



COURT 
    OF APPEAL FOR BRITISH COLUMBIA




Citation:


Abakhan 
          v. Halpen,







2008 
          BCCA 29



Date: 20080123

Docket: CA034664

Between:

George 
    Abakhan

Appellant

(
Respondent on Cross Appeal
)

(Plaintiff)

And

Michael 
    Halpen and Dwayne Diehl

Respondents

(
Appellants on Cross Appeal
)

(Defendants)




Before:


The 
          Honourable Chief Justice Finch




The 
          Honourable Mr. Justice Hall




The 
          Honourable Madam Justice Saunders








K. 
          Wedel


Counsel for the Appellant




D.J. 
          Barker


Counsel for the Respondents




Place 
          and Date of Hearing:


Vancouver, British Columbia




October 16, 2007




Place 
          and Date of Judgment:


Vancouver, British Columbia




January 23, 2008








Written 
          Reasons by
:




The 
          Honourable Madam Justice Saunders




Concurred 
          in by:




The 
          Honourable Chief Justice Finch

The 
          Honourable Mr. Justice Hall



Reasons 
    for Judgment of the Honourable Madam Justice Saunders:

[1]

This appeal concerns the obligations of co-guarantors.  The appellant 
    Mr. Abakhan commenced this action against his two co-guarantors, the respondents 
    Mr. Halpen and Mr. Diehl, to recover two sums.  The first sum is an amount 
    in contribution to monies Mr. Abakhan said he paid on his guarantee to reduce 
    the debt owing to the creditor bank by the principal debtors.  The second 
    sum is the amount of the remnant debt he says he is owed as an assignee of 
    the debt and security the bank held relating to the debt.

[2]

In his reasons for judgment (2006 BCSC 1979) the learned trial judge 
    ordered each respondent to pay Mr. Abakhan one-half the difference between 
    the total amount paid by Mr. Abakhan to the bank and Mr. Abakhans proportionate 
    share of the original debt.  By the order, the trial judge declined Mr. Abakhans 
    claim on the remnant debt except to the extent of including in his calculation 
    of the total amount paid by Mr. Abakhan to the bank the modest sum he paid 
    as consideration for the assignment.

[3]

Mr. Abakhan appeals, saying he is entitled to recover from the respondents 
    the entire amount of the remnant debt, in addition to the amounts ordered 
    by the trial judge as contribution to the monies he paid on the guarantee.  
    The respondents cross appeal, saying that the trial judge erred in finding 
    that Mr. Abakhan had actually paid a sum of $225,000 to the bank on his guarantee.

[4]

The claims arise from financial arrangements between three companies 
    and the Bank of Nova Scotia.  Mr. Abakhan, Mr. Halpen and Mr. Diehl guaranteed 
    the debts of the companies to the bank by joint and several guarantees.

[5]

Monies became owing by the companies to the Bank such that, in 2002, 
    the Bank issued demands upon the companies.  This demand was followed in October 
    2003 by demands upon each of the co-guarantors for principal and interest 
    owing by the companies, then in the amount of $309,568.63.

[6]

Mr. Halpen and Mr. Diehl made no payment to the Bank in response to 
    the demands.  In June 2004, Mr. Abakhan made an arrangement with the Bank 
    settling its claim against him for $225,000.  The Bank reflected a payment 
    of that amount in a spreadsheet showing a credit of that amount to the debts 
    of the three companies.  The payment was financed by an agreement between 
    the Bank and Mr. Abakhan that he would pay 11 equal annual payments.  Six 
    months after this arrangement was concluded, Mr. Abakhan paid the Bank $8,000 
    in exchange for an assignment of the debt and the security held by the bank 
    relating to the debt, including the promissory notes and all the guarantees 
    of the three co-guarantors.  The amount of the remnant debt owing to the Bank 
    at that time was $82,307.55.

[7]

In the action Mr. Abakhan claimed for contribution to the $225,000 
    he said had been paid on the companies debt, as well as the amount of the 
    remnant debt, $82,307.55, plus interest.  In defence, the respondents Mr. 
    Halpen and Mr. Diehl denied that Mr. Abakhan had paid $225,000 on account 
    of the debts, saying that because Mr. Abakhan had agreed with the Bank to 
    pay on a schedule of 11 equal annual payments, they were not obliged to contribute 
    to him monies he was not yet out of pocket.  Second, they contended that Mr. 
    Abakhan was not able to collect the remnant debt from them because their exposure 
    to Mr. Abakhan was limited by s. 34 of the
Law and Equity Act
, 
    R.S.B.C., 1996, c. 253 to contribution to amounts that Mr. Abakhan had paid 
    out as a guarantor over and above his proportionate share of the debt.

