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COURT OF APPEAL FOR ONTARIO

CITATION: Callidus Capital Corporation v. McFarlane, 2017
    ONCA 626

DATE: 20170728

DOCKET: C62330

Feldman, Gillese and Pepall JJ.A.

BETWEEN

Callidus Capital Corporation

Plaintiff

(Respondent)

and

Jeffrey McFarlane

Defendant

(Appellant)

Symon Zucker and Melvyn L. Solmon, for the appellant

Lisa S. Corne and John D. Leslie, for the respondent

Heard: February 1, 2017

On appeal from the judgment of Justice Frank J.C. Newbould
    of the Superior Court of Justice, dated May 24, 2016, with reasons reported at
    2016 ONSC 3451.

PEPALL J.A.:

A.

Introduction

[1]

A personal guarantee of corporate indebtedness
    should only be given after serious deliberation. Here the guarantor turned his
    mind to the language of the guarantee in the expectation that his exposure
    would be limited. That expectation was not met. The lender obtained summary
    judgment against the guarantor in an amount equal to US$3 million plus interest
    at the rate of 21% and costs. The guarantor now appeals from that judgment. For
    the reasons that follow, I would allow the appeal and reduce the summary
    judgment from an amount in Canadian currency sufficient to purchase the sum of US$3
    million to US$250,000.

B.

Facts

[2]

Xchange Technology Group LLC (the Company)
    carried on business as a supplier of information technology products and
    hardware rentals.
The appellant, Jeffrey McFarlane, was
the President and CEO of the Company.

[3]

Royal Bank of Canada and PNC Bank provided
    financing to the Company.

[4]

In support of the financing given by PNC Bank, McFarlane
    provided that bank with a limited guarantee of the Companys debt. The
    guarantee was limited to US$3 million plus interest and costs.

[5]

The respondent, Callidus Capital Corporation, is
    a high risk distressed debt lender. On October 11, 2012, Callidus purchased the
    Companys debt from PNC Bank. It paid PNC Bank US$11.6 million.  It also charged
    a facility fee to the Company of US$2.25 million.  McFarlane stated that his
    interest cost went from 4 to 6% per annum before the purchase to 18 to 21% per
    annum after the purchase. The Loan Agreement between the Company and PNC Bank and
    McFarlanes personal guarantee were transferred to Callidus as part of the
    purchase transaction and were amended to so provide on October 11, 2012.

[6]

The original guarantee as amended in favour of
    Callidus stated that:

The undersigned hereby jointly and severally
    (if more than one) guarantees payment to the Lender, upon demand therefore being
    made upon the undersigned, of all Obligations (as defined in the Loan
    Agreement) now or at any time and from time to time hereafter due to or owing
    to the Lender from or by the Borrowers or by any successor corporation of the
    Borrowers, limited to the amount of Three Million and 00/00 Dollars (US$3,000,000.00)
    in total; plus interest thereon, at the rate of interest applicable to such Obligations.

[7]

The Company defaulted on its obligations to
    Callidus. McFarlane blamed Callidus for the Companys increased difficulty in
    servicing its debt. He stated in his affidavit filed in subsequent court proceedings
    that Callidus was engaging in a loan to own strategy by which it consumed the
    equity value of the Companys business through debt and fees with a view to ultimately
    owning the company.

[8]

In June 2013, the Company negotiated a
    forbearance agreement with Callidus. This would avoid immediate enforcement of remedies
    under the Loan Agreement including repayment of the Companys debt. In
    conjunction with that agreement, McFarlanes guarantee was amended; he provided
    Callidus with mortgage security on property he owned; and he agreed to withdraw
    from management of the Company. McFarlane stated that he was alarmed by
    Callidus lending tactics and practices and was particularly alarmed by its
    high fees and accumulating charges to the Company. He recognized that upon his
    withdrawal from management, he would no longer be able to mitigate past fees or
    influence future fees. He insisted that he would not be responsible for any
    portion of the Company debt that arose from Callidus fees, past or future, and
    that his guarantee be amended to reflect that concern. As of the date of the
    amended guarantee, a US$2.25 million facility fee was one such charge.

