



COURT OF APPEAL FOR ONTARIO

CITATION: Bank of Montreal v. Javed, 2016 ONCA 49

DATE: 20160118

DOCKET: C60246

Cronk, Pepall and Lauwers JJ.A.

BETWEEN

Bank of Montreal for
    itself and on behalf of all creditors of Amer Javed, Ileshkumar Shah also known
    as Ileshkumarpadm Shah and Mayaben Ileshkumar Shah

Plaintiff (Respondent)

and

Amer Javed,
Ileshkumar
    Shah also known as Ileshkumarpadm Shah
and Mayaben Ileshkumar Shah

Defendants (
Appellant
s)

Shahzad Siddiqui, for the appellants

No-one appearing for Amer Javed

Ian Klaiman, for the respondent

Heard: October 13, 2015

On appeal from the judgment of Justice Mario D. Faieta of
    the Superior Court of Justice, dated March 11, 2015, with reasons reported at
    2015 ONSC 1229.

Lauwers J.A.:

[1]

The motion judge granted summary judgment on a personal guarantee and ordered
    the appellants to pay the respondent $55,521.79. He also set aside the transfer
    of the appellant Ileshkumar Shahs half-interest in the matrimonial home to his
    spouse, the appellant Mayaben Shah, on the basis that it was a fraudulent
    conveyance.

[2]

The appellants now appeal to this court. The appeal was argued on the
    basis that the spouses were both appellants, although the notice of appeal was
    filed on behalf of Mr. Shah only. Nothing turns on whether one or both spouses
    are appellants.

[3]

I would dismiss the appeal for the following reasons.

Factual Context

[4]

In early 2011, Mr. Shah, together with the co-defendant, Amer Javed,
    provided a joint and several guarantee

to
    the respondent Bank of Montreal (the Bank) to secure a small business loan to
7596308 Canada Inc. (the Company). The Company
    operated a donut franchise restaurant.
T
he
    Bank loaned the Company the principal amount of $213,486.00 secured by a
    promissory note dated February 24, 2011.
Mr. Shahs guarantee was
limited to the amount of $53,371.50, plus interest.

[5]

In late 2011, Mr. Shah resigned as a director of the Company and ceased
    to have an active role in it, although he remained vice-president. The Company
    defaulted on the loan in May 2014. The Bank made demand for payment on Mr. Shah
    under his guarantee by letter dated June 3, 2014.

The Issues on Appeal

[6]

The appellants advance two arguments: first, the Banks conduct rendered
    the loan transaction unconscionable; and second, the motion judge erred in
    finding that Mr. Shahs transfer of his interest in the matrimonial home to
    Mrs. Shah was a fraudulent conveyance. I address each argument in turn.

(1)

Unconscionability

[7]

The parties agree that the three-part test for determining
    unconscionability is set out in
Teitelbaum v. Dyson
(2000)
, 7 C.P.C. (5th) 356, [2000] O.J.
    No. 4583 (S.C.), at para. 40, affd (2001), 151 O.A.C. 399, [2001] O.J.
    No. 3483 (C.A.). That test requires a plaintiff to show that the defendant
    abused its bargaining power, preyed upon the plaintiff, or that the bargain was
    improvident.

(a)

The test for unconscionability
    was not met

[8]

The motion judge found that Mr. Shah did not demonstrate that the Bank abused
    its bargaining power, preyed upon him, or that the loan and guarantee bargain
    was improvident. The appellants do not argue that the motion judge erred in his
    application of the test for unconscionability. Instead, their argument seeks to
    extend the test beyond the inception of the relationship, as the motion judge
    explained at para. 25: [Mr. Shahs] factum suggests that unconscionability
    was not present at the outset, it crept into the relationship as soon as [he]
    resigned as a director of the Corporation.' Although the appeal factum does
    not use the same words, the appellants effectively make the same submission to
    this court.

[9]

In early 2013, Mr. Shah contacted the Banks account manager seeking
    access to the Companys business account information, but was refused. Mr. Shahs
    argument is that it was unconscionable for the Bank to refuse to provide the
    information to him, particularly as to the balance of the loan that he had
    personally guaranteed. He argues that the Banks failure to provide him with
    timely information about the debt deprived him of an opportunity to take steps
    to save the business and avoid liability under the guarantee.

[10]

The
    account manager based the Banks refusal to provide information to Mr. Shah on
    the fact that the debtor Company had withdrawn its authorization to do so, and Mr.
    Shah was no longer an authorized signing officer for the Companys business
    account with the Bank.