[8]

The trial judge found that Mr. Abakhan had paid $225,000 of the companies 
    debt and, joining that payment to the consideration for the assignment, held 
    that the amount paid by Mr. Abakhan on account of the debt was $233,000.  
    Referring to s. 34(3) of the
Law and Equity Act
, he concluded 
    that the right to contribution related only to the payments over and above 
    Mr. Abakhans proportionate share of the debt.  Thus he subtracted $103,189.54 
    (one-third of the amount of debt demanded of them by the Bank), from the amount 
    paid by Mr. Abakhan ($233,000), divided the balance equally and ordered Mr. 
    Halpen and Mr. Diehl to each pay Mr. Abakhan $64,905 in contribution.  Further, 
    he held that Mr. Abakhan was not entitled to judgment on the assignment of 
    the remnant debt because s. 34 of the
Law and Equity Act
denied 
    him recovery based upon an assignment.

[9]

In this appeal, Mr. Abakhan challenges the treatment of the remnant 
    debt.  He says that the amount of $8,000 that he paid as consideration for 
    the assignment was not payment under the guarantee, and rather should redound 
    to his benefit through a judgment in his favour against Mr. Halpen and Mr. 
    Diehl for the amount of the remnant debt, in addition to the judgment against 
    them for contribution (based upon the amount of $225,000 he paid on the guarantee).  
    If successful, and ignoring interest, Mr. Abakhan will obtain judgment against 
    each of Mr. Halpen and Mr. Diehl for $60,905 as contribution to his payment 
    under the guarantee ($225,000 - $103,189 ÷ 2), and judgment against each of 
    them on the remnant debt for $41,154 ($82,307.55 ÷ 2), for total recovery 
    by him of $204,118.  Considering that he paid $233,000, this would put Mr. 
    Abakhan out of pocket approximately $29,000 in respect to the transactions 
    in issue, and Mr. Halpen and Mr. Diehl each out of pocket about $102,000.

[10]

By cross-appeal, Mr. Halpen and Mr. Diehl challenge the characterization 
    of the $225,000 transaction, saying the companies debts have not been reduced 
    except by such annual payments as have actually been made.

The Appeal

[11]

Mr. Abakhan contends that the trial judge erred in his analysis and 
    application of s. 34(3) of the
Law and Equity Act
, and so erred 
    in failing to recognize the separate and unrelated nature of his claim under 
    the assignment of the remnant debt.

[12]

Section 34 of the
Law and Equity Act
provides:

34
(1)    Every person who, being surety for the debt or 
    duty of another or being liable with another for any debt or duty, pays the 
    debt or performs the duty is entitled to have assigned to him or her or to 
    a trustee for him or her every judgment, specialty or other security that 
    is held by the creditor in respect of the debt or duty, whether the judgment, 
    specialty or other security is or is not deemed at law to have been satisfied 
    by the payment of the debt or performance of the duty.

(2)        
    The person who has paid the debt or performed the duty is entitled to stand 
    in the place of the creditor and to use all the remedies and, if necessary 
    and on a proper indemnity, to use the name of the creditor in any action or 
    other proceeding at law or in equity, in order to obtain from the principal 
    debtor, or a co-surety, co-contractor or co-debtor indemnification for the 
    advances made and loss sustained by the person, and the payment or performance 
    made by the surety is not pleadable in bar of any action or other proceeding 
    by him or her.

(3)
A co-surety
, co-contractor or co-debtor
is not entitled to recover 
    from any other co-surety
, co-contractor or co-debtor, by the means referred 
    to in subsections (1) and (2),
more than the just proportion 
    to which, as between those parties themselves, the other co-surety
, co-contractor 
    or co-debtor
is justly liable
.

[Emphasis added.]

