



COURT OF APPEAL FOR ONTARIO

CITATION: 1162251 Ontario Limited v. 833960 Ontario Limited
    (M-Plan Consulting), 2017 ONCA 854

DATE: 20171107

DOCKET: C62761

Laskin, Lauwers and Brown JJ.A.

BETWEEN

1162251 Ontario Limited

Plaintiff (Respondent/

Appellant by way of cross-appeal)

and

833960 Ontario Limited carrying on business as
    M-Plan Consulting

Defendant (Appellant/

Respondent by way of cross-appeal)

Ronald G. Slaght and Patrick Healy, for the appellant

Sean Zeitz, for the respondent

Heard: May 4, 2017

On appeal from the judgment of Justice Paul M. Perell of
    the Superior Court of Justice, dated September 8, 2016.

Laskin J.A.:

[1]

The appellant 833960 Ontario Limited (M-Plan) loaned $500,000 to a
    company called Danbury Sales. Years later the respondent 1162251 Ontario
    Limited (116)  whose shareholders are the wives of the two principals of
    Danbury Sales  guaranteed repayment of the loan. M-Plan sued to enforce the Guarantee
    but its action was dismissed by summary judgment. The main question on the appeal
    is whether the motion judge erred by holding that M-Plans loan had been
    discharged, even before 116 gave the Guarantee, because the loan had been
    converted into a beneficial interest in another company, Danbury Financial.

A.

overview

[2]

Jeffrey Shankman and David Ordon had been close friends for over 50
    years. Shankman is a litigation lawyer; Ordon is the majority owner of Danbury
    Sales, which is a successful appraiser, auctioneer, and liquidator. Over the
    years Shankman and Ordon did business together many times.

[3]

In 2005, Ordon, his minority partner Barry Lockyer, and a third man,
    Frank Spain, started a new business, Danbury Financial, which was to be an
    asset-based lender. Shankman wanted to acquire an ownership interest in Danbury
    Financial. Shankmans company, M-Plan, loaned Danbury Sales $500,000, which
    Danbury Sales then used to make a shareholders loan of $750,000 to Danbury
    Financial. The motion judge found as a fact  at least three times in his
    lengthy reasons  that the $500,000 advanced by M-Plan would be a loan to
    Danbury Sales until shares in Danbury Financial were delivered to [M-Plan] and
    registered on the books of the company. In other words, M-Plan was to receive registered
    shares in Danbury Financial as consideration for its loan to Danbury Sales.
    Otherwise, the loan would remain unpaid.

[4]

M-Plan never obtained registered shares on the books of Danbury
    Financial, principally because Spain did not want any other shareholders in
    Danbury Financial. And, under the Shareholder Agreement between Spains company
    Invar and Danbury Sales, Invar had a veto over the transfer of shares to
    another party.

[5]

In 2010, Danbury Financial began to fail, after its principal lender
    refused to renew its line of credit. M-Plan, having tried without success to
    obtain registered shares in Danbury Financial, then pressed Danbury Sales for security
    for its loan.

[6]

In June 2010, amidst Danbury Financials difficulties, Danbury Sales
    entered into a Trust Agreement, which provided M-Plan with a beneficial
    interest in a portion of Danbury Sales shares in Danbury Financial. The 2010
    Trust Agreement lies at the heart of this appeal and, as I will discuss, is the
    basis for the motion judges decision.

[7]

After the 2010 Trust Agreement was signed and Danbury Financial had
    failed, M-Plan began to demand repayment of its loan. In 2013, in exchange for
    M-Plans agreement to forbear from suing for recovery of its loan, 116 agreed
    to guarantee Danbury Sales debt to M-Plan and to enter into a General Security
    Agreement with M-Plan. David Ordon and Barry Lockyer are the sole officers and
    directors of 116, and their wives Martine Ordon and Sonia Lockyer are the sole
    shareholders.

[8]

116 did not pay under its Guarantee. Instead it started an action
    against M-Plan and brought a motion for summary judgment for a declaration that
    the Guarantee and the General Security Agreement were unenforceable because the
    2010 Trust Agreement had discharged Danbury Sales debt to M-Plan. In turn,
    M-Plan started an action to enforce its Guarantee and brought a cross-motion
    for summary judgment.

[9]

The motion judge found in favour of 116. In apparent contradiction to
    his finding that M-Plan was to obtain registered shares in Danbury Financial as
    consideration for its $500,000 loan, the motion judge concluded that the 2010
    Trust Agreement discharged the loan by providing M-Plan with a beneficial
    interest in shares of Danbury Financial. Therefore M-Plan had obtained what it
    paid for. The motion judge also concluded that when the parties entered into
    the Guarantee and General Security agreement in 2013, they were oblivious to
    the fact Danbury Sales was no longer indebted to M-Plan.