[9]

The June 6, 2013 amended guarantee provided:

2.1     Section 1 of the Guarantee is amended
    entirely to read:

1.
The
undersigned (
Guarantor

) hereby jointly and severally (if more than one)
guarantees payment to the Lender
, upon
    demand therefore being made upon the undersigned,
of
    all Obligations
(as defined in the Loan Agreement) now
    or at any time and from time to time hereafter due or owing to the Lender from
    or by the Borrowers or by any successor of the Borrowers
excluding however the $2,250,000 Facility Fee as defined in the
    Loan Agreement or any forbearance fee charged by Lender in connection with any
    forbearance agreement with Borrowers, limited to the lesser of
:

(x)
the
    Limited Principal Amount or

(y)     provided that Guarantor is in compliance with the terms of
    the letter agreement dated June 6, 2013, by which Guarantor suspended and
    relinquished powers and authorities over the Borrowers (
Letter Ceding Authority
),
the Deficiency Amount
,

in each case as defined below,
plus interest
thereon at the rate of
    interest applicable to such Obligations (or the applicable rates of interests
    if different rates of interest apply to different parts of such Obligations),
    from and including the date of demand until payment, and legal or other costs,
    charges and expenses. [Emphasis added.]

[10]

Obligations was very broadly defined in the Loan
    Agreement:

[A]ll loans, advances, indebtedness,
    obligations and liabilities of Borrowers to Lender under this Agreement and the
    Notes, together with all other indebtedness, obligations and liabilities
    whatsoever of Borrowers to Lender, whether matured or unmatured, liquidated or
    unliquidated, direct or indirect, absolute or contingent, joint or several, due
    or to become due, now existing or hereafter arising.

[11]

Limited Principal Amount was defined in the
    amended guarantee as meaning US$3 million reduced by certain sums that are immaterial
    to this appeal.

[12]

Deficiency Amount was defined in the amended guarantee
    as meaning:

[T]he amount of the Obligations, excluding
    however the $2,250,000 Facility Fee as defined in the Loan Agreement or any
    forbearance fee charged by the Lender in connection with any forbearance
    agreement with Borrowers, that remains outstanding at the end of the Collateral
    Liquidation Period.

[13]

Collateral Liquidation Period was defined in the
    amended guarantee as meaning:

the 90 day period after:

(i)      Lender commences (either by exercise
    of self-help remedies or judicial proceeding) collection in a commercially
    reasonable manner of collateral constituting payments receivable by the
    Borrowers located in the United States and/or Canada including without
    limitation accounts receivable and lease receivables; and

(ii)      Lender commences (either by exercise
    of self-help remedies or judicial proceeding) sale in a commercially reasonable
    manner of collateral constituting inventory of the Borrowers located in the
    United States and/or Canada.

The amended guarantee was stated to
    be a continuing guarantee that would cover and secure any ultimate balance owing.
    It went on to state that except to the extent required by s. 1 of the amended
    guarantee, Callidus was not obliged to seek recourse against the Borrowers or
    other persons or the securities it held.

[14]

On
    July 26, 2013, Callidus demanded payment of all indebtedness from the Company
    and gave notice to McFarlane in his capacity as guarantor.

[15]

On August 3, 2013, Callidus, the Company, and
    McFarlane entered into another forbearance agreement. Callidus extended the
    date of debt enforcement to August 15, 2013, and charged the Company a
    forbearance fee of US$250,000. The Company and McFarlane provided Callidus with
    a broad release of claims against Callidus. McFarlane also signed a letter in
    which he confirmed that he had relinquished his powers as an officer and
    director of the Company.

[16]

On October 29, 2013, after the expiry of the
    period stipulated in the forbearance agreement, Callidus commenced court
    proceedings for the appointment of a receiver and the approval of both a
    stalking horse asset purchase credit bid agreement and a sale process. The
    proposed order also declared Callidus nominee company to be the successful
    bidder absent a better offer being generated from the sale process.

[17]

In support of the request, Callidus filed a
    report of the proposed receiver. Among other things, the stated purpose of the
    report was to provide background information about the Company, summarize the
    proposed sale process and the reasons the proposed receiver believed the sale
    process maximized the value of the business and assets and was in the best
    interests of stakeholders. The proposed receiver also recommended the proposed
    order.

[18]

The report stated that as at October 24, 2013,
    the Company was indebted to Callidus in the amount of $36.97 million. In its
    description of the purchase price, the proposed receiver wrote: Will be paid
    by credit bid and calculated as follows: Callidus debt on closing (less $3
    million) plus the Priority Payables. The Priority Payables represented
    approximately $790,000 in payables that potentially took priority over the debt
    to Callidus.