(b)

Bhasin v.
    Hrynew
does not modify the unconscionability test

[11]

The
    appellants rely on the decision of the Supreme Court of Canada in
Bhasin v.
    Hrynew
, 2014 SCC 71, [2014] 3 S.C.R. 494. They argue that
Bhasin
modified the test for unconscionability by requiring the court to import a
    general organizing principle of good faith and recognizing a duty to perform
    contracts honestly, in the words of Cromwell J., at para. 62. The appellants assert
    that the effect of
Bhasin

is to extend the test for
    unconscionability from an assessment of the equities of an agreement or
    transaction, to the assessment of a partys performance of its obligations
    under the agreement.

[12]


Bhasin
does not provide any basis for the appellants argument that the Supreme Court
    extended the common law test for unconscionability.

Bhasin
recognized a duty of honest performance. There is no basis in the evidence for
    suggesting that the Bank did not conduct itself honestly throughout. Cromwell
    J. also observed that a duty of honest performance should not be confused with
    a duty of disclosure. The motion judge did not err in rejecting the appellants
    arguments on unconscionability.

(c)

The Bank had a
    disclosure obligation to the guarantor

[13]

However,
    in my view, the motion judge erred in failing to find that the Bank breached
    its obligations to Mr. Shah by refusing to respond to his inquiries. Staff of
    the Bank explained the refusal to disclose the information as the consequence
    of the debtors change in account authorization. However, in this case, the
    guarantee itself contemplated that the guarantor(s) could seek information from
    the Bank regarding the debt secured by the guarantee.

[14]

Although
    the guarantee does not expressly oblige the Bank to disclose information
    regarding the primary debtor on request of the guarantor, it suggests that the guarantor
    could make reasonable request for information regarding the state of the
    primary debtors indebtedness and, hence, the state of the guarantors exposure
    under the guarantee, if it were made in the proper form. The guarantee provides:

Any request by the undersigned to the Bank for useful
    information respecting the content and the terms and conditions of the debts
    and liabilities of the Customers hereby guaranteed or the progress made in
    their performance, shall be made in writing by such undersigned to the Bank.

[15]

I
    make the following comments regarding this contractual term.  First, and
    importantly, the clause in question did not entitle Mr. Shah to obtain access
    to the Companys business account information, as he requested.  Rather, the
    clause is directed at the content and the terms and conditions of the
    Companys debts and liabilities to the Bank, if secured by the guarantee, and
    the Companys progress in satisfying those obligations.

[16]

This
    language, in my view, supports the conclusion that the guarantor was entitled,
    on the bargain made by the parties, to information regarding the state of the
    Companys indebtedness to the Bank, to the extent that it was secured by the
    guarantee, and, hence, to information about the state of the guarantors
    personal exposure under the guarantee. In other words, the guarantor had the
    right to inquire of the Bank concerning the amount for which he was liable
    under the guarantee. The guarantor was not entitled to know the particulars of
    the Companys business account with the Bank.

[17]

Second,
    while no written request was made to the Bank, there is uncontroverted evidence
    that Mr. Shah made verbal requests for information to a Bank employee. In my
    view, the failure to make the request in the proper form is not fatal in the
    circumstances of this case. See
Citadel Assurance v.
    Johns-Manville Canada
, [1983] 1 S.C.R. 513
, at p. 519, where the court recognized
    the general proposition, but added qualifications that do not apply in this
    case. The Bank therefore had a contractual obligation to provide information to
    Mr. Shah as set out in the guarantee.

[18]

In
    this case, however, the Bank provided nothing to Mr. Shah in response to his
    request, for information. It therefore breached its contractual obligation to
    provide information to him, in accordance with the terms of the guarantee.

(d)

The guarantee is
    not to be discharged

[19]

What
    is the effect of the Banks breach of its contractual disclosure obligation?
    Mr. Shah argues that the guarantee must be discharged. I disagree.