[10]

On its appeal, M-Plan submits that the motion judges conclusions
    contradict his own principal finding, misconstrue the purpose and effect of the
    2010 Trust Agreement, do not reflect the reasonable intentions of the parties,
    and produce a commercially absurd result. In response, 116 submits that the motion
    judges conclusions rest on findings of fact and inferences from the evidence
    supported by the narrative put forward by both parties, and thus appellate intervention
    is not justified.

[11]

Alternatively,
    116 cross-appeals and argues that its Guarantee and General Security Agreement
    are unenforceable because M-Plan knew that both of 116s shareholders had
    refused to consent to either document. In response to the cross-appeal, M-Plan
    points out that the motion judge considered this argument in his reasons, and
    concluded that the General Security Agreement and Guarantee were enforceable
    under Ontarios
Business Corporations Act
[1]
.
    M-Plan asks this court to uphold that conclusion.

[12]

Although
    this appeal and cross-appeal turn mainly on the 2010 Trust Agreement, the Guarantee,
    and the General Security Agreement, the appeal also raises a subsidiary issue.
    In 2011 and 2012, Danbury Financial made three payments totalling $130,000 to
    M-Plan. The motion judge found that Danbury Financial made these three payments
    to reduce the perceived but mistaken indebtedness of its majority shareholder
    Danbury Sales to [M-Plan]
[2]
.
    M-Plan submits that the payments were made to reduce Danbury Financials debt
    on a different transaction. 116 submits that the motion judges finding was
    reasonable and that we should not interfere with it.

[13]

Broadly
    stated then, the three issues on the appeal and the cross-appeal are the
    following:

1.

Did the motion
    judge err in holding that the 2010 Trust Agreement discharged M-Plans $500,000
    loan to Danbury Sales?

2.

If the answer to
    question 1 is yes, are the Guarantee and General Security Agreement
    unenforceable because M-Plan knew that neither shareholder of 116 consented to either
    document?

3.

Did the motion
    judge commit a palpable and overriding error in finding that Danbury Financial
    mistakenly paid M-Plan $130,000 to reduce Danbury Sales indebtedness to M-Plan?

[14]

I
    would answer the questions raised by these three issues yes, no and yes.
    Thus, I would allow M-Plans appeal and dismiss 116s cross-appeal.

B.

the issues

(1)

Did the motion judge err in holding that the 2010 Trust Agreement
    discharged M-Plans $500,000 loan to Danbury Sales?

Factual Background

[15]

To
    put this issue and the parties positions in context, I will review the
    following:

·

The incorporation of Danbury Financial and the Shareholder Agreement
    between Danbury Sales and Invar;

·

M-Plans $500,000 loan to Danbury Sales and the motion judges
    finding of fact on the consideration for the loan;

·

Ordons misrepresentations to Shankman and Spain;

·

The 2010 financial crisis of Danbury Financial and the subsequent
    2010 Trust Agreement;

·

The recitals in the Share Pledge and Assignment Agreement, the Guarantee,
    the General Security Agreement, and the 2013 Revised and Restated Promissory Note;

·

The motion judges credibility findings; and

·

The motion judges reasons for holding that the 2010 Trust Agreement
    discharged M-Plans loan.

(a)

The
    incorporation of Danbury Financial and the Shareholder Agreement between
    Danbury Sales and Invar

[16]

In
    April 2005, Ordon incorporated Danbury Financial. When it was incorporated, 100
    common shares were issued: 57 to Danbury Sales, 33 to Invar, and 10 to a
    consulting firm, which plays no role in this litigation. Danbury Financials
    main financier was CIT Business Credit Canada Inc. The new venture was
    capitalized by a $750,000 loan from Danbury Sales and a $1,000,000 loan from
    Invar. Danbury Financial gave Danbury Sales a General Security Agreement for
    its loan.

[17]

In
    November 2005, Danbury Sales and Invar signed a Shareholder Agreement. Two
    articles of the Agreement are relevant: article 3.2 and article 6.01.

[18]

Article
    3.2 provided that Danbury Sales and Invars loans would each be secured on a
    pari passu basis subject to the security granted by [Danbury Financial] to
    CIT. Importantly, article 3.2 also provided that no amount of the principal of
    Danbury Sales loan would be repaid until Invars loan had been repaid in full.

[19]

Article
    6.01 provided that no shares in the capital of Danbury Financial could be
    transferred without the consent of the holders of not less than 80% of the
    issued and outstanding shares of the company. As Danbury Sales held 57% of the
    shares and Invar held 33% of the shares, each effectively had a veto, which
    meant that Invar could block any proposed transfer of shares to M-Plan.

