    conduct.  In each of the mortgage renewal offers, and in the statement of
    claim, the defendants were referred to as guarantors.

[10]

Based on
Montreal Trust
, the appellant argues
    that the application judge erred in concluding that the appellant was a
    principal debtor under the Covenant.  While the appellant is referred to
    throughout as a Covenantor, and not as a guarantor, and did not sign as guarantor,
    subsequent documents describe the appellant as guarantor.  All of the common
    law defences to the enforcement of a guarantee are therefore open to the
    appellant, it argues, unless waived in the Covenant.  The appellant notes that
    in paragraph (h) of the Covenant it waives all notices of default,
    non-performance, non-payment and non-observance on the part
of the
    Borrower
of the terms, covenants and
    provisos contained in the Security (emphasis added).  Again relying on
Montreal
    Trust
, the appellant argues that it did not
    waive such notices in respect of the Borrowers assignees, and the general no
    prejudice clauses in the Covenant do not amount to a waiver of its right to
    rely on its failure to receive the demand notice issued by the respondent to
    the ultimate purchaser of the mortgaged property in a timely manner.

[11]

While the application judge concluded that the
    appellant was a principal debtor, that was not determinative of liability. He also
    correctly concluded that the liability of the appellant turned on the language
    of the Covenant.

[12]

Paragraph (f) of the Covenant provides that nothing
    but payment and satisfaction in full of the Indebtedness and the due
    performance and observation of all covenants, agreements and provisos in the
    Security and other security to be given to the Lender shall release the
    Covenantor of this covenant.  As the application judge noted, paragraph (j)
    provides that the liability of each Covenantor under this covenant shall not
    be impaired or discharged  by any other act or thing whereby, as guarantor,
    the Covenantor would or might be released in whole or in part.  The Covenant
    contemplated the sale of the hotels.

[13]

The application judge carefully considered the specific
    language of the Covenant. The language used in the Covenant is different from
    that used in
Montreal Trust.
We agree with his conclusion that the
    appellant contracted out of its ability to rely on its failure to receive a
    demand notice.

[14]

We also agree with the application judges finding
    that the appellant by, among other things, signing the Binding Term Sheet
    Regarding Forbearance Agreement, in which it agreed to sign an acknowledgement
    that its guarantee remained in effect and subsequently dispensing with the need
    for that formality, ratified the events that, but for the no prejudice
    language, might have entitled the appellant to release under the Covenant.

[15]

The material facts which the appellant pointed to in
    his oral submissions on this appeal as in dispute, and requiring a trial, arise
    out of an email exchange between counsel relating to the ratification issue.  The
    application judge rejected the appellants suggestion as to the proper
    interpretation of the emails as contrary to their plain import.  It was open to
    the application judge to rely on the plain meaning of the emails and thus
    determine the matter as an application.

[16]

In the result, the appeal is dismissed.

[17]

The respondent is entitled to its costs of the appeal
    on a partial indemnity scale, which are fixed at $13,000, inclusive of
    disbursements and applicable taxes.

M. Rosenberg J.A.

Alexandra Hoy J.A.

K. Swinton J. (ad hoc)