[13]

In his reasons for judgment the trial judge held that Mr. Abakhan had 
    paid $225,000 on the guarantee and that the two amounts paid by him should 
    be viewed as a global payment:

[21]      
    In my view, it would be an error to regard the plaintiffs payment towards 
    the principal debt of $225,000 on June 16, 2004, and his payment of $8,000 
    for an assignment of the Bank of Nova Scotia position as against the principal 
    debtors and the guarantors on December 15, 2004, as separate transactions.  
    On the basis of the evidence before me, I conclude that the plaintiffs payment 
    of $225,000 on June 16, 2004, represents an actual payment of that sum which 
    had the effect of reducing the principal debt by that amount.

[14]

The judge then addressed the effect of the assignment upon Mr. Abakhans 
    relationship to his other two co-guarantors:

[24]      
    On the issue of the effect of the assignment, I am not satisfied that by purchasing 
    an assignment of the outstanding principal debt six months after negotiating 
    a settlement of his own liability to the bank for the principal debt takes 
    the plaintiff outside the scope of s. 34.  What was at issue in
North 
    American v. F.B.D.B.

[(1989), 58 D.L.R. (4
th
) 505 (B.C.C.A.)], 
    the decision relied on by the plaintiff, was whether a creditor of the principal 
    debtor could improve its position by taking an assignment from another creditor 
    which had priority even though the creditor taking the assignment was, as 
    well, a guarantor of some of the principal debtors liability.  In holding 
    that s. 30 did not apply and the plaintiff was not limited to recovering from 
    Sleeping Giant only what it paid on the principal debt ($60,000), but could 
    recover consistent with the assigned priority agreement between FBDB and BCDC 
    60 percent of its payment of $205,000 from Sleeping Giant for Sleeping Giants 
    assets, the Court of Appeal ruled, in effect, the plaintiff was not pursuing 
    indemnification, but was pursuing recovery of its shareholders loan to Sleeping 
    Giant.

[25]
In the present case, the plaintiffs relationship with the principal debtors 
    was as a guarantor, not a creditor, and his relationship with the defendants 
    was a co-guarantor even after he settled his liability to the bank.  
    At all material times, he retained the right of a co-guarantor to

seek 
    contribution from the defendants for any amount he paid in excess of his proportionate 
    share and to recover against the principal debtors
.  This case, therefore, 
    does not follow the exception identified in the
North American Leasing
decision in which it was not established the plaintiff entered the transaction 
    as a guarantor because he was entering it as a creditor.
Although 
    the plaintiff argues that since he had been released by the bank in June of 
    2004 and therefore was no longer a guarantor vis-à-vis the bank, in my view, 
    that does not alter his status as a co-guarantor within the meaning of s. 
    34.
Section 34 is clearly concerned with protecting a co-guarantor 
    against being liable to pay another co-guarantor more than the just proportion 
    to which, as between those parties themselves, the former guarantor is justly 
    liable.

[26]      
    In his second amended statement of claim dated October 16, 2006, the plaintiff 
    specifically relied on s. 34(3) of the
Law and Equity Act
in seeking 
    a contribution from the defendants in relation to his payment of $225,000 
    against the principal debt.
It is not the plaintiffs position vis-à-vis 
    the creditor which determines his status under s. 34(3).  It is his status 
    vis-à-vis his co-guarantors.
In the present case, his status brings 
    him squarely within s. 34 which limits his right to a contribution from the 
    defendants in keeping with that section.

[Emphasis added.]

[15]

Having rejected the claim for the remnant debt, the judge then addressed 
    the amount of contribution to which Mr. Abakhan was entitled:

[29]      
    The question as I see it is in relation to in what amount are the proportionate 
    shares of the co-guarantors to be determined.  Is it the sum of $309,568.63, 
    which was outstanding when the plaintiff reduced the debt by $225,000 on June 
    16th, 2004, or is it the sum of $233,000, which the plaintiff has paid in 
    total after paying $8,000 on December 15th, 2004, for an assignment of the 
    debt and the security documents including the guarantees?  As I have 
    determined that the plaintiff cannot enforce the assigned debt against the 
    co-guarantors beyond the limits imposed by s. 34(3), could the defendants 
    ever be called upon to pay more than their proportionate share of $233,000?  
    If not, then their respective contributions should be based on a one-third 
    share of that amount.  If so, then it should be based on a one-half share 
    of the amount by which the plaintiffs contribution exceeded his proportionate 
    share of the principal debt.