(b)

M-Plans
    $500,000 loan to Danbury Sales and the motion judges finding of fact on the
    consideration for the loan

[20]

In
    2005, M-Plan loaned Danbury Sales $500,000. The loan is evidenced by a Promissory
    Note, which Danbury Sales signed on November 29, 2005. Danbury Sales used the
    $500,000 for its $750,000 loan to Danbury Financial.

[21]

M-Plan
    made the loan to Danbury Sales because Shankman wanted an equity interest in
    Danbury Financial. Early in his reasons, the motion judge noted that between
    Mr. Shankman and Mr. Ordon, there was an understanding that the $500,000
    unsecured loan would remain a debt until [M-Plan] got an ownership interest in
    Danbury Financial.

[22]

Later
    in his reasons, at para. 29, the motion judge made a finding of fact that a 22%
    ownership interest (or 22 shares) in Danbury Financial was intended to be consideration
    for the loan:

I also find as a fact that in 2005, Mr. Ordon and Mr. Shankman
    orally agreed that the ultimate goal was to use [M-Plans] $500,000 loan as
    consideration for [M-Plan] being allocated a 22% interest (22 common shares) in
    Danbury Financial. From the outset, Mr. Shankmans primary aspiration was that [M-Plan]
    acquire an ownership interest in Danbury Financial.

[23]

Two
    paragraphs later, the motion judge specified that the $500,000 would remain a
    loan until shares in Danbury Financial were delivered to M-Plan and registered
    on the books of the company:

Mr. Ordon and Mr. Shankman agreed that the [M-Plans] $500,000
    would be a loan to Danbury Sales until shares in Danbury Financial were
    delivered to [M-Plan] and registered on the books of the company.

[24]

At
    para. 38, the motion judge repeated this specific finding of fact:

I find as a fact that the situation from 2005 to 2010 was that
    Danbury Sales was indebted to [M-Plan] for $500,000 pending delivery of an
    ownership interest in Danbury Financial registered in the book of that company.

[25]

And
    he did so again at para. 45 of his reasons:

However, I find that  the status quo remained that the
    $500,000 loan would remain a loan until an ownership interest was registered on
    the books of Danbury Financial. This, in turn, required that Mr. Spain would
    agree that [M-Plan] was a partner in Danbury Financial.

[26]

But
    M-Plan never received registered shares in Danbury Financial.

(c)

Ordons
    misrepresentations to Shankman and Spain

[27]

Ordon
    misled both Shankman and Spain in the setting up and early management of
    Danbury Financial.

[28]

Most
    important, Ordon did not disclose to Shankman that Invar had a veto over the
    transfer of shares to M-Plan, or give Shankman a copy of the Shareholder Agreement
    setting out this veto, until well after M-Plan loaned Danbury Sales the $500,000.
    Ordon did not tell Shankman about Invars veto because he knew Spain would only
    deal with Danbury Sales and did not want another investor in Danbury Financial.
    Instead, Ordon used his friendship to placate Shankman by promising that he
    would find the right time to persuade Spain to bring M-Plan on board. For a
    number of years, Ordon also did not disclose to Shankman that Danbury Financial
    had given Danbury Sales a General Security Agreement.

[29]

Ordon
    did not disclose to Spain that $500,000 of Danbury Sales $750,000 loan to
    Danbury Financial had come from M-Plan. Instead, Ordon told Spain that the
    entire $750,000 had come from Danbury Sales own resources.

(d)

The
    2010 financial crisis of Danbury Financial and the subsequent 2010 Trust
    Agreement

[30]

When
    Shankman eventually learned that Ordon had been misleading him about Invars
    veto, he became concerned about M-Plans unsecured loan. He began seeking
    security from Ordon. Then, in early 2010, Danbury Financials major financier,
    CIT, announced that it would not renew Danbury Financials line of credit. This
    announcement placed M-Plans unsecured loan at further risk.

[31]

In
    the face of the financial crisis of Danbury Financial precipitated by CITs withdrawal,
    and after Shankman learned about Invars veto, M-Plan and Danbury Sales signed the
    2010 Trust Agreement
[3]
.
    The Agreement was signed around June 2010, but was backdated to November 29,
    2005 to coincide with the date Danbury Sales signed the Promissory Note in
    favour of M-Plan.

[32]

By
    its terms, the 2010 Trust Agreement did three things for M-Plan. First, it
    expressly acknowledged that a portion of Danbury Sales loan to Danbury
    Financial came from M-Plan and that M-Plans $500,000 loan was still
    outstanding. Second, it expressly acknowledged that M-Plan had a beneficial
    interest in 22 of Danbury Sales 57 shares in Danbury Financial. And third, it
    provided that M-Plan had an interest to the extent of its $500,000 loan in the
    General Security Agreement given by Danbury Financial to Danbury Sales.