[19]

The report did not include any description of
    the purpose of the $3 million. It did include as an appendix a June 6, 2013
    letter from McFarlane that stated that he had guaranteed the Obligations as
    defined in the Loan Agreement pursuant to an October 11, 2012 guarantee subject
    to the limitations set forth therein. The letter confirmed that he had
    relinquished the exercise of his powers as an officer and director of the
    Company and had provided Callidus with a release.

[20]

McFarlane did not object to approval of the proposed
    order. On October 29, 2013, Morawetz J. granted the order requested. The order
    contemplated that if a superior bid to that of the stalking horse bid was not
    received, no further court approval was required and a nominee company owned by
    Callidus would become the new purchaser of the Company.  The receiver would be
    obliged to apply later for a vesting order.

[21]

In his endorsement granting the October 29, 2013
    receivership order, Morawetz J. noted that the purchase price was the amount
    owing to Callidus plus priority payables less $3 million. The price would be
    satisfied by the credit bid and by payment or assumption of the priority
    payables. Morawetz J. also wrote in his endorsement that nothing in the order
    was to affect any defences McFarlane had with respect to his personal
    guarantee.

[22]

On November 19, 2013, the receiver advised Callidus
    that it was the successful bidder. It also filed a receivers report dated
    November 19, 2013, on the progress of the receivership with the court.

[23]

The purchase price was described in the approved
    asset purchase agreement dated October 25, 2013:

The purchase price payable to the Vendor for
    the Purchased Assets (such amount being hereinafter referred to as the
    Purchase Price) will be the aggregate of: (a) the amount of the obligations
    of the Debtors to Callidus as at the Closing Date less CDN$3,000,000 and (b)
    the [Priority Payables Amount].

[24]

The Closing Date was the Business Day two days
    following the date on which the U.S. Order was granted, or such earlier or
    later date as may be agreed to in writing by the Parties. The U.S. Order was in
    the nature of a recognition order and the receiver was to file and serve an
    application with the U.S. court for entry of the order as soon as practicable
    following the granting of the Canadian approval and vesting order.

[25]

A vesting order was subsequently granted on
    November 22, 2013.  The recognition order was granted by the U.S. court on
    November 25, 2013.  The receivers certificate was delivered on January 2,
    2015. The Companys September 30, 2015 financial statements recorded its assets
    held for sale as having a value of US$66.902 million.  It was acknowledged that
    the assets held for sale refers to the assets of the Company acquired by
    Callidus.

[26]

Callidus then sued McFarlane on his guarantee
    and subsequently brought a motion for summary judgment. It was McFarlanes
    position that the amount of the facility and forbearance fees of US$2.75
    million was included in the Companys total debt of $37 million. While the
    Company may have been obliged to Callidus for US$37 million, his exposure
    (subject to the cap on the guarantee) was to a debt that was US$2.75 million
    lower, or in this scenario, US$34.25 million. As the credit bid satisfied US$34
    million, his guaranteed debt was limited to US $250,000.

[27]

More than two years after the vesting order, Callidus
    nominee brought a rectification motion as a result of which the asset sale
    agreement reference to CDN$3 million was rectified by court order on January
    14, 2016 to reflect US$3 million.

C.

Reasons of Summary Judgment Motion Judge

[28]

In his reasons granting summary judgment to
    Callidus, the motion judge observed that the guarantee provision restricting
    the liability of McFarlane to exclude liability for the $2.75 million facility
    and forbearance fees was inserted at McFarlanes insistence.  The motion judge wrote:

The amended Guarantee provides that Mr.
    McFarlane will be liable for all of the Obligations [approximately $37
    million], excluding however the facility and forbearance fees [$2.75
    million], limited to the lesser of the Limited Principal Amount [$3 million] or
    the Deficiency Amount [$37 million less $2.75 million, or $34.25 million]. In
    dollar terms, Mr. McFarlane guaranteed $34.25 million with his liability
    limited to $3 million.

[29]

He noted that the purchase price in the asset
    purchase agreement was the amount of the Companys obligations to Callidus at
    the closing date less $3 million, that is, $37 million less $3 million, or $34
    million.