[30]      
    In my view, this is not a case where the debt has been extinguished.  
    What has happened is that the plaintiff has settled his liability by paying 
    $225,000 down on the debt, and has purchased an assignment of the balance 
    of the debt remaining.
The fact that s. 34(3) prevents him from pursuing 
    the defendants for the full value of the remaining debt does not mean that 
    the defendants could never be called upon to pay that amount if the plaintiff 
    assigns it to some third party
.  In my view, therefore, the appropriate 
    disposition is to order that the defendants each pay to the plaintiff $64,905 
    representing one half of the difference between what the plaintiff paid to 
    reduce the debt ($233,000) and his proportionate share of the original debt, 
    of $309,568.63 ($103,189.54), being the sum of $129,810.46.

[Emphasis added.]

[16]

Two questions are entwined in the appeal: the nature of the relationship 
    between Mr. Abakhan and his two co-guarantors, Mr. Halpen and Mr. Diehl, after 
    Mr. Abakhan settled with the Bank and subsequently acquired the assignment; 
    and the potential liability of the co-guarantors to a subsequent assignee 
    of the remnant debt.

[17]

For the reasons that follow, I conclude respectfully that the trial 
    judge was correct in concluding that the settlement with the Bank did not 
    alter the nature of the relationship between the then co-guarantors, but incorrect 
    in concluding that Mr. Halpen and Mr. Diehl remain vulnerable to a call on 
    the remnant debt from a third party.

[18]

Both of these conclusions derive from the essential character of the 
    original relationship between the parties, a character first laid out in very 
    old authority which has not been altered by recent jurisprudence.

[19]

A guarantee establishes a relationship of principal and surety between 
    the original debtor and the guarantor.  The terms guarantor and surety may 
    be used interchangeably.  The word surety is used in s. 34(3) of the
Law 
    and Equity Act
replicated above, the reasons for judgment of the trial 
    judge, and the submissions of the parties refer in the main to the parties 
    as co-guarantors.  The distinction in terminology makes no difference.

[20]

The premise of Mr. Abakhans submission is that the temporal sequence 
    by which he first settled the Banks claim against him and then took an assignment 
    of the debt instruments made him a creditor of Mr. Halpen and Mr. Diehl.  
    In my view, this submission is contrary to the weight of authority, the analysis 
    of learned authors on the obligations of co-sureties, and the premise of the 
    right of contribution.  For example, Henry Anselm de Colyar, in his
A Treatise 
    on the Law of Guarantees and of Principal and Surety,
3
rd
ed. 
    (London: Butterworths, 1897) observes at p. 341-42:

The 
    doctrine of contribution, as has been remarked before, originally was only 
    a doctrine of the courts of equity, and, as an equitable doctrine, it is not 
    founded
in contract
, but is the result of
general equity
, on 
    the ground of equality of burden and benefit.  This independent equity seems 
    to arise from the co-sureties towards each other,
at the inception of the 
    contract
, so that, each of them being supposed to be equally benefited 
    by the credit given to the principal debtor, is bound to bear an equal share 
    of the burden which is the consideration for such credit.

[Emphasis in original.]

And, 
    at p. 360, he observes as to the equal sharing of benefit:

[S]ureties 
    are not only entitled to contribution from each other for monies paid in discharge 
    of their joint liabilities for the principal,
but they are also entitled 
    to the benefit of all securities which have been taken by any one of them 
    to indemnify himself against such liabilities
.

[Emphasis added.]

[21]

More recently David G.M. Marks and Gabriel S. Moss, in
Rowlatt on 
    the Law of Principal and Surety,
4
th
ed. (London: Sweet & 
    Maxwell, 1982) observed at p. 151:

A 
    suretys right to use securities given to the creditor by the principal is 
    limited to the recoupment of the suretys indemnity against the principal.  
    If the surety makes terms with the creditor and settles the debt for a lesser 
    sum, and then obtains an assignment of the creditors securities, he cannot 
    recover more from the principal than he has actually paid [citing
Reed 
    v. Norris
(1837), 6 L.J. Ch. 197 at 198, 2 My. & Cr. 361 at p. 374-376].

And 
    at p. 152-3:

Where 
    a co-surety pays the debt, or more than his proportion of it, and the principal 
    is insolvent, the co-surety is entitled to contribution from his fellow co-sureties 
    to equalise the burden.