[33]

The
    2010 Trust Agreement also provided that Danbury Sales held the 22 shares for
    M-Plan as a bare trustee and that on the written direction of M-Plan, Danbury
    Sales would transfer or convey title of the shares to M-Plan. As I will discuss,
    the motion judge relied on these two provisions in holding that the 2010 Trust
    Agreement discharged M-Plans $500,000 loan.

[34]

After
    the 2010 Trust Agreement was signed, Danbury Financial continue to flounder.
    Eventually CITs withdrawal and Danbury Financials failure to secure
    alternative financing proved fatal. In the latter half of 2011, Danbury
    Financial stopped operating.

(e)

The
    recitals in the Share Pledge and Assignment Agreement, the Guarantee, the General
    Security Agreement, and the 2013 Revised and Restated Promissory Note

[35]

In
    2013, some three years after the 2010 Trust Agreement was signed, the principal
    parties to this litigation, with the benefit of legal advice, executed four
    documents: a Share Pledge and Assignment Agreement, a Guarantee, a General
    Security Agreement, and a Revised and Restated Promissory Note. The first three
    documents gave M-Plan security for its $500,000 loan to Danbury Sales. All four
    documents recited that the loan was still outstanding.

[36]

In
    February 2013, Danbury Sales and M-Plan signed the Share Pledge and Assignment Agreement,
    which was backdated to November 2005. The purpose of the Assignment Agreement
    was to give M-Plan some security for its $500,000 loan, which the parties
    expressly acknowledged was still owing. Under the terms of this agreement,
    Danbury Sales assigned its shares in Danbury Financial, as well as Danbury
    Financials indebtedness to it, to M-Plan as security for M-Plans loan.

[37]

On
    June 7, 2013, Ordon, on behalf of 116, signed the Guarantee and General Security
    Agreement given to M-Plan. Both documents recited that Danbury Sales was
    indebted to M-Plan in the sum of $500,000. On June 20, 2013, a lawyer
    instructed by Ordon registered the General Security Agreement under the
Personal
    Property Security Act
[4]
.

[38]

The
    Guarantee also recited that the debt was evidenced by a Revised and Restated Promissory
    Note. This Promissory Note was also signed in June 2013, but was backdated to
    October 2006. In it, Danbury Sales acknowledged that the $500,000 had been
    advanced to it, and that the $500,000 continue[d] to be outstanding and
    payable to [M-Plan] under the terms of this Revised and Restated Note.

(f)

The motion
    judges credibility findings

[39]

Early
    in his reasons, the motion judge addressed the credibility of the two principal
    protagonists who gave evidence on the motion: Ordon and Shankman. He said at
    para. 8 that there [we]re reasons not to believe all of the evidence of either.
    He concluded, however, that Mr. Ordons version of the narrative by-and-large
    confirm[ed] Mr. Shankmans version of the factual background.

[40]

But
    the motion judge also found that Ordons conduct was dishonorable:

I find that Mr. Ordons conduct was dishonorable, but there is
    a difference between being dishonourable and being untruthful, and Mr. Ordon
    got himself into a double ethical bind, an unresolvable situation from which
    there was no escape without undesirable consequences. He had a conflict of
    interest, and in the end, he could not be loyal to all of his close friend, Mr.
    Shankman, his business partners wife, Mrs. Lockyer, and his own spouse, Mrs.
    Ordon, who co-owned [116]. Ultimately, Mr. Ordon betrayed both his friend and
    the spouses.

[41]

In
    the next paragraph, the motion judge then said that he mainly believed Mr.
    Shankmans account of the events, and where he did not believe Shankman, it was
    not because he favoured Ordons evidence.

(g)

The
    motion judges reasons for holding that the 2010 Trust Agreement discharged
    M-Plans loan

[42]

The
    motion judge concluded at paras. 57 and 58 of his reasons that the 2010 Trust
    Agreement was a genuine conveyance of an ownership interest and not a security
    interest:

Under the 2010 Trust Agreement there was a conveyance of
    Danbury Sales ownership interest in 22 shares of Danbury Financial to [M-Plan].
    This conveyance of ownership was achieved by Danbury Sales acknowledging that
    it was holding 22 shares as bare trustee for the beneficial owner of those
    shares, [M-Plan]. The Trust Agreement acknowledges that 22 out of the 57 common
    shares held by Danbury Sales were acquired by the advance of funds by [M-Plan].
    The Trust Agreement provides that upon the written direction of the [M-Plan],
    Danbury Sales will execute a transfer, or other documents necessary to convey
    title to the 22 shares.

[43]

And
    so, according to the motion judge, the 2010 Trust Agreement gave M-Plan an
    ownership interest in Danbury Financial. Danbury Sales was no longer indebted
    to M-Plan for $500,000. M-Plan had obtained what it paid for.