[30]

The motion judge determined that there was no
    ambiguity in the amended guarantee.  The obligations of the Company included
    $2.75 million in facility and forbearance fees. Moreover, the Companys
    obligations were not extinguished by the credit bid as $3 million continued to
    be owing by the Company to Callidus. In his view, the $3 million carve out in
    the asset purchase agreement was intended to maintain McFarlanes guarantee
    obligation by Callidus and that sum was still outstanding.  He noted that a
    surety who has given a continuing guarantee for a stated amount is not entitled
    to a discharge if, after payment of the stated amount, the principal remains
    indebted to the creditor.  There was no general legal principle that required all
    payments received from a debtor to be applied to the guaranteed portion of a
    debt.

[31]

The motion judge held that Callidus acquired
    title to the Companys assets under the November 22, 2013 vesting order. Although
    the interim financial statements of Callidus as at September 30, 2015, records
    assets held for sale in the amount of $66.902 million, it was unclear what gave
    rise to that figure, but as at December 2014, there was no amount recorded in
    Callidus financial statements for assets held for sale. In any event, an increase
    in value of the assets after the asset purchase agreement would not accrue to
    McFarlanes benefit.

[32]

The motion judge accordingly granted judgment to
    Callidus on the guarantee in an amount in Canadian currency sufficient to
    purchase the sum of US$3 million plus interest at 21%.

D.

Issues

[33]

Before us, McFarlane did not advance any argument
    based on ambiguity. Rather, he focused on the motion judges failure to
    consider all of the terms of the guarantee and to calculate the amount due in
    the correct order based on what McFarlane and the Company each owed to Callidus.
    Although he advanced additional arguments in his factum, given my conclusion, it
    is unnecessary to address them.

[34]

In disputing McFarlanes appeal, among other
    things, Callidus relies on
Sattva Capital v. Creston Moly
, 2014 SCC 53, [2014] 2 S.C.R. 663.  It
submits that the motion judge and his decision should be reviewed on
    a deferential basis.  He made no palpable and overriding error. It also argues
    that under section 4, the guarantee was continuing in nature and that under the
    Loan Agreement, payments made in respect of the loan could be applied to such
    part of the debt as Callidus saw fit. The carve out of $3 million was to
    preserve Callidus ability to enforce the guarantee. Lastly, it also submits
    that the fact that as at September 30, 2015, Callidus valued the assets it
    acquired from the receiver at $66.902 million is irrelevant to McFarlanes
    liability under his guarantee.

[35]

I
    do not accept Callidus position.  For the reasons that follow, I would allow
    the appeal and reduce the amount in the summary judgment from US$3 million to US$250,000.

E.

Analysis

[36]

Contractual interpretation involves issues of
    mixed fact and law:
Sattva
,
    at para. 50.  The interpretation of
a non-standard
    form guarantee, which is a contract, is therefore a question of mixed fact and
    law:
Toronto-Dominion Bank v. Konga
, 2016 ONCA
    976. In the absence of an extricable error of law or a palpable and overriding
    error of fact, deference is owed to a motion judges decision.  The failure to
    consider a relevant factor may amount to an extricable error of law:
Sattva
at para. 53.

[37]

In my view, the motion judge erred in law by
    failing to consider that s. 2.1 of the amended guarantee served to reduce the
    Companys obligations that were guaranteed.  He then made a further palpable
    and overriding factual and mathematical error in calculating the amount owing
    under the guarantee.

[38]

The amended guarantee was to accomplish three
    things: (1) McFarlane would personally commit to paying the Obligations of the
    Company to Callidus; (2) his exposure would be limited to the lesser of US$3
    million plus interest and Callidus deficiency less facility and forbearance
    fees; and (3) to the extent the Obligations included facility or forbearance
    fees, his guarantee would not extend to cover those amounts. On this last point,
    the motion judge stated that McFarlane had insisted that he not be responsible
    for any portion of the Companys debt that arose from fees and the guarantee
    was amended to reflect that concern.

[39]

The Companys total Obligations amounted to
    approximately $37 million (not including priority payables of $750,000).  These
    Obligations included the $2.75 million in facility and forbearance fees.  The
    purchase price that was the subject matter of the credit bid was calculated
    under the asset purchase agreement as the debt on closing ($37 million which
    included the $2.75 million) less $3 million plus priority payables of
    approximately $790,000.  Accordingly, $34.25 million of debt was extinguished through
    the credit bid, leaving $3 million of debt outstanding.