[ 
    . . . ]

The 
    underlying principle of equity is that the creditors remedies against the 
    co-sureties should be applied so as to apportion the burden rateably.  If 
    the remedies have been applied otherwise the court will correct the inequity 
    as between the co-sureties.

[22]

Kevin P. McGuinness, in his
The Law of Guarantee,
2
nd
ed. (Toronto: Carswell, 1996) addressed the enjoyment of a benefit obtained 
    by a co-surety from the principal in respect to the debt, at p. 516:

A 
    surety who obtains a counter-security from the principal to which he may look 
    for indemnification in the event that he is called upon to pay must hold that 
    security for the benefit of all his co-sureties.  By extension, the surety 
    must bring into the hotch-pot for distribution among all co-sureties any amount 
    which he receives from the realization of the security, even in cases where 
    the surety entered into his commitment on the express understanding with the 
    debtor that the security would be for his own exclusive benefit.
The right 
    to share in a security is that of the co-sureties and therefore is not liable 
    to be defeated by any agreement between one of their number and the principal.
This right is derived from the equitable principal that equality of treatment 
    is equitable and that sureties should in general bear the burden of the guarantee 
    in equal proportions, and also upon the principal that one co-surety must 
    not withdraw something from the estate of the debtor for his exclusive benefit.

[Emphasis added.]

[23]

While these passages do not address the precise circumstances before 
    us, their general theme is to the effect that one surety may not act to the 
    disadvantage of an equitable sharing of the debt as between the sureties and, 
    where, as here, guarantees of all three co-guarantors are assigned to one 
    guarantor, the two non-holding guarantors are entitled to share the benefit 
    of all the security.

[24]

It is said on behalf of Mr. Abakhan that the assignment of the debt 
    permits him to enforce the debt as a creditor.  I do not agree.  Whatever 
    arrangement was made between the creditor and Mr. Abakhan did not alter the 
    relationship between the co-guarantors.  The legal expectation when the guarantees 
    were given was that the burden of the debt guaranteed would be equalized.  
    As I have explained above, in the event Mr. Abakhan obtains judgment for the 
    amount of the remnant debt, that burden would not be equal  Mr. Abakhan would 
    be out of pocket significantly less than either Mr. Halpen or Mr. Diehl.

[25]

The case of
North American Leasing Ltd. v. Federal Business Development 
    Bank
(1989), 58 D.L.R. (4
th
) 505, 37 B.C.L.R. (2d) 216 
    (C.A.), referred to in the passage from the reasons for judgment replicated 
    above, is relied upon by Mr. Abakhan as establishing his entitlement to judgment 
    on the assignment.  But
North American Leasing
was a different 
    case.  In
North American Leasing
a creditor became a co-guarantor, 
    and then improved its position as a creditor.  The case concerned a contest 
    between creditors and not co-guarantors, and is simply an example of a case 
    in which a creditor successfully improved its position as a creditor.  The 
    words of Lord Halsbury in
Quinn v. Leathem
[1901] A.C. 495 at 
    506 are apt: . . . a case is only an authority for what it actually decides.

[26]

It is said for Mr. Abakhan that American jurisprudence favours his 
    claim, particularly
Fowler v. Strickland
, 107 Mass. 552 (S.J.C. 
    1871) and
Manuel v. Hicks Iron Works,
216 Cal. 459, 14 P.2d 
    756 (Sup. Ct. 1932).  In
Fowler
the plaintiff payee of a note, 
    endorsed the note and then permitted the payor to negotiate it with a third 
    party for its full amount.  Upon learning that the payor would not be able 
    to meet the note at maturity, the plaintiff purchased the note from the third 
    party creditor for a reduced value and successfully sued the payor of the 
    note for its face value.  In my view,
Fowler
is unlike the circumstances 
    before us as it does not concern competing claims in equity of co-guarantors 
    or their relationship.  In
Manuel
a co-guarantor purchased the 
    promissory note establishing the debt, as well as the guarantee.  He then 
    sued the debtor and his co-guarantors, and obtained judgment against each 
    of them (recognizing that he was obliged in that action to pay his proportionate 
    share of the note).  On the issue as to the applicable limitation period the 
    co-guarantors argued unsuccessfully that the plaintiffs claim was as a guarantor 
    for contribution, and not as a creditor.  While
Manuel
on its 
    face appears to support Mr. Abakhan in his submission that he was entitled 
    to sue as an assignee, the case does not address the issue of equal sharing 
    of the benefit of security obtained by a co-guarantor, and I would decline 
    to follow it for the proposition advanced.  I prefer instead the approach 
    taken in
Merchants Discount Co. v. Federal Street Corp.
,