[44]

The
    motion judge appeared to buttress his conclusion by noting that in the fall of
    2010, after the 2010 Trust Agreement was signed, Spain told Ordon that Invar
    would be prepared to recognize M-Plans ownership of 22 shares in Danbury
    Financial. Yet the motion judge also noted at para. 74 that negotiations for a
    new shareholder agreement had floundered. They had floundered because Invar
    insisted Danbury Sales vote any shares issued to M-Plan and because Invar
    insisted its percentage shareholding be increased as it had put up the most
    money.

[45]

Still,
    having concluded that the 2010 Trust Agreement had discharged the loan, the
    motion judge had to address why, in 2013, M-Plan and Danbury Sales had signed a
    Share Pledge and Assignment Agreement. He also had to address why 116 had
    agreed to guarantee M-Plans $500,000 loan, which 116 acknowledged remained
    outstanding and unpaid. The motion judges answer, given at para. 103 of his
    reasons, was that Shankman and Ordon were oblivious to the fact M-Plan
    already owned an interest in Danbury Financial.

Discussion

[46]

116s
    basic position rests on the standard of appellate review. It submits that we
    should defer to the motion judges interpretation of the relevant documents and
    the largely uncontradicted narrative of events. Simply because this court might
    weigh the evidence differently or might have drawn different inferences from
    the evidence does not justify our intervention.

[47]

I
    accept that the motion judges findings and his ultimate conclusion on the
    effect of the 2010 Trust Agreement attract a deferential standard of appellate
    review. But if his findings or his conclusion is tainted by palpable and
    overriding error, or more simply is unreasonable, appellate intervention is
    justified. And in my view, though the motion judges reasons are lengthy and
    thoroughly analyze the evidence, his conclusion that the 2010 Trust Agreement
    discharged M-Plans loan is unreasonable.

[48]

It
    is unreasonable for three main reasons: it contradicts the motion judges own
    finding on the consideration for the loan; it fails to take into account all of
    the terms of the 2010 Trust Agreement and importantly the context or
    circumstances in which the Agreement was made; and it disregards the conduct
    and understanding of the parties themselves after they signed the 2010 Trust
    Agreement. These errors yielded a result that is not supportable.

(a)

The
    contradiction between the motion judges finding of fact and his conclusion

[49]

The
    motion judge found as a fact that M-Plans $500,000 loan to Danbury Sales could
    be discharged only by issuing to M-Plan registered shares in Danbury Financial.
    Until then the loan remained a loan. That bargain never changed. And as the
    motion judge recognized at para. 45 of his reasons, M-Plan could obtain
    registered shares in Danbury Financial only if Spain agreed to it.

[50]

Yet
    contrary to his finding of fact, the motion judge concluded that M-Plans
    beneficial interest in 22 shares of Danbury Financial, which was acknowledged
    in the 2010 Trust Agreement, discharged M-Plans loan. The motion judges
    finding of fact on the consideration for the loan and his conclusion on the
    effect of the 2010 Trust Agreement cannot stand together.

[51]

M-Plan
    did not get what it paid for when it received a beneficial interest in the
    shares of Danbury Financial. It was entitled to a legal interest  registered
    shares. With only a beneficial interest M-Plan was denied the most fundamental
    right of share ownership  the right to vote the shares.

[52]

It
    is no answer to M-Plans position that in the fall of 2010, Spain said he would
    recognize M-Plan as an owner of Danbury Financial. His recognition, and that of
    his company Invar, were limited. Invar never agreed to forgo its veto and
    permit the transfer of shares to M-Plan. Invar did not even agree M-Plan could
    vote the shares that it held beneficially. According to Spain and Invar,
    Danbury Sales had to vote those shares. And Spain and Invar would agree to a
    shareholder agreement that included M-Plan only if Invars percentage
    shareholding were increased.

[53]

The
    beneficial interest in the shares of Danbury Financial, which the motion judge
    said M-Plan acquired in the 2010 Trust Agreement, was not a substitute for the
    consideration M-Plan had bargained for when it loaned Danbury Sales $500,000. On
    this ground alone I would set aside the motion judges conclusion.

(b)

The
    terms of the 2010 Trust Agreement and the context or circumstances in which it
    was made

[54]

The
    2010 Trust Agreement is a contract. In interpreting it, ordinary principles of
    contract interpretation apply. To ascertain what the parties meant, the terms
    of the contract must be read as a whole, and they must be read in the context
    or circumstances in which the contract was made: see
Dumbrell v. The Regional
    Group of Companies Inc.
[5]

[55]

The
    motion judge concluded that the 2010 Trust Agreement gave M-Plan a beneficial
    interest in 22 shares of Danbury Financial, which had the effect of discharging
    M-Plans loan to Danbury Sales. In his words at para. 57, the 2010 Trust
    Agreement was a genuine conveyance of an ownership interest in the shares. In
    so concluding, the motion judge focused on two terms of the Agreement: the term
    providing that Danbury Sales held 22 of its shares in Danbury Financial as a
    bare trustee for M-Plan; and the term providing that on a direction from M-Plan,
    Danbury Sales would be required to transfer the shares.