[40]

Callidus position is that the $34.25 million of
    debt that was extinguished included the facility and forbearance fees, leaving
    $3 million of debt, all of which was covered by McFarlanes guarantee.  However,
    there is no basis for that position.  The debt was treated as a whole; there
    was no issue of allocation.  The whole debt was $37 million, $34.25 of which
    was extinguished.

[41]

The amended guarantee was based on a formula.   McFarlane
    guaranteed the Companys debt limited to the lesser of $3 million or the Deficiency
    Amount, a defined term.  The date for calculation of the Deficiency Amount as
    described in the amended guarantee was the end of the Collateral Liquidation
    Period.  Based on the motion judges finding, Callidus acquired title to the
    assets on November 22, 2013.  No real issue was taken with $37 million
    representing the quantum of the obligations to be reduced by the sales price.  The
    Deficiency Amount was comprised of two elements.  First, the amount of the
    Obligations outstanding at the end of the Collateral Liquidation Period and
    second, the exclusion of the $2,250,000 facility fee and any forbearance fees. 
    The Obligations amounted to $3 million.  The forbearance fees amounted to
    $500,000.  Forbearance and facility fees to be excluded therefore totaled
    $2,750,000.  $3 million less $2,750,000 left an amount of $250,000 owing from
    McFarlane on his amended guarantee.

[42]

Counsel for McFarlane submits that Callidus is
    the author of its own misfortune. He argues that in essence Callidus could have
    structured its loan to own strategy in a manner that reflected a purchase price
    of $30 million which would have left room to recover $7 million, which
    necessarily includes $3 million more than the amount of the facility and
    forbearance fees.  That would have left McFarlane liable for the full $3
    million on the guarantee.  He argues that, being a public company, Callidus
    refrained from doing so so that it would not have to show a loss to its
    investors.  Moreover, the facility and forbearance fees would appear as profit. 
    Indeed, counsel argues that Callidus made a windfall on the acquisition of the
    Company as evident from the $66.902 million value set forth in the Companys
    September 30, 2015 financial statements.

[43]

While it is the case that Callidus might have
    structured the transaction by negotiating or stipulating a purchase price less
    than $34.25 million, the fact is that it neglected to do so.  There is no need
    to draw any conclusion on its motivation.  Nor is such a determination
    necessary for the purposes of identifying McFarlanes obligations under the
    guarantee.

[44]

In addition, the continuing nature of the
    guarantee as described in section 4 of the amended guarantee is immaterial to the
    calculation.  That provision in the amended guarantee was in part made subject
    to s. 1 of the amended guarantee which expressly excluded the facility and
    forbearance fees from the debt guaranteed.  More importantly, however, while under
    the Loan Agreement, payments made in respect of the loans could be applied to
    such part of the debt as Callidus saw fit, under the guarantee, those
    obligations were to exclude the facility and forbearance fees.  McFarlane did
    not guarantee $3 million.  He guaranteed the Companys debt excluding facility
    and forbearance fees.  Although Callidus obviously tried to preserve its claim
    under the guarantee, whatever its maturation, its unilateral action was
    inadequate and failed to accomplish its objective.  Moreover, this purpose was
    not addressed in the preliminary report or reports of the receiver, the court
    orders approving the sale, the vesting order, or in Morawetz J.s endorsement
    in support of the sale approval order.  The after the fact subsequent amendment
    of the order to reflect US dollars and the ancillary endorsements cannot serve
    to assist Callidus position.

Disposition

[45]

Accordingly, I would allow the appeal and vary the
    summary judgment to substitute US$250,000 for US$3 million in paragraph 1 of
    the May 24, 2016 judgment.  As McFarlane has been successful on this appeal, I
    would order Callidus to pay his costs of the appeal as agreed, fixed in the
    amount of $27,500 inclusive of disbursements and applicable taxes and would vacate
    the order below of $86,817.30 in favour of Callidus.  I would also order
    McFarlane to deliver his written costs submissions, not exceeding five pages in
    length, on the appropriate disposition for the costs below to the Registrar of
    this court within 15 days from the date of the release of these reasons and
    that Callidus deliver its responding costs submissions, not exceeding five
    pages in length, on the appropriate disposition for the costs below to the
    Registrar within 15 days thereafter.

Released:

SEP                                                 S.E.
    Pepall J.A.

JUL 28 2017                                    I
    agree K. Feldman J.A.

I
    agree E.E. Gillese J.A.