[20]

A
    guarantee is a contract, and the ordinary principles of contract law apply to a
    creditors breach. Consequently, only the most serious misconduct on the part
    of the creditor will discharge a guarantee. Some examples from the cases 
    include: a creditor acting in bad faith toward the surety; the creditor
    concealing material information at the inception of the guarantee; where the
    creditor causes or connives the default of the principal debtor; or where there
    is a variation in the terms of the contract between the creditor and the
    principal debtor of a type that would prejudice the interests of the surety:
Bank
    of India v. Trans Continental Commodity Merchants Ltd. & Patel
, [1982] 1 Lloyd's Rep. 506 (Q.B. Com. Ct.), at p. 515,
    aff'd [1983] 2 Lloyd's Rep. 298 (C.A.) at p. 302;
Bank of Montreal v. Wilder
, [1986] 2 S.C.R. 551
;

Pax Management Ltd. v. Canadian
    Imperial Bank of Commerce
, [1992] 2 S.C.R. 998
;
Manulife Bank of Canada v. Conlin
,

[1996]
    3 S.C.R. 415.

[21]

In
Pax Management
, Iacobucci J. held, at para. 42, p. 1021:

A guarantor should not be discharged from the obligation which
    he or she has undertaken except by acts which have some impact on the magnitude
    or likelihood of the materialization of that risk. Other objectionable or
    wrongful conduct by the creditor towards the guarantor should be dealt with by
    causes of action that are otherwise appropriate such as the tort of deceit or
    breach of fiduciary duty.

[22]

Kevin
    McGuiness notes in
The Law of Guarantee
, 3d ed. (Markham, Ont.:
    LexisNexis Canada Inc., 2013) at s. 12.2 (p. 1001):

Usually, the measure of a suretys damage where the creditor
    breaches the terms of the principal contract can be equated with a degree of
    prejudice suffered as a result of the breach in much of the same way as the
    prejudice suffered by the principal can be so quantified.  Where such
    quantification is practical, then in order to compensate the surety adequately
    for the breach  and also to deter creditors from committing such breaches 
    the surety should obtain a partial release from liability under the guarantee
    to the extent of the amounts so quantified.

[23]

In
    this case, as in
Pax Management
, the breach by the Bank of its
    contractual disclosure obligation to Mr. Shah was not sufficiently serious to
    give rise to a right of rescission in his favour. The breach then comes down to
    a question of damages based on proven prejudice to the guarantor.

[24]

The
    reasonableness of this approach is reinforced by the laws expectation, in
    general terms, that the guarantor, not the creditor, is responsible for
    monitoring the debtors behaviour.  As McGuiness observes, at p. 948: there is
    no general duty of active diligence imposed by law upon the creditor; as a
    person who has given the guarantee, it is the suretys business, rather than
    the creditors to see that the principal performs the guaranteed obligation.
    Further, at p. 363, he states: [t]he assumption that has guided the courts is
    that in most cases, sureties have a superior ability to that of the creditor to
    monitor the performance of the principal.

[25]

There
    is no evidence that Mr. Shah sought any information from the Company regarding
    the state of its indebtedness to the Bank and was refused. In his affidavit on
    the motion, Mr. Shah claims only that if he had been aware of the amount of the
    loan, he could have somehow saved the business or convinced his business
    partner to sell assets in order to repay the loan. These claims were entirely abstract
    and speculative. Mr. Shah adduced no evidence to substantiate them.

[26]

The
    appellants, therefore, did not discharge their positive obligation to prove
    damages for the Banks breach, and consequently are not entitled to any set-off
    against or reduction in the amount owed on the guarantee.

(2)

Fraudulent
    Conveyance

[27]

The
    second issue raised by the appellants concerns Mr. Shahs transfer of his
    half-interest in the matrimonial home to Mrs. Shah two days after being told by
    the Banks account manager that a demand would be made on the guarantee. Mr.
    Shah purported to explain this action in his affidavit:

My legitimate reason is this: I booked a property on December
    2013, well in advance of the Plaintiff banks demand letter and, indeed,
    without any knowledge of the financial problems at the Corporation. I had to
    ensure that I qualified for a mortgage on my own for that property.

[28]

The
    motion judge noted, at para. 34, that Mr. Shahs explanation for the conveyance
    of the property does not make sense. I see no error in the motion judges
    determination that there is no genuine issue requiring a trial regarding
    whether the transfer of the property was a fraudulent conveyance. The motion
    judge exercised his discretion, at para. 36, to refuse Mr. Shahs request to
    be given the opportunity to give
viva voce
evidence with respect to
    the property transfer and access to the banking information. That exercise of
    discretion is entitled to deference.

Disposition

[29]

I
    would dismiss the appeal, with costs to the Bank in the amount of $5,000,
    all-inclusive.

Released:   January 18, 2016 EAC

P.
    Lauwers J.A.

I
    agree E.A. Cronk J.A.

I
    agree S.E. Pepall J.A.