[56]

The
    motion judge, however, did not take account of the 2010 Trust Agreement as a
    whole or the context in which it was made. It is evident from both the 2010
    Trust Agreement itself and the context that the Agreement did not convey
    ownership of the shares to M-Plan. Its purpose, at most, was to give M-Plan
    some security for its loan.

[57]

Nothing
    in the 2010 Trust Agreement itself says that M-Plans beneficial interest in
    the shares satisfied its loan. Nothing in the Agreement says that the shares were
    conveyed to M-Plan. And term 8 of the 2010 Trust Agreement gives M-Plan not an
    ownership interest in the shares, but instead a security interest in the General
    Security Agreement held by Danbury Sales. If the motion judge is correct that
    the 2010 Trust Agreement was a genuine conveyance of an ownership interest in
    the shares, term 8 would have been unnecessary.

[58]

That
    the purpose of the 2010 Trust Agreement was to provide security for M-Plans
    loan, rather than to discharge it, is consistent with the context in which the
    Agreement was made. Shankman had been pressing Ordon for security for his loan
    after he became aware that Ordon had misled him about Invars veto and had
    misled Spain about the nature of M-Plans contribution. Eventually, to give
    Shankman some reassurance, Ordon revealed to him the existence of the General
    Security Agreement between Danbury Sales and Danbury Financial, and offered
    Shankman an interest in that Agreement. The 2010 Trust Agreement is the result
    of that offer.

[59]

The
    2010 Trust Agreement was also made in the context of the Shareholder Agreement
    between Danbury Sales and Invar. The two agreements have to be looked at
    together. By the time Shankman signed the 2010 Trust Agreement, he was aware of
    the Shareholder Agreement. The Shareholder Agreement gave Invar a veto over the
    transfer of shares to M-Plan, a veto that it never relinquished. The term in
    the 2010 Trust Agreement providing that on M-Plans direction Danbury Sales was
    to transfer the shares to M-Plan, a term on which the motion judge relied, was
    ineffective. Because of Invars veto, the 2010 Trust Agreement could not convey
    a legal ownership interest in the shares to M-Plan.

(c)

The
    conduct and understanding of the parties after the 2010 Trust Agreement was
    signed

[60]

After
    the 2010 Trust Agreement was signed, both Shankman and Ordon conducted
    themselves on the basis M-Plans loan was still outstanding. After Danbury
    Financial had failed, Shankman began pressing Ordon for repayment of the loan,
    and Ordon tried to find a way to forestall a lawsuit. He knew that neither
    Danbury Sales nor Danbury Financial had the money to repay M-Plans loan. So he
    offered a guarantee and other security for the loan in another company he was
    associated with, 116. 116 could give security because it had a 17 percent ownership
    interest in five properties on Queen Street East in Toronto. Shankman accepted
    this security. In June 2012, the parties began negotiating a series of
    agreements, and eventually signed three security documents and a promissory
    note the following year.

[61]

Each
    of the three security documents signed in 2013  the Guarantee, the Share Pledge
    and Assignment Agreement, and the General Security Agreement  together with
    the Revised and Restated Promissory Note, recited that M-Plans $500,000 loan was
    still outstanding. Each document was negotiated and drafted with legal advice.
    Three of the documents were the subject of a year-long negotiation. Shankman
    and Ordon were not neophytes. They were sophisticated individuals,
    knowledgeable in commercial matters. To suggest that when these four documents
    were negotiated and signed Shankman and Ordon were oblivious to their legal
    rights is implausible. Both knew  and rightly so  that M-Plans loan still
    had not been satisfied.

[62]

The
    motion judges conclusion that the 2010 Trust Agreement discharged M-Plans
    loan was unreasonable. Subject to 116s cross-appeal, both the Guarantee and
    the General Security Agreement are valid and enforceable.

(2)

Are the Guarantee and General Security Agreement unenforceable because
    M-Plan knew that neither shareholder of 116 consented to either document?

[63]

As
    I said, Ordon and Lockyer were the directors of 116; their wives were the two
    shareholders. Although David Ordon agreed that 116 would secure M-Plans
    $500,000 loan, neither Martine Ordon nor Sonia Lockyer consented to giving security;
    both were unwilling to do so.

[64]

Before the motion judge, 116 submitted that if M-Plans loan was still
    outstanding, both the Guarantee and the General Security Agreement were
    unenforceable because Shankman and M-Plan knew the shareholders of 116 had not
    authorized giving this security. Although the motion judge agreed with 116s
    principal submission that the 2010 Trust Agreement discharged M-Plans loan to
    Danbury Sales, he addressed 116s alternative submission. And he concluded that
    if the loan were still outstanding, both security documents would be
    enforceable because of s. 184 of
Ontarios
Business
    Corporations Act
.