300 Mass. 167, 14 N.E.2d  155 (S.J.C. 1937).  In
Merchants Discount 
    Co.
the Supreme Judicial Court of Massachusetts held that a co-guarantor 
    who acquired the guaranteed note upon part payment of the debt could not enforce 
    the note against the co-guarantors for its full face value.

[27]

I draw two conclusions.  First, Mr. Abakhan was bound to act in the 
    interests of all guarantors in relation to the assigned debt instruments and 
    therefore may not re-assign them to the prejudice of his co-guarantors.  This 
    means, contrary to the conclusion of the trial judge, that the advantage that 
    Mr. Abakhan gained by the settlement and assignment of the debt and security 
    was gained for all three.  Second, Mr. Abakhan is not able to seek from his 
    co-guarantors more than their proportionate share of the monies he paid to 
    corral the debt from the Bank.

[28]

Just as the Court of Chancery in
Reed v. Norris
held 
    that a surety cannot settle with a creditor and, instead of treating the settlement 
    as payment of the debt, treat it as an assignment of the whole debt to himself, 
    Mr. Abakhan can not settle with the Bank, obtain an assignment of the remnant 
    debt and enforce it against his co-guarantors.

[29]

I am bolstered in this conclusion by the mischief that may be worked 
    against the principle of equal sharing of the burden of a guarantee by judgment 
    on a remnant debt in circumstances similar to the ones here present.  It is 
    easy to conceive of a case in which the first co-guarantor to make payment 
    to a bank may then acquire an assignment of the security instrument and, suing 
    upon it, derive a substantial profit from the transaction.  Such a result 
    would offend the long standing principles that govern the relationship of 
    co-guarantors.

[30]

The appeal was couched in terms of the application of s. 34 of the
Law and Equity Act
.  Section 34 limits a guarantors recovery 
    to a proportionate share of the debt for which, as between the co-guarantors, 
    they are justly liable.  Here, by the time of the action, Mr. Abakhan had 
    ensured that he would not be liable for the remnant debt, and had obtained 
    an assignment in his favour.  That is, by his action Mr. Abakhan had determined 
    the maximum amount for which the co-guarantors would be liable to the creditor, 
    had paid that amount himself, and is entitled to a judgment from each of his 
    co-guarantors for one-third that amount.

The Cross Appeal

[31]

In their cross appeal Mr. Halpen and Mr. Diehl contend that the trial 
    judge erred in finding that Mr. Abakhan had paid $225,000 to the bank on account 
    of the companies debts.

[32]

The finding that is challenged is a finding of fact.  As is well known, 
    this Court may not interfere with a finding of fact except in limited circumstances:
Housen v. Nikolaisen
, 2002 SCC 33, [2002] 2 S.C.R. 235.

[33]

In my view, it was open to the trial judge, on the evidence, to find 
    that the debt of the companies was reduced by the amount of $225,000.  That 
    this was done by a separate agreement with the Bank whereby Mr. Abakhan agreed 
    to make 11 equal annual payments is a matter between Mr. Abakhan and the Bank.  
    The significant aspect is the Banks acknowledgement that the debt guaranteed 
    by Mr. Halpen and Mr. Diehl was reduced by $225,000, and that Mr. Abakhan 
    was the source of that reduction.

[34]

In summary, I see no basis upon which to interfere with the conclusion 
    of the trial judge on this finding of fact.

Conclusion

[35]

For the reasons here stated, I would allow the appeal to the extent 
    of setting aside the order and substituting for it an order for judgment in 
    Mr. Abakhans favour against each of the respondents in the amount of one-third 
    of $233,000 plus interest.  I would dismiss the cross appeal.

The Honourable 
    Madam Justice Saunders

I AGREE:

The Honourable Chief Justice Finch

I AGREE:

The Honourable Mr. Justice Hall