[65]

Subsection 184(1) stipulates that a director of a corporation can give a
    Guarantee and a General Security Agreement on behalf of a corporation without
    shareholder authorization unless the articles, by-laws, or a unanimous
    shareholder agreement of the corporation provides otherwise:

184 (1) Unless the articles or by-laws of or a unanimous
    shareholder agreement otherwise provide, the articles of a corporation shall be
    deemed to state that the directors of a corporation may, without authorization
    of the shareholders,

(c) give a guarantee on behalf of the corporation to secure
    performance of an obligation of any person; and

(d) mortgage, hypothecate, pledge or otherwise
    create a security interest in all or any property of the corporation, owned or
    subsequently acquired, to secure any obligation of the corporation.

[66]

116 did not have a shareholder agreement, and nothing in its articles or
    by-laws prevented a director from giving security without shareholder approval.
    To the contrary, the corporations general By-Law No. 2 allowed the directors
    to guarantee the repayment of debts, and so supplemented s. 184 of the statute.
    The motion judge held that the Guarantee was enforceable under s. 184(1)(c) and
    the General Security Agreement was enforceable under s. 184(1)(d).

[67]

In
    this court, 116 submits that the motion judge committed a palpable and
    overriding error in relying on s. 184 because M-Plan knew that Martine Ordon
    and Sonia Lockyer did not consent to giving security and therefore knew that
    Ordon did not have authority to bind 116. In support of its submission, 116
    makes three points. First, although Shankman received a certificate signed by
    Barry Lockyer certifying that a special resolution of the shareholders had been
    passed authorizing the security, the certificate omitted signature lines for
    Martine Ordon and Sonia Lockyer. Second, 116 points to a special resolution of
    the shareholders consenting to the security, which though signed by David Ordon
    and Barry Lockyer, left the signature lines for Martine Ordon and Sonia Lockyer
    blank. Finally, 116 relies on s. 19 of the
Business Corporations Act
,
    which, in substance, legislates the indoor management rule
[6]
.

[68]

I
    do not agree with 116s submission. The motion judge did not err in determining
    that the Guarantee and General Security Agreement were enforceable under s. 184
    of the
Business Corporations Act
.

[69]

As
    the motion judge found, Shankman never insisted that there had to be a
    shareholders resolution authorizing the security. The motion judge held at
    para. 111 that it was nice but not a legal necessity. Even so, in the certificate
    of the special resolution of shareholders that Shankman received, Barry Lockyer
    certified that a shareholders resolution had been passed in June 2013. In the
    absence of any other evidence  and there was none  M-Plan had no reason to
    think that the resolution was unreliable. The absence of signature lines for
    Martine Ordon and Sonia Lockyer did not undermine the certificates
    reliability. Nor did the absence of their signatures on the special resolution
    of shareholders itself. Indeed, it is unclear that Shankman ever received the
    special resolution.

[70]

Section
    19 of the
Business Corporations Act
entitled M-Plan to assume that
    Ordon was authorized to give the Guarantee and General Security Agreement on
    behalf of 116 unless M-Plan or Shankman knew otherwise:

19 A corporation or a guarantor of an obligation of a
    corporation may not assert against a person dealing with the corporation or
    with any person who has acquired rights from the corporation that,

(d) a person held out by a corporation as a director, an
    officer or an agent of the corporation has not been duly appointed or does not
    have authority to exercise the powers and perform the duties that are customary
    in the business of the corporation or usual for such director, officer or
    agent;

(e) a document issued by any director, officer or agent of a
    corporation with actual or usual authority to issue the document is not valid
    or genuine;



except where the person has or ought to have, by virtue of the
    persons position with or relationship to the corporation, knowledge to that
    effect.

[71]

But
    the motion judge found at para. 114 of his reasons that, in the light of its
    receipt of the certificate of the shareholders resolution, M-Plan did not know
    the shareholders had not authorized the security:

In the immediate case the short answer to the matter of the
    application of the Indoor Management Rule is that Mr. Shankman had been told
    that only Mrs. Lockyer was holding out opposition but subsequently [M-Plan]
    received a certificate of the shareholders resolution signed by Mr. Lockyer
    and by the time of the closing of the transaction [M-Plan] did not have
    knowledge that the transaction did not have the authorization of the
    shareholders.

[72]

That
    finding of fact was reasonably available to the motion judge. It is not tainted
    by any palpable and overriding error. I therefore agree with the motion judge
    that the Guarantee and General Security Agreement are enforceable.

(3)

Did the motion judge commit a palpable and overriding error in finding
    that Danbury Financial mistakenly paid M-Plan $130,000 to reduce Danbury Sales
    debt to M-Plan

[73]

Between
    October 2011 and March 2012, Danbury Financial made three payments to M-Plan 
    two of $50,000 and one of $30,000, for a total of $130,000. M-Plans position
    was that the payments were made to reduce a $300,000 debt owed to M-Plan by a
    related company, Danbury Industrial, in a separate transaction  the
    Progressive Molded transaction. The payments had nothing to do with Danbury
    Sales $500,000 debt to M-Plan. The motion judge found otherwise. He found that
    Danbury Financial mistakenly made all three payments to reduce the debt of its
    majority shareholder, Danbury Sales, to M-Plan. In the motion judges view the
    payments were mistaken because they were made after the 2010 Trust Agreement
    had discharged M-Plans $500,000 loan.

[74]

M-Plan
    submits that the motion judges finding is palpably and overridingly wrong. As
    it did on the motion, M-Plan says that Danbury Financial made the three payments
    to reduce Danbury Industrials debt on the Progressive Molded transaction. 116
    submits that the motion judges finding is reasonable and we should not interfere
    with it.

[75]

I
    agree with M-Plans submission for two reasons. First, the timing and size of
    the payments correspond to payments Danbury Industrial admittedly made to
    reduce its debt to M-Plan on the Progressive Molded transaction. In his
    affidavit filed on the motion, Ordon admitted that in August 2011, Danbury
    Industrial made two $50,000 payments to M-Plan to reduce its indebtedness on
    the Progressive Molded transaction. Beginning two months later, after Danbury
    Industrial encountered its own financial difficulties, Danbury Financial made
    the three payments in issue  two further $50,000 payments and one $30,000 payment
    to M-Plan. The amount of the payments and their timing strongly suggest that
    they were also made in connection with the Progressive Molded transaction.

[76]

Second,
    the three payments of $130,000 were made well before the Guarantee and General
    Security Agreement were given. If the parties intended that the payments were
    made to reduce Danbury Sales debt to M-Plan, then these documents would have
    stated that only $370,000 was owing on M-Plans loan to Danbury Sales. But both
    documents reflect the full amount of the debt, $500,000. Similarly,
    correspondence between Ordon and his lawyer in November 2012 (long after the
    three payments of $130,000 were made to M-Plan) confirms that Ordon understood
    Danbury Sales still owed M-Plan the full $500,000. In cross-examination on his
    affidavit on the motion, Ordon admitted that he believed as much up until
    shortly before 116 filed its statement of claim in this proceeding.

[77]

I would therefore set aside the motion judges finding that the $130,000
    was paid to reduce Danbury Sales debt to M-Plan.

C.

conclusion

[78]

I
    would allow the appeal, set aside the judgment of the motion judge, and in its
    place grant judgment as follows:

a)

A Declaration that 116s
    Guarantee of the debt of Danbury Sales to M-Plan is a valid and binding guarantee;

b)

A Declaration that the
    General Security Agreement between M-Plan and 116 is a valid and binding security;

c)

Judgment on the Guarantee
    in the amount of $500,000 plus pre-judgment and post-judgment interest at the
    rate of 3% per annum from November 29, 2005 to the date of payment;

d)

An order that the
    judgment in favour of M-Plan be paid out from the funds held in court to the
    credit of the action under the consent order of Conway J. dated September 25,
    2015; and

e)

An order dismissing 116s
    summary judgment motion.

[79]

M-Plan
    is entitled to its costs of the appeal and the cross-appeal, which I would fix
    in the amount of $40,000 inclusive of disbursements and HST. If the parties
    cannot agree on the costs of the motion before the motion judge, they may make
    brief submissions in writing to the panel.

Released: J.L. November 7, 2017

John Laskin J.A.

I agree. P. Lauwers J.A.

I agree. David Brown J.A.





[1]
R.S.O. 1990, c. B.16.



[2]

The motion judge refers to the appellant numbered Ontario
    company as the Shankman Corporation. I have referred to it as M-Plan, the name
    used by the appellant in its factum. Also, the motion judge refers to 116 as
    the Wives Corporation.



[3]

Two previous trust agreements had been prepared but M-Plan did
    not sign either one of them.



[4]
R.S.O. 1990, c. P.10.



[5]
2007 ONCA 59, 85 O.R. 3(d) 616.



[6]

Under the indoor management rule if a corporation holds
    someone out as a director, officer, or agent to a third party, the corporation
    cannot deny that the person has the authority usual for the position. The third
    party is entitled to assume that the corporations internal procedures have
    been complied with unless the third party knew or ought to have known
    otherwise. See:
Midas Investment Corp. v. Bank of Montreal
, 2016 ONSC
    3003, at para. 4


